AIR Terrorism Loss Estimation Model Jack Seaquist Terrorism Model Product Manager AIR Worldwide, Inc.

© 2003 AIR Worldwide Corporation CONFIDENTIAL Topics q AIR Background q AIR Terrorism Loss Analysis Model q Use of Model Output for Underwriting and Pricing q Impact on Terrorism Risk Insurance

© 2003 AIR Worldwide Corporation CONFIDENTIAL AIR Models Losses Due to Extreme Winds... Tropical (Hurricanes) Extratropical (Winterstorms) Severe Thunderstorm (Tornado)

© 2003 AIR Worldwide Corporation CONFIDENTIAL... Earthquakes

© 2003 AIR Worldwide Corporation CONFIDENTIAL … and Other Perils Throughout the World

© 2003 AIR Worldwide Corporation CONFIDENTIAL Introduction: AIR Technical Staff Mathematicians and Statisticians Operations Researchers Actuaries Geophysicists Physicists Meteorologists Reinsurance and Insurance Specialists Software Specialists Seismologists Engineers Over 100 professionals Multi-discipline approach Over thirty hold PhD’s

© 2003 AIR Worldwide Corporation CONFIDENTIAL Models, Perils, and Lines of Business

© 2003 AIR Worldwide Corporation CONFIDENTIAL Components of Catastrophe Models - Terrorism Challenges Event Generation Intensity Calculation Exposure Information Damage Calculation Validation, Reporting Policy Conditions Insured Loss Calculation EngineeringHazardLoss Estimation q Where might future terrorist attacks occur? q For each possible attack, how much loss could be expected? q How often and how big?

© 2003 AIR Worldwide Corporation CONFIDENTIAL AIR Models Possible Conventional Attacks Where They are Likely to Occur - AIR Landmark Database q Commercial facilities ä Prominent buildings ä Corporate headquarters ä Transportation facilities and critical infrastructure ä Industrial facilities ä Energy facilities ä Retail centers and malls ä Sport arenas and stadiums ä Amusement parks q Government facilities ä Federal office buildings and courthouses ä Embassies ä Postal facilities q Educational, medical, and religious institutions Over 300,000 Landmarks

© 2003 AIR Worldwide Corporation CONFIDENTIAL Weapon Intensity and Resulting Damage q Bomb Blast q Air Crash q Chemical q Biological q Radiological q Nuclear

© 2003 AIR Worldwide Corporation CONFIDENTIAL Components of AIR’s Conventional Injury Model Loss Calculation Damage ratio distribution Number of Employees Engineering Loss Estimation Damage state Damage state Damage state Damage state Damage state Damage state Damage state Damage state Injury Severity Levels Cost of injuries Building Information Earthquake Events Terrorism Events

© 2003 AIR Worldwide Corporation CONFIDENTIAL Modeling CBRN using Consequences Assessment Tool Set (CATS) q Developed by Defense Threat Reduction Agency (DTRA) ä Responsibility in Defense Department for all aspects of weapons of mass destruction ä Includes former Defense Nuclear Agency ä Built upon more than 50 years of research ä Includes Hazard Prediction and Assessment Capability (HPAC) q Resulted from demands of Operation Desert Storm q Used for emergency management, defensive planning, and operational planning

© 2003 AIR Worldwide Corporation CONFIDENTIAL Components of HPAC Hazard Sources Weather & Transport Effects Chem/Bio Facilities Chem/Bio Weapons Nuclear Weapons Nuclear Facilities Nuclear Weapon Incident Missile Intercept Human Medical Effects Toxicity Levels Contaminated Areas Population Exposure Hazard Areas Casualties Historical Weather Forecast Weather Current Observations Forensic Weather Particle Transport

© 2003 AIR Worldwide Corporation CONFIDENTIAL Military Applications of HPAC q Military Commander In Chiefs use for offensive and defensive planning q European Command, Pacific Command, Strategic Command and Central Command q HPAC has also been used to support the Bosnia deployment and Desert Thunder planning q Defense Intelligence Agency, Joint Chiefs of Staff, National Command Authority also use for assessment of potential WMD hazards q The Chemical and Biological Incident Response Force, the Directorate of Operations for Military Support for Domestic Preparedness, the Federal Bureau of Investigation, and the Center for Disease Control use for domestic support q The Gulf War Office used HPAC to evaluate the impact of destruction of chemical weapons after the Gulf War

© 2003 AIR Worldwide Corporation CONFIDENTIAL Civilian Applications of HPAC q The 1996 Summer Olympics in Atlanta, Georgia q The 2002 Winter Olympics in Salt Lake City, Utah q The September 11th attacks on the World Trade Center and the Pentagon q The 1997 (53rd) & 2001 (54th) Presidential Inaugurations q The 2000 & 2001 State of the Union Addresses q The 1997 Group of Eight Summit in Denver, Colorado

© 2003 AIR Worldwide Corporation CONFIDENTIAL How Often and How Big? q Expert opinion used for attack frequency/severity and allocation to landmarks ä Problem is partitioned into manageable pieces ä Delphi Method used to combine expert opinions ä Experts in counterterrorism operations and threat assessment ä Experience from FBI, CIA, Defense Dept., Energy Dept., etc. q Results in attack likelihood (frequency) for each individual landmark and event

© 2003 AIR Worldwide Corporation CONFIDENTIAL Delphi Method Provides Sound Basis for Frequency Estimates q Developed during 1940s at the RAND Corporation to study the "broad subject of inter-continental warfare other than surface " q Based on a structured process for collecting and distilling knowledge from a group of experts by means of a series of questionnaires interspersed with controlled opinion feedback q The key elements of the Delphi Method: ä Structuring of information flow ä Feedback to the participants ä Anonymity for the participants q The Delphi method has been widely used to generate forecasts in technology, education, and other fields

© 2003 AIR Worldwide Corporation CONFIDENTIAL Terrorist Groups Considered Separately q Domestic Terrorists ä Right-wing ä Left-wing ä Special interest q Formal International Terrorist Groups (Foreign) ä State Sponsored ä Formal Terrorist Organizations q Loosely Affiliated Extremist Networks (Foreign)

© 2003 AIR Worldwide Corporation CONFIDENTIAL Locales Landmark Attack Vectors Determine Likely Severity and Frequency by Location Target Types: Com’l Bldgs Fed Bldgs Airports... Terrorist Groups Objectives Means History Countermeasures Weapon/attack Types Group Threat Index (GTI) Target type Weapon/attack type Locale Group Attack Frequency (GAF) Expert Opinion

© 2003 AIR Worldwide Corporation CONFIDENTIAL Use of AIR Terrorism Loss Estimation Model q Calculate fully probabilistic loss distribution and exceedance probability curves based on detail modeling q Location, policy, zone, territory, portfolio levels ä Company-specific ä Industry-level q Foreign vs. domestic sources (certified vs. non-certified) q Conventional vs. CBRN attacks q Commercial and/or residential property q Direct business interruption q Workers’ compensation, life, disability

© 2003 AIR Worldwide Corporation CONFIDENTIAL Proximity to Terrorist Targets - Ring Analysis

© 2003 AIR Worldwide Corporation CONFIDENTIAL Sample Exposure Portfolio

© 2003 AIR Worldwide Corporation CONFIDENTIAL Exceedance Probability Curve Results for Portfolios

© 2003 AIR Worldwide Corporation CONFIDENTIAL Uses of AIR Terrorism Model Results q Manage terrorism exposure ä Understand exposure concentrations relative to potential terrorism targets ä Help price terrorism coverage down to location-specific levels ä Establish underwriting guidelines to offer profitable coverage while controlling risk q Determine effects of the Terrorism Risk Insurance Act of 2002 q Quantify capital and reinsurance needs q Provide basis for ISO loss costs

© 2003 AIR Worldwide Corporation CONFIDENTIAL Model Results Confirm What We Know q Major cities have been identified as favored targets, particularly for conventional weapons attacks ä National symbols of government and capitalism ä Vital economic centers and embassies ä Places of amusement ä Critical infrastructure ä Mass casualties objective q Major urban areas offer freedom of relatively unhindered operations ä Surveillance of targets, meetings, movement ä Public street access to exterior of many buildings q Higher loss per event due to urban density ä Vertical exposure versus horizontal footprint ä Landmarks surrounded by dense commercial property, not parking lots q Higher replacement cost per square foot

© 2003 AIR Worldwide Corporation CONFIDENTIAL Similar Experience With Other Perils q Earthquake premiums are predominantly a California burden ä California average annual loss is 72% of U.S. total ä Total U.S. average annual earthquake loss is much greater than U.S. terrorism property loss estimates q Hurricane loss cost relationships also show variations similar to terrorism ä Florida is approximately 50% of U.S. total ä Florida average annual hurricane loss estimates are greater than entire U.S. terrorism property loss estimates ä Florida statewide is more than 10 times higher than New York state ä Miami Beach is over 100 times higher than Washington, D.C. ä After Hurricane Andrew homeowner premiums in Florida increased substantially

© 2003 AIR Worldwide Corporation CONFIDENTIAL Use of AIR Models in ISO Advisory Loss Costs q Industry-wide analysis ä Commercial property ä AIR industry exposure database ä Average annual loss ä Separate building and contents results q Modeled certified acts q Gross industry loss was adjusted for other factors ä Contingent BI ä Other commercial lines ä Alternative markets ä Loss adjustment expenses ä Federal backstop

© 2003 AIR Worldwide Corporation CONFIDENTIAL Terrorism Risk Insurance Act of 2002 Issues q State approval processes for rates and forms q Non-certified events q Significant change each year -- sunset in 2006 q Combined commercial business lines q No “occurrence” concept - based on annual aggregate q Not a pool - each company is on its own q No coverage for reinsurer losses q Existing policy exclusions remain q Profile of potential loss characteristics q Pricing and the market to date

© 2003 AIR Worldwide Corporation CONFIDENTIAL For Further Information, Please Contact Jack Seaquist AIR Worldwide THANK YOU