© 2007 Towers Perrin May 7, 2007 Ed Hochberg TERRORISM REINSURANCE YESTERDAY AND TODAY

© 2007 Towers Perrin 2 TERRORISM REINSURANCE AGENDA: History of Terrorism Reinsurance USA Europe – UK, France, Germany, Spain Terrorism Reinsurance Today Major Categories of Coverage Major Elements Influencing Pricing and Terms Emerging Issues

© 2007 Towers Perrin 3 History of Terrorism Reinsurance - USA Pre-September 11, 2001 (Re)insurance functions well when individual losses are random, uncorrelated and not enormous since risks can be spread over a large population Terrorism losses pre-9/11were generally small, random and uncorrelated, so private (re)insurance markets were able to cover terrorism risk effectively and without fanfare Insurance against terrorism risk was included in most commercial lines without extra premium Stand-alone terrorism market was mainly limited to providing solutions for property owners and trade/investment exposures in countries with elevated terrorism risk (UK, Colombia, Sri Lanka, etc.)

© 2007 Towers Perrin 4 History of Terrorism Reinsurance - USA Post-September 11, 2001 The perceived and real potential for enormous and/or a sustained run of smaller correlated terrorism losses meant risk spreading would no longer work as smoothly The correlation of terrorism risk exists on two levels, (1) multiple lines affected instantaneously and (2) several catastrophic attacks can occur simultaneously High risk of private (re)insurer insolvency Policyholders suffering losses might not be paid coverage due under policies The inability of (re)insurance industry to predict number, scale, frequency or correlation of future terror attacks resulted in widespread imposition of exclusion clauses

© 2007 Towers Perrin 5 History of Terrorism Reinsurance - USA Post-September 11, 2001 (continued) Demand: Commercial insurance customers wanted and needed terror coverage Supply: Insurers were reluctant to provide terror coverage Outcome: Urgent need for a solution After much private and public research and debate, the only immediate way to ensure compensation of terrorism victims was through governmental guarantees Enter Terrorism Risk Insurance Act (TRIA)

© 2007 Towers Perrin 6 History of Terrorism Reinsurance - USA Terrorism Risk Insurance Act (TRIA) Passed by Congress November 19, 2002, signed into law November 26, 2002, to expire December 31, 2005 Acknowledgement by Government that terror risk is too unpredictable, with too severe a loss potential, for (re)insurance industry to safely handle Provides federal backstop for certain acts of terrorism via temporary federal program for sharing risk of loss from foreign terrorist attacks with insurance industry Temporary measure to allow time for private markets to stabilize, resume pricing of such insurance and build capacity to absorb future losses while preserving State insurance regulation and consumer protection

© 2007 Towers Perrin 7 History of Terrorism Reinsurance - USA Terrorism Risk Insurance Extension Act (TRIEA) Approved by Congress on December 17, 2005 to expire December 31, 2007 – may not renew Under the Act(s) carriers are required to: Offer terrorism coverage Retain a (staggering) increasing portion of their prior year’s DEP for covered lines (20% in 2007) Carry increasing co-participations (15% in 2007) Growing number of private industry products However, private (re)insurance industry continues to work with the federal government and policyholders to establish an on-going, viable private-public solution

© 2007 Towers Perrin 8 History of Terrorism Reinsurance - USA Alternatives to TRIA or further extensions thereof: The federal government as a retrocessionaire or a finite reinsurer? Federal securitization of terrorism loss options? No role for federal government? Capital markets – bonds/securitizations? On-going public/private partnership? Mutual insurance organization similar to UK?

© 2007 Towers Perrin 9 History of Terrorism Reinsurance – UK Pre-September 11, : Government-backed terrorism reinsurance pool, “Pool Re”, established in response to property losses from bombings by IRA Mutual insurance organization HM Treasury acts as reinsurer of last resort Participating (re)insurers must be properly authorized (Re)insurer coverage by/participation in pool optional Coverage generally limited to property policies

© 2007 Towers Perrin 10 History of Terrorism Reinsurance - UK Post-September 11, 2001 Coverage expanded to include more risks (e.g., NBC) Premiums, generally based on location and amount of coverage purchased, doubled due to more participation Annual and per event losses of (re)insurers capped Retentions based on degree of pool participation Industry-wide retentions escalate over time No surcharge after losses to Pool Re Facets of Pool Re encouraging competition: Max deductible raised to encourage private reinsurer re-entry into market Insurers free to set premiums for underlying policies

© 2007 Towers Perrin 11 History of Terrorism Reinsurance - France Pre-September 11, 2001 France suffered several waves of deadly terrorist attacks during the 1980s and 1990s French law does not allow commercial property insurers to dissociate terrorism coverage from commercial property September 9, 1986: French law obligates insurers to provide terrorism coverage up to the overall limits of a property policy Post September 11, 2001, in light of the perceived increased in terrorism risk, many insurers stopped covering terrorism, which meant they had to stop covering commercial property The French government urgently need to find a solution

© 2007 Towers Perrin 12 History of Terrorism Reinsurance - France Post-September 11, 2001 December 10, 2001: France established temporary terrorism reinsurance pool, “GAREAT” All property owners must purchase coverage All insurers must join pool Premiums set on basis of amount of coverage purchased – rates don’t vary by industry or location Insurers bear initial losses, private reinsurance bears middle layers of loss, government bears catastrophic losses (without cap) Government shares in premiums Extended - in effect until December 31, 2007

© 2007 Towers Perrin 13 History of Terrorism Reinsurance - Germany Pre-September 11, 2001 Insurance against terrorism risk included in most commercial lines without extra premium

© 2007 Towers Perrin 14 History of Terrorism Reinsurance - Germany Post-September 11, 2001 September 3, 2002: Germany established temporary terrorism reinsurance pool, “Extremus AG” Coverage optional Premiums set on basis of amount of coverage purchased – rates don’t vary by industry or location Insurers bear initial losses, private reinsurance bears middle layers of loss, government bears catastrophic losses (with cap) Government shares in premiums Extended - in effect until December 31, 2007

© 2007 Towers Perrin 15 History of Terrorism Reinsurance - Spain Pre-September 11, (During Spanish Civil War): State established permanent insurance pool, “Consorcio de Compensacion de Seguros” Covers natural disaster and terrorism losses —Property damage only Integrated into policies issued by private insurers that collect premiums on Consorcio’s behalf Mandatory insurer participation Premiums set on basis of amount of coverage purchased – rates don’t vary by industry or location

© 2007 Towers Perrin 16 History of Terrorism Reinsurance - Spain Post-September 11, 2001 Coverage against complete range of risks expanded to include business interruption Spain’s pool paid losses from the March 11, 2004 bombings of several train stations in Madrid

© 2007 Towers Perrin 17 Terrorism Reinsurance Today The market has come a long way since 2001 Many reinsurers in London, Bermuda, and Continental Europe provide terrorism cover on some basis However, the market for terrorism reinsurance is estimated to have only approximately $6 to $8 billion in global capacity and only $1 to $2 billion for NBCR 1 This compares to estimated potential losses in excess of $100 billion Also by way of comparison, the global property catastrophe market, which excludes terrorism, is in excess of $120 billion of capacity 1 Based upon the testimony of Christopher Nassetta, CEO of Host Hotels and Resorts, on behalf of the Coalition to Insure Against Terrorism, to the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises and the Subcommittee on Oversights and Investigations of the House Committee on Financial Services on September 27, 2006.

© 2007 Towers Perrin 18 Major Categories of Coverage Property – TRIEA (Certified) and Non-Certified Property – Stand-alone Workers’ Compensation/Personal Accident Other and Miscellaneous Exposures Personal lines

© 2007 Towers Perrin 19 Major Categories of Coverage Property – TRIEA (Certified) and Non-Certified Capacity: Substantial, in the hundreds of millions Markets: Primarily London and Bermuda for stand- alone cover Sometimes “thrown in” on mainframe treaties, depending upon the nature of the exposure (e.g. “main street” businesses outside of major metro areas), although in this case NBCR is not typically included Sometimes terrorism is excluded in mainframe treaties, but coverage for the “fire following” exposure is provided

© 2007 Towers Perrin 20 Major Categories of Coverage Property – Stand-Alone There have been treaties placed for specific terrorism insurance (outside of TRIEA) Such treaties tend to be E&S situations – trophy properties, etc. Capacity: More restricted since these tend to be higher risk situations involving somewhat broader cover - tend to be more “clashy” Many entities who reinsure this exposure write it directly Markets: Dominated by London, Bermuda, and Berkshire

© 2007 Towers Perrin 21 Major Categories of Coverage Workers’ Compensation/Personal Accident Issues similar to TRIEA Property Issues revolve around PML measurement (e.g. how many employees/people are actually in a location at a single time?) Capacity: Relatively plentiful for non-CBI and non- NBCR exposures Markets: London market tends to lead in this space

© 2007 Towers Perrin 22 Major Categories of Coverage Other and Miscellaneous Exposures Aviation – For US carriers, terrorism is presently covered by the Department of Transportation Hull – Aviation War, which is typically reinsured in the marine market Passenger and Third Parties – Excluded with war risk via AVN 48, with a “write back” via AVN 52 Marine – typically handled in the marine war market Contingency, etc. – coverage is available, and is handled various ways…

© 2007 Towers Perrin 23 Major Categories of Coverage Personal Lines Frequently “thrown in” on mainframe treaties Particularly true outside of CBI’s Not perceived as a major exposure

© 2007 Towers Perrin 24 Major Elements Impacting Price and Terms New York, New York Other CBI’s Outside of NY and other CBI’s, capacity is relatively plentiful and inexpensive Analogous to peak zone exposures in property, but without reliable modeling NBCR Makes PML/RDS evaluation relatively difficult Potential range of exposure much bigger Contingent Business Interruption Viruses/Cyber Terror

© 2007 Towers Perrin 25 Emerging Issues Sunset of TRIEA – What will the market look like after 12/31/07? More exposure? Even if TRIEA sunsets, what about the run-off? What about “fire following”? What about workers’ comp? Rating Agencies – Views are evolving Typically used if larger than property PML’s If rating agencies step up “concern”, it will spur demand