Terrorism Risk Insurance Program Reauthorization Act of 2007 Illusions and Realities Casualty Actuarial Reinsurance Seminar Boston, MA May 19 – 20, 2008 Tom Kusmierczyk Senior Property Treaty Officer Munich Reinsurance America, Inc.

2 Agenda The Challenge of Terrorism The TRIA Solution TRIPRA 2007 – Comparison vs Market Update

3 The WTC attacks- What went wrong? Geographical accumulation within and between lines of business Damage to buildings Degree of effect Undamaged Required cleaning Damaged but stable Severe structural damage Destroyed Danger of collapse

4 The WTC attacks - Total Losses (Insured Damage plus Victims Compensation Fund) * Compensation for Losses from the 9/11 Terrorist Attacks, Source: Risk Wharton Centre with Data from Insurance Information Institute WTC insured damage in m. US $ Total: 39,159

5 High Low High Probability / Feasibility Possible Damage Nuclear Conventional Radioactive Biological Chemical Analyzing Tactics, Skills and Means Threat Levels by Kind and Probability of Attack

6 Terrorism Risk Insurance Program TRIA Illusions 1.TRIA provides broad coverage with no limitation on coverage for NBCR. 2.TRIA provides a backstop of US$ 100 billion in federal monies per year. 3.TRIA will provide marketing conditions so that at expiration, the insurance and reinsurance industries will have evolved into a vigorous private sector provider of terrorism coverage.

7 Terrorism Risk Insurance Program TRIEA 2005 Primer/Review 1.The Terrorism Risk Insurance Act (TRIA) of 2002 was extended by amendment on December 26, The Terrorism Risk Extension Act (TRIEA) expired effective 12/31/07. 2.TRIA required insurance carriers to “make” terrorism risk insurance “available” in its Property & Casualty policies. 3.TRIA is triggered when the Treasury Secretary, in concurrence with the Secretary of State and the Attorney General, certifies that an incident meets the TRIA definition of an act of terrorism. 4.To be certified for federal funding, an event must cause at least $100 million in aggregate property and casualty insurance losses, have been perpetrated by a foreign person or on behalf of a foreign interest, and take place on U.S. soil.

8 Terrorism Risk Insurance Program TRIEA 2005 Primer/Review 1.Each participating insurer is responsible for paying out a certain amount in claims – a 20% deductible – before Federal assistance becomes available. 2.For losses above a company’s deductible, the federal government will cover 85%, while the insurance carrier contributes 15% in “coinsurance. 3.For 2007, the aggregate insurance industry deductible is $27.5 billion, an increase of 66.6% since Losses covered by the program are capped at $100 billion. 5.TRIA does not cover Auto, Professional Liability, Life, Health or other Personal Lines of Insurance or Reinsurance.

9 TRIPRA % TRIPRA Co-Ins 85% TRIPRA Coverage Individual Company AAD 20% of gross direct earned premium (prior year) Original Policy Deductible $100bn $100m Program Trigger Summary of Key Changes in TRIPRA 2007 Extension Bill Includes “domestic” terrorist acts in the definition of a Certified TRIA Event Provides for a seven (7) year term with no changes to current TRIEA 2005 Deductibles, Coinsurance or Loss Trigger thresholds No change in covered Property & Casualty lines Clarifies that insurers are “capped” at their respective retention levels for deductibles and coinsurance exposures TRIPRA Coinsurance TRIPRA Terrorism Coverage TRIPRA Deductible Original Policy Deductible

10 Terrorism Risk Insurance Program. Recoupment Example Discretionary Recoupment $12.5B $40B Insured Loss Assumptions Loss occurs Insurers Impacted Mandatory Recoupment $16.4B $27.5B Industry Aggregate Retention TRIA covered DEP 100 Insurers = $30B 20% Deductible = $6.0B 15% Coinsurance =$5.1B 100 Companies Pay $11.1B $11.1B Paid by 100 Companies Payment Trigger Event $100M TRIP $28.9B

11 Terrorism Risk Insurance Program Illusion of US$ 100 billion Federal Back-Stop (US$) Insurer DWPTop 1080,000,000,000 Amount of Loss 20,000,000,000 Insurer Retention 20.00% Insurer Co-Payment 15.00% Insurer Retention 16,000,000,000 Loss Before Insurer Co-Payment 4,000,000,000 Insurer Co-Payment 600,000,000 Total Insurer Payments 16,600,000,000 Total Federal Payments 3,400,000,000

12 Terrorism Risk Insurance Program Illusion of US$ 100 billion Federal Back-Stop (US$) Insurer DWPAll150,000,000,000 Amount of Loss 40,000,000,000 Insurer Retention 20.00% Insurer Co-Payment 15.00% Insurer Retention 30,000,000,000 Loss Before Insurer Co-Payment 10,000,000,000 Insurer Co-Payment 1,500,000,000 Total Insurer Payments 31,500,000,000 Total Federal Payments 8,500,000,000

13 TRIPRA Comparison TRIA TRIEA TRIPRA Deductible 15% DWP 17.5 Y4 – 20% Y5 20% Expiration 12/31/ /31/ /31/2014 Payment Trigger >US$5m >$50m (4/1/04) – >$100m >$100m (1/1/06) Federal share 90% 90% Y4 - 85% Y5 85% Comp. Deduct. 7% Y1, 10% Y2, 15% Y3 17.5% Y4, 20% Y5 20% Lines Covered All Commercial P&C, Excludes Comm. Auto, Excludes Comm. Auto incl. Workers Comp. Burglary & Theft, Surety, Burglary & Theft, Surety Farm Owners MP, PL Farm Owners MP, PL Recoupment *$10B Y1, >$12.5B Y2, *$25B Y4, >$27.5B Y5 *$27.5B *$15B Y3 Covered TR Foreign acts only Foreign acts only All Terrorism events * Up to

14 IssueTRIEA 2005TRIPRA 2007 Term/Timeline2 Year Term – Extension effective 1/1/06 – 12/31/07 7 Year Term – Extension effective for 1/1/08 – 12/31/2014 Latest Action by Congress/White House December 22, 2005 – TRIEA 2005 signed into law December 18, 2007 – House passes Senate version of TRIA extension legislation December 26, 2007 – TRIPRA 2007 signed into law TRIPRA 2007 Comparison: TRIEA 2005 vs. TRIPRA 2007

15 IssueTRIEA 2005TRIPRA 2007 Covered Terrorist Events (definition of a “certified” TRIA event) Acts by or on behalf of foreign terrorists only – no domestic terrorism event coverage To be certified, an event must cause at least $5 million in aggregate property and casualty insurance losses, have been perpetrated by a foreign person or on behalf of a foreign interest, and take place on U.S. soil (limited foreign exposure exceptions) Program Trigger 2006 $50M; 2007 $100M Changed: Any terrorism act, including domestic terrorism (done by eliminating “acting on behalf of any foreign person or foreign interest”) – domestic is a new change To be certified, an event must cause at least $5 million in aggregate property and casualty insurance losses and take place on U.S. soil (limited foreign exposure exceptions) Program trigger $100M TRIPRA 2007 Comparison: TRIEA 2005 vs. TRIPRA 2007

16 TRIPRA 2007 Comparison: TRIEA 2005 vs. TRIPRA 2007 IssueTRIEA 2005TRIPRA 2007 Loss Limit (Annual Aggregate amount of funds available to fund losses) USD100 bb annual aggregate (including insurance industry aggregate retentions) Losses above USD100 bb to be funded as determined by Congress – no specific cap on insurer liability to USD100 bb loss limit No change: USD100 bb annual aggregate (including insurance industry aggregate retentions) Changed: Clarifies that insurers are “capped” at their respective retention levels for deductibles and coinsurance exposures

17 TRIPRA 2007 Comparison: TRIEA 2005 vs. TRIPRA 2007 IssueTRIEA 2005TRIPRA 2007 Make Available (mandatory offer of coverage) Required for all covered P&C lines Terrorism Mandatory Disclosure Form (prerequisite to claims payments) requires insurers to indicate premium charge and federal share of losses No change: Required for all covered P&C lines Changed: Terrorism Mandatory Disclosure Form (prerequisite to claims payments) now adds reference to USD100 bb annual aggregate and requires insurers to indicate premium charge and federal share of losses

18 TRIPRA 2007 Comparison: TRIEA 2005 vs. TRIPRA 2007 IssueTRIEA 2005TRIPRA 2007 Recoupment Provision (forcing insurers to repay funds below certain annual aggregate loss thresholds) For 2007 Program Year, USD27.5 bb – if aggregate losses are below this threshold, insureds assessed a surcharge on all in-force P&C policies of up to 3% with insurers remitting these funds to Fed. Govt. Recoupment above this threshold is also available at discretion of Congress See “Funding Change” below. USD27.5 bb – if aggregate losses are below this threshold, insureds assessed a surcharge on all in- force P&C policies (no cap on surcharge) on with insurers remitting these funds to Fed. Govt. Recoupment above this threshold is also available at discretion of Congress

19 TRIPRA 2007 Comparison: TRIEA 2005 vs. TRIPRA 2007 IssueTRIEA 2005TRIPRA 2007 Funding TRIA “Costs” (as a result of CBO estimates ranging from USD5.1 bb to USD8.4 bb over ten years for the Senate and House Bills, respectively No cost estimate issue for TRIA to date (new issue with extension beyond 2007) Change. Accelerate Recoupment Provision (see above) payment by: 1)Removing 3% cap on surcharges and mandatory recoupment level set at 133% of the mandatory recoupment amount for a given Program Year); 2)Requiring repayment for losses below the USD27.5 bb aggregate loss threshold over two terms (losses between 2007 – 2013 repaid by 2013 and losses after 2011 repaid by 2017)

20 TRIPRA 2007 Comparison: TRIEA 2005 vs. TRIPRA 2007 IssueTRIEA 2005TRIPRA 2007 Reporting and Study Provisions September 2006 President’s Working Group (PWG) Report – analysis re the affordability and availability of terrorism insurance including the need for NBCR and Group Life Changed: Requires: Two PWG Reports in 2010 and 2013 with same scope as 2006 Report Report re affordability and availability of NBCR insurance Reset Report for markets and geographic regions with terrorism capacity issues

21 TRIPRA 2007 Comparison: TRIEA 2005 vs. TRIPRA 2007 IssueTRIEA 2005TRIPRA 2007 Loss Notification Procedures In the event of a claim that exceeds USD100 bb annual aggregate, Terrorism Risk Insurance Program office to issue pro rata claims procedures Change: U.S. Treasury to advise Congress following an event if there is a potential to exceed the USD100 bb Loss Limit Treasury to issue pro rata claims guidelines during Program Year 2008 (report within 120 days of enactment, regulations within 240 days of enactment)

22 Insured Loss Estimates: Large NBCR Attack ($ Billions) Type of CoverageNew YorkWashingtonSan Francisco Des Moines Group Life$82.0$22.5$21.5$3.4 General Liability Workers Comp Residential Prop Commercial Prop Auto Total$778.1$196.8$171.2$42.3 Source: American Academy of Actuaries, Response to President’s Working Group, Appendix II, April 26, 2006

23 Managing the uncertainty of Terrorism Risk Nov. 1, 2007 Marsh J. Dalton, B. Tucker

24 Managing the uncertainty of Terrorism Risk Nov. 1, 2007 Marsh J. Dalton, B. Tucker

25 Terrorism Risk Insurance Program Possible justification for a permanent Government-industry Partnership for Terrorism Insurance: 1.The unpredictability of Terrorism impedes the ability of the private insurance market to take on the financial risk without governmental support, 2.A government-industry partnership can support the use of the private insurance market to provide some terrorism insurance, and 3.A government-industry partnership to provide this protection is consistent with national interests.

Thank you for your attention.