Page 1 Recording of this session via any media type is strictly prohibited. Page 1 TRIA: If a Tree Falls in the Woods

Page 2 Recording of this session via any media type is strictly prohibited. Janice Ochenkowski Managing Director - Global Risk Management, Jones Lang LaSalle Vice Chair - RIMS External Affairs Committee Former President of RIMS Emil Metropoulos Senior Vice President - Guy Carpenter LLC Workers’ Compensation & Terrorism Specialty Practices Strategic & Rating Agency Advisory Marsh / Guy Carpenter Terrorism Task Force

Page 3 Recording of this session via any media type is strictly prohibited. What to Expect Through the session you will gain a better understanding of the uncertainty non-reauthorization of TRIA is having on risk managers (and not just on their insurance programs), the insurance marketplace and how to prepare for live without TRIA We will discuss : Impact on insurance and renewals Impact on financial obligations The challenges to Risk Managers and Insurers/reinsurers Alternatives in the in the event of non-reauthorization

Page 4 Recording of this session via any media type is strictly prohibited. TRIA – A Risk Manager’s View

Page 5 Recording of this session via any media type is strictly prohibited. A Risk Manager’s View TRIA is not an insurance policy TRIA is the backstop that allows insurers to measure their exposures to an event Because their risk can be quantified, insurers can offer policies that includes terrorism coverage If TRIA is not reauthorized, the backstop goes away and insurers have no safety net to fund aggregated losses Insurers then must limit the number of policies and their aggregate exposure

Page 6 Recording of this session via any media type is strictly prohibited. A Risk Manager’s View But, risk managers’ needs are not lower, so the result is more competition in the marketplace for fewer policies and lower limits of coverage The natural result of increased competition is higher prices Which means that the insurance limits required to fund an organization’s internal risk assessments and external contractual requirements may not be available Or, the limits required may be available, but only at non-commercially acceptable prices Which leaves the Risk Manager with a problem

Page 7 Recording of this session via any media type is strictly prohibited. A Risk Manager’s View Workers’ Compensation - A Special Case State and territorial laws do not differentiate between terrorism and other causes of loss An insurer that writes a Workers’ compensation policy must cover losses from terrorism risks If the insurer determines that it has too high a concentration of risk in a particular area, it will not write a policy or renew an existing policy Employers with large concentration of lives in major urban areas or target areas may not be able to find insurers willing to offer coverage If an alternate insurer is found, premium may be higher than the expiring program If an insurer is not identified, or premium is too high, self-insurance or the assigned risk pool may be the only options for a risk manager The ultimate consequence of these choices may be higher costs, loss of specialized loss control and specialized claim handling

Page 8 Recording of this session via any media type is strictly prohibited. A Risk Manager’s View Risk managers who have high risk operations or whose offices are in major urban areas such as NY, LA, SF, Chicago, or Boston may have difficulty purchasing adequate property insurance with terrorism coverage So, is just going bare for the risk so bad? There haven’t been many incidents, so it may be a risk worth taking…that analysis is what a good risk manager does. However, Many mortgages require terrorism insurance and some landlords require terrorism insurance of tenants Loans for leased equipment (office furniture and equipment) may require terrorism coverage Importantly, some corporate lines of credit require terrorism insurance So, price and availability of terrorism insurance is not just a real estate risk manager’s problem, many risk managers will have to create solutions for their organizations

Page 9 Recording of this session via any media type is strictly prohibited. Impact on the Insurance Marketplace

Page 10 Recording of this session via any media type is strictly prohibited. Efficacy of Private Market Capital  September 11, 2001 $32.5B (2001 dollars) $42.9B (2013 dollars) 1  Largest Modeled Conventional Weapon Loss $38.6B 2 – 10 ton truck bomb in Midtown Manhattan  Largest Modeled NBCR Loss $941B 2 – nuclear detonation Midtown Manhattan (Re)Insurance Industry is not adequately capitalized to support large NBCR Losses Notes: dollars based on Bureau of Labor statistics CPI Index 2.The loss figures above assume a 100% Property take-up rate among commercial insureds 3.Industry capital figures presented assume 100% of capital is available, or deployed, to cover terrorism. In reality, many (re)insurers – particularly capital/convergence markets – have little-to-no appetite to write terrorism because of correlation with financial markets loss. Source: Guy Carpenter Business Intelligence Private Industry CapitalLoss Scenarios Estimated $322B Global Reinsurance Dedicated Capital Estimated $700B 3 P&C US (Re)Insurance Dedicated Capital Estimated $100B North American Reinsurance Dedicated Capital

Page 11 Recording of this session via any media type is strictly prohibited. Who benefits from TRIA: P&C Profile by PHS 2012 industry surplus for P&C carriers writing TRIA exposed business  $590B Approximately 850+ carriers are subject to the Federal program A higher % of the held capital for smaller to mid-sized insurers is required to meet the deductible requirements of TRIA (75+ have a TRIA deductible > 25% PHS) This group tends to depend on TRIA recoveries and contemplates TRIA protection notably more in their risk management strategies Many use the reinsurance to “buy down” their TRIA deductibles and cede some program co-insurance Carriers with TRIA deductibles > $500M tend to manage their exposures to City and Zonal accumulations, rather than contemplating TRIA recoveries Source: SNL 2012 YE data & Guy Carpenter Business Intelligence

Page 12 Recording of this session via any media type is strictly prohibited. Terrorism modeling requests tend to be more punitive relative to those for Nat Cat A.M. Best focuses on 5-ton truck bomb deterministic losses at the carriers largest accumulations (regardless of proximity to landmarks and/or designated targets) o It then applies its “probabilities” to these worst case scenarios based on location o There are BCAR implications as losses exceed certain defined terror stress test limits Through briefings and annual rating meetings, A.M. Best, S&P, Fitch have been direct in expressing the importance of solid risk management strategies on terrorism risk aggregations: “Overreliance on TRIA is not a substitute for sound risk management” Rating Agency Impact on Carrier’s Terrorism Exposure A.M. Best had identified 34 carriers with significant terrorism exposure and TRIA dependency - subject to negative outlooks and potential rating downgrades Solid actionable contingency plans continue to be requested Additional negative watch concern for carriers having large loss < $100M industry loss TRIA trigger - and no TRIA cover More recently, the rating agencies have increased their requests on NBCR accumulation monitoring and loss scenarios (as % PHS)

Page 13 Recording of this session via any media type is strictly prohibited. The Impact on P&C Renewals Started in 2013 and continues… Implementation of conditional TRIA endorsements (excl. NY, FL, GA) Tier 1 insureds have been facing increased costs, and/or greater Deductibles / SIRs o Workers’ Compensation accumulation issues drove the earliest movement o Notable large account movement among the top 15 P&C carriers o A few carriers opportunistically writing business, while others non-renew o Some large accumulation risks are moving to the state funds Short-term or six month policies have been issued as a stop gap measure o WC: published NCCI form allows for price Δ mid-term should act expire* o Property: policies endorsed (manuscript form) allowing for price Δ if TRIA were to expire* Initial impact being felt most among smaller mutuals and regional writers that are highly TRIA dependent and have limited PHS relative All of the above and increased quoting and binding activity in the Stand Alone / Specialty terrorism market 13 *These policy endorsements are subject to state and federal regulation. *These policy endorsements are subject to state and federal regulation

Page 14 Recording of this session via any media type is strictly prohibited. Terrorism Insurnace Purchasing (Property) Approximately 95% of Marsh clients that purchased terrorism insurance did so as part of their property policies. The remainder used: Captives Standalone terrorism policies can be an important supplement to TRIA coverage A combination of approaches The primary industry segments purchasing standalone policies include: o Hospitality, Real estate, Financial institutions Smaller but significant amounts were purchased by the following segments: o Retail, Media, Transportation, Public entity Terrorism Take Up rates have been fairly consistent in the mid 60% range Notable take-up rate variation by industry Source: Marsh 2014 Terrorism Risk Insurance Report *These policy endorsements are subject to state and federal regulation.

Page 15 Recording of this session via any media type is strictly prohibited. Unique Challenges of Workers’ Compensation Impact on Carriers is compounded Workers’ Compensation is a state regulated compulsory line: o terrorism cannot be excluded, policies are written on an unlimited basis o NBCR perils are covered - and a significant concern to WC insurers – Arguably the most uninsurable risk(s) – Limited reinsurance capacity Modeled PMLs can easily pyramid into amounts greater than 10-20% of a carriers PHS Insurers continue to limit or reduce their exposure to large-scale terrorism events: o Pushing for higher prices anticipating TRIA expires or is reauthorized with significant changes o Reducing exposure by limiting the policies issued or the amount of capacity they will deploy in certain geographic areas o Less willing to underwrite the risks of employers in high-profile industries o Attaching endorsements that allow (subject to regulatory approval) for a unilateral mid-term re-underwriting and pricing if TRIA sunsets or is materially altered o Setting the policy expiration dates to coincide with TRIA’s anticipated expiration 15 *These policy endorsements are subject to state and federal regulation.

Page 16 Recording of this session via any media type is strictly prohibited. (Re)Insurers reactions To a Reduced Federal Role on TRIA Individual carriers reaction to notable changes to TRIA are difficult to predict Without a backstop (or a notably curtailed TRIA program), carriers may have to manage their exposure by reducing it - in order to preserve their financial condition Some rating agencies report that some insurers are scaling back (where permitted) as they renew policies when not covered under the current law The insurance industry's aggregate TRIA retention is 20% of the entire DWP of the lines subject to the program: o Currently at $34B  increasing to nearly $40B (if TRIRA renews with little Δ’s) Private market (re)insurance capacity available for terrorism: o Approximately $6B  $8B on a individual per risk basis o Treaty reinsurance: Typically up to $2.5B  decreasing down to about $1B for Tier I risks and/or Workers’ Compensation – NBCR Capacity : Approximately $1B in Tier I locations With limited means to manage/spread the risk, primary insurers have little choice absent TRIA but to manage only the exposures they can handle 16 *These policy endorsements are subject to state and federal regulation. Source: Marsh 2014 Terrorism Risk Insurance Report

Page 17 Recording of this session via any media type is strictly prohibited. Possible Remedies to Consider

Page 18 Recording of this session via any media type is strictly prohibited. A Risk Manager’s View What can a risk manager do? First, and most importantly, communicate internally, communicate, and then communicate Be sure that you ask your finance group to look at existing lines of credit and corporate loans to determine your requirements Meet with all relevant internal groups such as procurement, office services, etc. Ask them to review documents so you understand obligations, prepare them for higher budget costs in 2015, especially if TRIA is not reauthorized and you have to purchase stand alone policies

Page 19 Recording of this session via any media type is strictly prohibited. A Risk Manager’s View Meet with your insurance brokers and underwriters to understand what to expect at your renewal Work with your insurance broker to create a plan and to price options; present them internally with plenty of time for discussion of the issues and consequences With the approval of your organization’s management, create a strategy to deal with possible loss or reduction of insurance Network with risk managers in your industry groups and in your local RIMS chapter to learn more about solutions that are working for your peers Attend the RIMS Legislative Summit

Page 20 Recording of this session via any media type is strictly prohibited. Strategies for handling the potential expiration of TRIA Property Programs Align property programs with insurers that will continue to support terrorism coverage if TRIA expires Standalone terrorism policy as an alternative to embedded TRIA ones Bind standalone terrorism product(s) to lock in market capacity prior to possible TRIA sunset Standalone capacity reservation approach – use standalone capacity in excess position with option to “flip” to be primary if TRIA is not extended o Conversion premium to be identified within quote TRIA captive: pre-agreed terms in 2014 to “flip” standalone terrorism reinsurance to be primary and/or enhanced delayed payment coverage conversion Standalone capacity commitment contracts 20 *These policy endorsements are subject to state and federal regulation. Source: Marsh 2014 Terrorism Risk Insurance Report

Page 21 Recording of this session via any media type is strictly prohibited. Captive Strategies for Handling the Potential Expiration of TRIA Captive TRIA Certified Policy: U.S. based captives can act as TRIA authorized insurers and access the federal backstop TRIA reinsurance offered excess of captive TRIA retention Captive share can either be retained, subject to sufficient capital, or reinsured with the standalone terrorism market Standalone Terrorism TRIA “wrap”: A: $100 million TRIA trigger reinsurance B: TRIA deductible reinsurance C: 15% Co-participation reinsurance D: Option -delayed TRIA certification /payment coverage 21 *These policy endorsements are subject to state and federal regulation. Source: Marsh 2014 Terrorism Risk Insurance Report

Page 22 Recording of this session via any media type is strictly prohibited. Why Does Employee Concentration Data Matter ? 22 *These policy endorsements are subject to state and federal regulation. Carriers monitor their WC concentrations of insured employees on a portfolio basis as well as on a multi-line basis Those that are “PML over-lined” in certain key Central Business District areas or Tier I cities could decline risks or surcharge premiums Concentration data and terrorism catastrophe models have improved, allowing them to: o Manage their potential exposures to various deterministic terrorism loss scenarios o Achieve pricing more reflective of the assumed risk o Satisfy rating agency requirements Insureds with large concentrations of employees - especially in major metropolitan areas o Should be prepared to provide insurers with very detailed and specific information o Examples of data that can accurately reflect an insureds cat exposure include - total number of employees, employees working during peak shifts - actual buildings where the employees are located on campus / corporate park settings - % of the workforce in the field or telecommuting, rather than at the location the payroll is assigned Source: Marsh 2014 Terrorism Risk Insurance Report

Page 23 Recording of this session via any media type is strictly prohibited. Using High Quality Data as a Market Differentiator 23 *These policy endorsements are subject to state and federal regulation. Examples of some additional data elements include: Building level employee data Employee marital / dependency status Employee telecommuting practices and impact on concentration Physical security of the building: i.e. guards, surveillance cameras, parking areas, HVAC How access to the building is controlled Construction of the building and location of the offices. Management policies around workplace violence, weapons, and employment screening. Employee security procedures / staff. Emergency response / crisis management plan and procedures. Fire / life safety program. Source: Marsh 2014 Terrorism Risk Insurance Report

Page 24 Recording of this session via any media type is strictly prohibited. RIMS is going to Capitol Hill and we want you to come with us. Join us and lobby for the interests of risk management—your interests. This is your chance to not only see what goes on in Washington, but to actively participate in your government. We’ll have experts to walk you through the lobbying process and instruct you on how to present your issues. Then you’ll take your new skills to Capitol Hill. "Attending this event has become one of my favorite Society events. Not only do you have the opportunity to meet fellow risk managers and RIMS members, it is a real life civics lesson on how the Federal government works. Being able to better understand the Society’s legislative platforms and having the opportunity to explain to members of Congress why these issue are important to the Society and the risk management community becomes a very tangible value of membership and advocacy. If you have an interest in these topics, I highly recommend attending. It will provide a different perspective of how the democratic process works." Scott B. Clark - Risk and Benefits Officer, Miami-Dade County Public Schools "On my last visit, I met with a member of the House leadership. As it turns out, we had a common acquaintance. The Congressman was a regular guy and understood our issues. He already was backing one piece of legislation and agreed to sign onto another of RIMS' supported legislation." Richard E. Rabs, AIC, ARM - Vice President – Insurance & Risk, Veolia North America

Page 25 Recording of this session via any media type is strictly prohibited. Life without TRIA – or terrorism insurance – is a risk Good risk managers anticipate risks assess the consequences to their organizations communicate the issues and the strategies create an approved plan to deal with them manage them And In Conclusion

Page 26 Recording of this session via any media type is strictly prohibited. Questions, Final Comments and Contact Information Speakers Janice Ochenkowski Jones Lang LaSalle Emil Metropoulos Guy Carpenter LLC Other Nathan Bacchus Sr. Government Affairs Manager – RIMS