Managing the Uncertainty of Terrorism Risk

TERRORISM RISK INSURANCE The September 11, 2001, terrorist attacks created a severe market shortage for terrorism insurance The US Congress passed the Terrorism Risk Insurance Act (TRIA) as a federal “backstop” for insurance claims related to terrorism events in the US and US interests abroad It has been extended (with amendments) twice and the current Act is scheduled to expire on December 31, 2014, if not renewed

How The Act Works 2007 Renewal (Current In-Force) $100B Maximum w/out Congressional Action 85% TRIPRA Coverage 15% Company Co-Participation Company Retention = 20% of PY DEP $100M Aggregate Minimum > $5M Event Certification > Original Policy Deductible

Evolution of TRIA/TRIPRA   TRIA 2002 TRIA Extension 2005 TRIPRA 2007 Termination December 31, 2005 December 31, 2007 December 31, 2014 Make-available provision Must make coverage available for certified acts of terrorism on same terms and conditions as for other covered risks No change Covered acts Foreign terrorism in the U.S. and on U.S. interests abroad. Includes an act of war for workers’ compensation policies only. Foreign and Domestic terrorism in the U.S. and on U.S. interests abroad. Includes an act of war for workers’ compensation policies only. Certification level $5 million Program trigger $5 million in 2006 (thru March 31, 2006) $50 million in 2006 (after March 31, 2006) $100 million in 2007 $100 million in insured loss in a Program Year With each update to TRIA there has been an increase the industry’s loss position. Deductibles have increased from 7% in Year 1 to the current 20% along with increases in the coinsurance rate

Evolution of TRIA/TRIPRA (Continued)   TRIA 2002 TRIA Extension 2005 TRIPRA 2007 Covered Lines Commercial property and casualty (P&C) insurance (including excess insurance, workers’ compensation and surety insurance) Commercial P&C insurance (including excess insurance, workers’ compensation and directors and officers insurance) No change Excluded Federal crop Private mortgage Financial guaranty Medical malpractice Health or life insurance including group life Flood under NFIA Reinsurance or retro Added Exclusions: Commercial auto Burglary and theft Surety Professional liability Farm owners multiple peril Insurer Deductible (% of direct earned premium) 15 percent in 2005 17.5 percent in 2006 20 percent in 2007 20 percent Federal reinsurance quota share 90 percent in 2002-2005 90 percent in 2006 85 percent in 2007 85 percent Insurance industry retention for mandatory recoupment $15 billion in 2005 $25 billion in 2006 $27.5 billion in 2007 $27.5 billion Cap on liability $100 billion With each update to TRIA there has been an increase the industry’s loss position. Deductibles have increased from 7% in Year 1 to the current 20% along with increases in the coinsurance rate

WHAT TO EXPECT There is limited expectation of TRIA being addressed in Congress until we get closer to the expiration date in 2014 TRIA has historically received centrist bipartisan support This could outweigh any far right or left sentiment relative to limiting government involvement in terrorism insurance Three pieces of legislation have been tabled in the House of Representatives

Property Terrorism Risk Transfer Solutions

TERRORISM RISK INSURANCE Terrorism Insurance Take-up Rates By Year

HOW TO PREPARE Strategies for handling potential expiration of TRIA December 31, 2014 Align property programs with carriers who will continue to support terrorism coverage in the absence of a TRIA backstop to minimize TRIA “sunset” Consider a standalone terrorism policy as alternative to embedded TRIA – bind a standalone terrorism product 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 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

Options for Managing Terrorism Insurance Uncertainty Secure full term embedded terrorism coverage from All Risk property markets where possible Stand-alone terrorism market solutions 100 percent or partial stand-alone terrorism coverage Capacity commitment contracts “Flip/Flop” stand-alone terrorism contracts

Capacity Commitment Mechanism to reserve capacity prior to 31st December 2014 Partial take-up of committed capacity is permitted Coverage offered on the basis of the T4/T4A or the All Risks policy form

“Flip/Flop” Stand-Alone Terrorism Contract TRIA with partial Sunset provisions Post-December 31, 2014 with “Flip/Flop” Excess Standalone Terrorism All Risk Conversion premium identified on quote Full term Sunset

TRIA Captive Program – TRIA expiration strategy Captive TRIA Policy C. Co-Participation 15% Retention Reinsured by the Federal Government TRIA 85% Captive TRIA Certified Policy: U.S. based captives can act as TRIA authorized insurers and access the U.S. TRIA Federal backstop. TRIA reinsurance offered excess of captive TRIA deductible, captive share can either be retained, subject to sufficient capital, or reinsured with the stand-alone 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 B. TRIA Captive Deductible (20% of prior year’s direct earned premium) Policy Retention A. Federal Backstop Trigger $100M

WORKERS COMPENSATION

UNIQUE ASPECTS OF Workers’ Compensation State regulated and compulsory line of business Insurers cannot limit or exclude any form of terrorism coverage Nuclear, Biological, Chemical, and Radioactive perils covered and a significant concern to WC writers Arguably the most uninsurable risk(s) Limited reinsurance capacity Policies written on an unlimited basis

Insurer REACTION TO PENDING TRIPRA EXPIRATION The uncertainty of TRIPRA’s future is having an impact on the WC line of coverage; unique because More granular employer concentration data requirements Increased scrutiny by carriers on insured employee concentrations Some insurers have non-renewed WC programs or are only offering short term renewal policies with 12/31 expiration dates to coincide with current TRIPRA expiration Large risks in NYC are most affected, but problem persists in other major urban cities or for industries such as financial institutions, colleges / universities, hospitals, and defense contractors Fewer insurer options for buyers and price increases Contingent endorsements that allow unilateral pricing increases (subject to regulatory approval) are being added to policies

Employee Concentration RISK Why do employee concentrations matter? Insurers monitor their concentrations of insured employees on a portfolio basis as well as in concert with other correlated lines of coverage Insurers “overlined” in certain areas or cities decline risks or impose surcharges on premiums Concentration data and terrorism catastrophe models have improved, allowing insurers to: Manage their potential exposures to terrorism loss scenarios Achieve pricing more reflective of the assumed risk Satisfy rating agency requirements

Managing the UNCERTAINTY: WHAT CAN YOU DO? Be proactive: Start renewals early 120 days or more prior to policy effective date Provide high-quality underwriting data Use modeling and risk analytics to differentiate terrorism risk profile Work with risk advisors to develop communication and presentation strategies for key risk exposures

Managing the UNCERTAINTY: WHAT CAN YOU DO? Highest quality data serves as best differentiator 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 including guards, surveillance cameras, parking areas, and HVAC protections 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

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