Terrorism Risk Insurance Program Reauthorization Act of 2007 Illusions and Realities Casualty Actuarial Reinsurance Seminar Boston, MA May 19 – 20, 2008.

Terrorism Risk Insurance ProgramReauthorization Act of 2007

Illusions and Realities

Casualty Actuarial Reinsurance SeminarBoston, MA

May 19 – 20, 2008

Tom KusmierczykSenior Property Treaty Officer

Munich Reinsurance America, Inc.

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Agenda

• The Challenge of Terrorism

• The TRIA Solution

• TRIPRA 2007 – Comparison vs. 2005

• Market Update

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The WTC attacks- What went wrong?Geographical accumulation within and between lines of business

Damage to buildings

Degree of effect

UndamagedRequired cleaningDamaged but stableSevere structural damage DestroyedDanger of collapse

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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

VCF (under TPL), 7,049, 18%

Life, 1,010, 3%

General Liability + Personal Accident,

4,010, 10%

Aviation**, 3,520, 9%

Property Damage + Business

Interruption + Event Cancellation,

21,680, 52.7%

Workers Compensation,

1,890, 5%

WTC insured damage in m. US $

Total: 39,159

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High

Low

Low High

Pro

bab

ilit

y /

Fea

sib

ilit

y

Possible Damage

Nuclear

Conventional

Radioactive

Biological Chemical

Analyzing Tactics, Skills and MeansThreat Levels by Kind and Probability of Attack

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Terrorism Risk Insurance ProgramTRIA 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.

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Terrorism Risk Insurance ProgramTRIEA 2005 Primer/Review

1. The Terrorism Risk Insurance Act (TRIA) of 2002 was extended by

amendment on December 26, 2005. 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.

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Terrorism Risk Insurance ProgramTRIEA 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 2005.

4. 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.

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TRIPRA 2007

15%

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

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Terrorism Risk Insurance Program. Recoupment Example

Discretionary Recoupment

$12.5B

$40B Insured Loss Assumptions Loss occurs 2008 100 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

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Terrorism Risk Insurance ProgramIllusion of US$ 100 billion Federal Back-Stop(US$)

Insurer DWP Top 10 80,000,000,000

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

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Terrorism Risk Insurance ProgramIllusion of US$ 100 billion Federal Back-Stop(US$)

Insurer DWP All 150,000,000,000

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

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TRIPRAComparison

TRIA TRIEA TRIPRA

Deductible 15% DWP 17.5 Y4 – 20% Y5 20%

Expiration 12/31/2005 12/31/2007 12/31/2014

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

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Issue TRIEA 2005 TRIPRA 2007

Term/Timeline 2 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 legislationDecember 26, 2007 – TRIPRA 2007 signed into law

TRIPRA 2007Comparison: TRIEA 2005 vs. TRIPRA 2007

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Covered Terrorist Events (definition of a “certified” TRIA event)

Acts by or on behalf of foreign terrorists only – no domestic terrorism event coverageTo 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 changeTo 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


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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

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Make Available (mandatory offer of coverage)

Required for all covered P&C linesTerrorism 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 linesChanged: 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

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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

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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)

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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 ReportReport re affordability and availability of NBCR insurance ResetReport for markets and geographic regions with terrorism capacity issues

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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 LimitTreasury to issue pro rata claims guidelines during Program Year 2008 (report within 120 days of enactment, regulations within 240 days of enactment)

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Insured Loss Estimates: Large NBCR Attack ($ Billions)

Type of Coverage New York Washington San Francisco Des

Moines

Group Life $82.0 $22.5 $21.5 $3.4

General Liability 14.4 2.9 3.2 0.4

Workers Comp 483.7 126.7 87.5 31.4

Residential Prop. 38.7 12.7 22.6 2.6

Commercial Prop. 158.3 31.5 35.5 4.1

Auto 1.0 0.6 0.8 0.4

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

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Managing the uncertainty of Terrorism Risk Nov. 1, 2007

Marsh J. Dalton, B. Tucker

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Managing the uncertainty of Terrorism Risk Nov. 1, 2007

Marsh J. Dalton, B. Tucker

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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.

Terrorism Risk Insurance Program Reauthorization Act of 2007 Illusions and Realities Casualty Actuarial Reinsurance Seminar Boston, MA May 19 – 20, 2008.

Documents

act of terrorism

insurance carriers

casualty insurance losses

challenge of terrorism

personal lines of insurance

tria definition

tria solution tripra

certified tria eventprovides