The Terrorism Risk Insurance Act of 2002 Now You See It . . .

1. The Terrorism Risk Insurance Act of 2002Now You See It . . . Christopher Yaure, Esquire GE Insurance Solutions Presentation to CARe September 13, 2004

2. “Uncertainty is the only certainty there is, and knowing how to live with insecurity is the only security.” John Allen Paulos, quoting his father, in A Mathematician Plays the Stock Market (2003 New York)

3. What Is Different About (Re)Insuring Against Terrorism? • Underwriting • Non-random events • Risk difficult to quantify • Expected frequency can change quickly • Asymmetrical information • Interdependent risk • Historical data less relevant • Difficulty proving cause of loss • Distribution of risk • Multiline risk • Correlation between geographically remote events • Correlation between events in different countries • Corporate level concerns • Correlation between loss events and asset values • Shareholder awareness • Public policy considerations

4. Lines of Coverage Property Workers Compensation Aviation Marine General Liability Auto Liability Directors and Officers Liability Professional Liability

5. Type of Terrorism Coverage

6. “Obtaining Coverage. – This title may not be construed to limit or prevent insurers from obtaining reinsurance coverage for insurer deductibles or insured losses retained by insurers pursuant to this section, nor shall the obtaining of such coverage affect the calculation of such deductibles or retentions.” Sec. 103(g)(1) “Limitation on Financial Assistance. – The amount of financial assistance provided pursuant to this section shall not be reduced by reinsurance paid or payable to an insurer from other sources, except that recoveries from such other sources, taken together with financial assistance for … a Program Year provided pursuant to this section, may not exceed the aggregate amount of the insurer’s insured losses for such period. . . .” Sec. 103(g)(2) TRIA on Reinsurance to Cover Exposure

7. How Is Reinsurance Different From Insurance? • Not subject to form and rate regulation • No mandatory availability • No (direct) TRIA compensation • Concentration of risk (e.g., excess of loss) • Two-year tail (risks attaching) • Less control over risks • Less detailed data

8. Facultative Easier Than Treaty to Provide More data More control Shorter tail

9. How Big Can It Be? • Nuclear • Radioactive • Biological • Chemical • Swarm attacks • Serial attacks

10. Reporting • Premium • AM Best • Surveys • Claims

11. Premium • Treasury is authorized to use the NAIC to collect information on terrorism risk insurance premium rates

12. A.M. Best Supplemental Rating Questionnaire • A.M. Best requires two rating questionnaires to be filled out by P&C companies • A background questionnaire that asks for basic data • The Supplemental Rating Questionnaire (SRQ) • The SRQ asks for information that is not typically available in a company’s financial statements, e.g., • Operations • Policy coverage • Catastrophe exposures and management • Reinsurance programs The SRQ typically is submitted by April 1st of each year

13. Terrorism Section of the SRQ • A.M. Best has added a 4-question Terrorism Section to the SRQ this year. • Question 41 – Terrorism Exposure Management • Questions 42-44 – Quantification of Potential Loss • Very qualitative – numbers are not used in A.M. Best’s capital model The ability to answer these questions is at least as important as the actual answers you provide.

14. Modeling Analysis You Will Need • Aggregate multiline exposures – 42-44 • Identify “at risk” locations – 42 • Maximum possible loss – 42 and 43 • Modeled losses by event (weapon) scenario – 44 • Geocoding and radius analysis - 44 No probabilistic analysis is needed

15. Completing the SRQ • If you have questions, contact your A.M. Best analyst • This is a research process for A.M. Best • No quantitative benchmarks yet • A.M. Best wants to see that management is doing the necessary analysis • Can your company measure its exposure?

16. Treasury Surveys • Policyholder survey – representative sample • Insurer survey – representative sample • Reinsurer survey – all US reinsurers

17. TRIP Claims Process • Effective July 29, 2004 • Early notification – when losses including IBNR exceed 50% of deductible • Initial certification of loss – after paid losses exceed deducible • Supplementary certification of loss • Loss bordereau • Compliance certification

18. TRIA Status TRIA expires 12/31/2005 Certified acts of terrorism Government reinsurance Mandatory availability

19. Mandatory availability • Treasury announced that it is extending the make available requirement of TRIA through 2005 • On most US commercial P&C policies incepting through 12/31/2005, the insurer is required to offer coverage for losses from certified acts of terrorism • Although Treasury has not officially stated how the make available requirement applies to policies incepting before 12/31/2005 but expiring after 12/31/2005, the common assumption is that coverage for acts of terrorism happening after 12/31/2005 can be excluded • ISO has filed conditional terrorism endorsements to be effective 1/1/2006 if TRIA is not renewed

20. Government reinsurance • Under TRIA, the federal government reinsures (for no premium) most P&C insurers for 90% of losses from terrorism in excess of a retention • In 2005 the retention increases to 15% of the insurer’s 2004 applicable direct earned premium • There is no federal reinsurance for losses from acts of terrorism after 12/31/2005

21. Certified Acts of Terrorism • TRIA applies only to acts of terrorism committed on behalf of a foreign person or foreign interest, generally in the US, with aggregate P&C insurance losses exceeding $5 million • An act of terrorism is covered under TRIA only if it is certified as such by the Secretary of the Treasury, with no judicial review permitted • Treasury does not appear to have the authority to certify an act of terrorism that happens after 12/31/2005

22. Implications • TRIA extension will not be resolved before the 2005 renewal season begins, and may not be resolved before 1/1 renewals • The expiration of TRIA affects risks attaching reinsurance treaties incepting after 1/1/2004 and losses occurring treaties incepting after 1/1/2005 • Treaties and policies that refer to “certified acts of terrorism”, either for coverage or exclusions, and that cover losses in 2006 should contain conditional language in the event TRIA is not extended • Cedants with policies in lines where terrorism can be excluded (most property and liability) will have less need for terrorism reinsurance after 1/1/2005 • Cedants with policies in lines where terrorism cannot be excluded (workers comp, fire following property, states rejecting the ISO conditional terrorism exclusions) will have greater need for terrorism reinsurance after 1/1/2005

23. Christopher Yaure Risk Manager, Terrorism and Emerging Risk GE Insurance Solutions 215-255-6746 1818 Market Street, Suite 2600 Philadelphia, PA 19103 Christopher.yaure@ge.com