The Committee discussed how best to reach a consensus on a recommendation and produce a
working paper.

Director McRaith confirmed that cyber coverage offered under a TRIA-eligible line is eligible
for TRIA reimbursement.

At 12:37 P.M., Chairwoman Peters concluded the meeting.

I hereby certify these minutes of the June 1, 2016 Advisory Committee on Risk Sharing
Mechanisms public meeting are true and correct to the best of my knowledge.

Lb

Wendy PetegS/ ACRSM Chair



UNITED STATES DEPARTMENT OF THE TREASURY
ADVISORY COMMITTEE ON RISK SHARING MECHANISMS
SUMMARY OF PUBLIC MEETING

June 1, 2016

The Advisory Committee on Risk Sharing Mechanisms was convened at 10:00 A.M. on June 1,
2016, in Media Room A at the U.S. Department of the Treasury, 1500 Pennsylvania Avenue,
NW, Washington, D.C., with Wendy Peters, Chair, presiding.

In accordance with the provision of the Federal Advisory Committee Act, the meeting was open
to the public.

Committee Members Present:

WENDY PETERS, Executive Vice President, Financial Solutions — Terrorism and Political
Violence, Willis Towers Watson, Chair

JONATHAN CLARK, Managing Director, Guy Carpenter & Company LLC

KEAN DRISCOLL, Vice President and CEO, Validus Reinsurance, Ltd.

GREG HENDRICK, CEO, XL Catlin Reinsurance

EDWARD RYAN, Senior Managing Director, Aon Benfield

MICHAEL SAPNAR, President & CEO, Transatlantic Holdings, Inc.

JOHN SEO, Managing Principal, Fermat Capital Management LLC

KEITH WOLEE, President US P&C — Regional & National, Swiss Re

Also Present:

MICHAEL MCRAITH, Director, Federal Insurance Office, U.S. Department of the Treasury
BRETT HEWITT, Designated Federal Officer, Federal Insurance Office, U.S. Department
of the Treasury

Introduction

Director McRaith welcomed the members of the Advisory Committee on Risk Sharing
Mechanisms (ACRSM) and convened the meeting. Director McRaith reviewed the purpose of
the committee. Chairwoman Peters outlined the agenda for the meeting and identified three
areas of focus for the committee to discuss during the meeting: (1) capital markets and the role of
instruments such as insurance-linked securities and spreading the risk of loss resulting from an
act of terrorism; (2) the role of traditional insurance and reinsurance markets, how they have
supported terrorism risk to date, and how this role can be expanded, and (3) the need for
terrorism risk and reinsurance and how the need for coverage can be placed outside of the current
Terrorism Risk Insurance Act (TRIA) system.



Proposed Structures of Private Terrorism Risk Market

Chairwoman Peters asked each committee member to outline their opinion on how a more robust
private terrorism risk market could be structured. Mr. Seo emphasized the importance of having
unfettered transparent access to risk through many different forms of capital as possible in order
to maintain system stability after an event. Mr. Driscoll stated that terrorism is a unique risk, and
the government should be involved with high-severity risks. Chairwoman Peters noted the
potential value in examining other global programs. Mr. Clark stated the current system is “one
size fits all” but companies have a variety of needs that should be examined. He also stated that
workers’ compensation is a distinguishing factor in the United States compared to other
programs around the world.

Insurance-Linked Securities (ILS) Market

Mr. Seo provided a snapshot of the ILS market. He discussed ILS market growth, followed by a,
discussion of the sponsor mix of the catastrophic bonds market and the investor mix of the
catastrophic bonds market. Mr. Seo then provided an estimate of ILS market terrorism capacity.
Mr. Seo then addressed possible impediments to use of the ILS market, and compared the
appetite for terrorism risk to the market appetite for natural peril risk. He also discussed
confidence levels in the modeling of terrorism risk. Mr. Seo addressed correlation between ILS
and traditional markets.

Mr. Sapnar discussed the importance of looking at market capacity outside of the United States.
Mr. Hendrick and Mr. Wolfe noted that the capacity for terrorism risk varies by carrier.

Mr. Sapnar and Mr. Hendrick discussed the ways in which TRIA is by carriers to help maintain
capacity by managing retained risk to exposures.

Private Reinsurance Market

Mr. Driscoll, Mr. Wolfe, and Mr. Sapnar provided an overview of the private reinsurance
market, with the hopes that this background could identify future areas for committee review.
Mr. Sapnar began by discussing global reinsurance capacity, including ILS capacity. Mr. Sapnar
stated that the global terrorism reinsurance market is robust, and have similar dynamics to the
natural perils market. He noted that the frequency and severity of terrorism has increased, and
discussed trends in economic costs of terrorism since 2000. Mr. Sapnar also discussed U.S.
terrorism take-up rates and prices over the last decade. Mr. Sapnar stated his belief that
encouraging a robust free market system would help drive better data and allow the market to
expand.

Mr. Wolfe discussed the framework of the overall existing market for terrorism coverage,
including key aspects of the current regulatory framework under TRIA and state law. Mr. Wolfe
then highlighted several changes to the Terrorism Risk Insurance Program (TRIP) that occurred
as a result of the Terrorism Risk Insurance Program Reauthorization Act of 2015 (TRIPRA). He
also discussed several proposed reforms which were not adopted in TRIPRA.

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Mr. Driscoll reviewed a hypothetical loss allocation resulting from a $45 billion loss covered by
TRIA. He then provided a comparative analysis of TRIA compared to other government-funded
pools, and highlighted current market components within the insurance and reinsurance
industries. Mr. Driscoll then addressed the importance of measuring data quality in terms of
both accuracy and completeness, and indicated that data quality is lower in terrorism than in
other segments. Mr. Driscoll also discussed the current limitations of vendor model capabilities
with respect to terrorism risk.

In response to questions from Director McRaith, Mr. Driscoll noted that the United States is the
only country that subsidizes terrorism risk, and Mr. Driscoll and Mr. Hendrick discussed the
impact of TRIA’s recoupment provisions on the marketplace.

Mr. Sapnar and Mr. Wolfe discussed whether events must be “certified” by the government or
meet other criteria in order to qualify as an act of terrorism in different segments of the market.

Mr. Seo, Mr. Clark and Mr. Hendrick discussed the types of models that carriers use for
terrorism risk modeling, and Mr. Sapnar and Mr. Seo noted that investors may view models
differently.

Mr. Sapnar addressed a question from Mr. Seo on the impact of pricing if another major i
terrorism event occurs.

Distribution and Placement of Private Terrorism Coverage

Mr. Clark presented materials related to the distribution and placement of private terrorism
coverage based on reports produced by Guy Carpenter, covering the following topics: (1)
reviewed the highest property losses due to terrorism to date; (2) the industry’s ability to cover
insurance losses; (3) an overview on changes to the Terrorism Risk Insurance Program as a result
of the passage of the 2015 Terrorism Risk Insurance Program Reauthorization Act; (4) terrorism
risk insurance take-up rates; and (5) terrorism risk insurance pricing.

The Committee members discussed the impact of reinsurance on insurance carriers, how much
terrorism insurance capacity is available, insurance demand, take-up rates for embedded versus
stand-alone policies, and the role of captive insurers within the Program.

Discussion of Committee Working Groups and Next Steps
Chairwoman Peters outlined the Committee’s goal of producing a working paper to provide a |

specific recommendation for the development of a private, non-governmental risk sharing
mechanism.

Chairwoman Peters recommended establishing three working groups covering: (1) the role of
capital markets, (2) the private reinsurance market, (3) the need for coverage and the

mechanisms needed to establish or further risk-sharing mechanisms. After discussion, the F
Committee determined that subcommittees would not be established at this time. |