Chairwoman Peters stated that the ultimate idea of a pool is to lessen government involvement,
although the government may be the ultimate backstop. Mr. Driscoll said that government
involvement can also lessen because of increased private market alternatives. He noted that
participation in PoolRe (the UK pool) is diminishing because the private market is discovering
better ways to provide terrorism coverage. He stated that participation in the National Flood
Insurance Program (NFIP) is decreasing for the same reason. He stated it is therefore important
to build a mechanism where the private market is able to fill in the gaps of the government
program. Mr. Metropoulos commented that the private market is currently doing this under
TRIP with respect to deductibles and co-shares. He stated that although it would be a good idea
to examine international pool structures, the United States faces unique issues (such as the size of
its economy and workers’ compensation) and therefore may require a different solution.

The Committee then turned to a discussion of take-up rates. Director McRaith said that take-up
rates are critical because a primary goal of TRIP is to ensure that insureds have terrorism.
coverage. However, he suggested that another goal is to rationalize prices to ensure they
accurately reflect risk, take-up rates could be decreased, which would not serve the goal of
keeping private capital available for businesses after an event. He also suggested that it can be
difficult to enforce mandatory take-up by insured, and pointed to difficulties faced by the NFIP
as an example.

Mr. Sapnar suggested that the NFIP isn’t a good comparison to terrorism, and stated that
terrorism insurance needs to have a public and private partnership. He also cautioned against
creating a system that encourages behavior which creates additional risks.

Mr. Seo stated that generally insurers are not charging for terrorism coverage, as when they
attempt to levy an additional charge, it is viewed by insureds as a ploy to get more money, as
opposed to being used to support capital requirements. He therefore believes that the market will
recoil from an increase in terrorism pricing, as there is a lack of trust when a price increase
occurs, and insureds do not have a accurate understanding of the Federal backstop mechanism

Director McRaith asked the Committee to consider how to reconcile the interest in high take-up
rates with the desire for actuarially-justified rates (which would likely increase the cost of
premiums).

The Committee discussed Treasury’s recent regulations on Treasury’s process for certification of
an act of terrorism. Mr. Sapnar asked whether a concrete timeline was included in the rule.
Director McRaith stated that set milestones for certification are unreasonable due to the
complexity of making a determination about whether an act of terrorism has occurred, but
confirmed that if an event satisfies the statutory criteria to be certified as an act of certification,
the public will be notified that a certification process has commenced. Mr. Sapnar questioned
whether this process could potentially create situations in which insurers would face significant
financial impairment prior to a decision by Treasury, and Director McRaith suggested that this
question be considered by the Committee, as TRIA was structured following the terrorist attacks
of 9/11, and changes in the nature of threats could potentially warrant changes to the Program
structure.



Mr. Ryan was selected to chair the Consumer Interests subcommittee. Mr. Metropoulos
volunteered to serve on this subcommittee, on behalf of Mr. Clark. Mr. Ryan proposed changing
the name of the Consumer Interests subcommittee, however no determination was made on
whether a name change would occur.

The Committee discussed whether additional lines of business should be able to access TRIP.
Mr. Sapnar suggested, for example, that Personal Lines, should be considered. Mr. Metropoulos
noted that the Committee would discuss what lines of business to include in TRIP going forward,
and Personal Lines would be part of this discussion.

Next Steps

Director McRaith reviewed the Committee’s discussion of questions to be discussed, and
reiterated that the Committee members were selected for their expertise and perspective. As a
result, he stated that he expected they had very clear views on certain matters, and while those
views would be supported, it would be most helpful for the Committee to obtain a consensus on
a path forward.

Director McRaith asked the Committee to select four dates for public meetings prior to October
31, 2017, and within 7 days, to provide a hierarchy of questions to be answered that would assist
in framing an agenda for these meetings. Director McRaith noted that it would be possible to
hold meetings in other locations, as well as longer meetings, if this would facilitate the
Committee’s work.

Mr. Metropoulos inquired about whether meetings could be closed to the public if the Committee
would be discussing confidential or proprietary data. Director McRaith confirmed that Treasury
would speak to its subject-matter experts on the Federal Advisory Committee Act (FACA) to
verify if this was a possibility.

Chairwoman Peters stated she would reach out to Mr. Wolfe (absent), who previously agreed to
inquire about each member’s schedule and arrange meeting dates.

At 3:50 P.M., Director McRaith concluded the meeting.

Ihereby certify these minutes of the December 15, 2016 Advisory Committee on Risk Sharing
Mechanisms public meeting are true and correct to the best of my knowledge.

~

le LAs
Wendy Peep fos Chair



subcommittees, is available in the proposed project plan and available on the ACRSM website at
https://auth.treasury.gov/initiatives/fio/acrsm/Pages/default.aspx.

Director McRaith then asked the Committee for feedback regarding the list of proposed
Considerations.

Mr. Metropoulos stated that the list was comprehensive, but noted that there are certain areas,
such as workers’ compensation, which face unique issues, and stated the Committee should
focus on these areas in its work. He suggested having a representative from the National Council
on Compensation Insurance (NCCI) to provide in-depth information on the workers’
compensation market. Chairwoman Peters stated that she believes the main issues facing
workers’ compensation relate back to modeling, because the highest potential for loss exists
within pockets of concentration. These pockets skew the market and make it difficult to
accurately model risk.

Chairwoman Peters also suggested that the Committee consider how the “make-available”
provision in TRIA skews the market. Mr. Ryan expanded on this and suggested the Committee
also explore whether a make-available provision could be required in an alternative to the
Program.

Mr. Driscoll suggested reviewing post-funding structures, stating that they can produce both
positive and negative unintended consequences. He also suggested that capacity in the
reinsurance market serves s a good proxy for understanding pricing, and therefore recommended
exploring existing transfers of risks to third-parties. Mr. Sapnar noted that the United States is
the only post-funding government system, and that all other countries use a pre-funding system.
He therefore stated it is important to look at whether post-funding is the best approach. Mr.
Ryan questioned whether TRIP should really be considered a “post-funding” mechanism,
because the aggregate market retention requirement could ultimately result in zero outlay from
the government.

The Committee then discussed the operation of terrorism insurance pools in other countries.
Director McRaith interpreted “post-funding” in the United States as meaning there is no pool of
funding set aside to be used in the case of a certified event (other than the industry pool of funds
collected through premiums). Mr. Sapnar noted that the industry is not necessarily collecting
these premiums to use for terrorist events, but rather allocating a certain amount of premium
towards terrorism (when reporting) after the premium is collected. He also commented that the
UK government is distributing data to pool members to help inform their behavior and
understand the aggregation of risk, which helps improve the accuracy of pricing.

The Committee discussed whether the size of the U.S. economy makes pooling less feasible in
the United States. Mr. Seo suggested that the size of the economy actually provides an
advantage. Mr. Metropoulos added that the size of the economy makes matters more complex,
but it could nonetheless serve as an advantage. Mr. Ryan discussed the importance of
establishing a premium in pool model, but cautioned against assigning a premium before an
accurate model is developed.


Mr. Metropoulos agreed that the nature of risks has changed, and suggested the Committee look
at whether other loss scenarios should be included in TRIP, such as cyber events (which were not
contemplated at the time TRIA was originally passed). Director McRaith agreed and asked the
Committee to consider what their clients are currently requesting to cover in terms of risks.
Chairwoman Peters and Mr. Metropoulos both stated that clients are requesting broader business
interruption coverage, and asking about non-physical damages such as loss of attraction.
Director McRaith then noted that the events in Orlando and Boston serve as examples where
areas were closed off for an extended period of time and businesses within the perimeters
experienced business interruptions.

Mr. Driscoll stated that cyber is arguably the fastest growing line of insurance, and he believes
that inclusion of cyber within TRIP should be limited to truly catastrophic events, because TRIP
is not a natural home for cyber coverage, and the industry should innovate to address cyber loss
needs. Mr. Metropoulos agreed with this assessment.

The Committee then discussed considerations related to the reinsurance market. For purposes of
facilitating discussion, Director McRaith asked the Committee whether it would be feasible to set
up a $100 billion minimum threshold for TRIA participation, wherein the private market would
handle all loses beneath the threshold. Director McRaith also asked what the timeline would
need to be to transition to this mechanism, assuming it was feasible. Mr. Seo says that there is a
threshold of approximately $50 billion in the reinsurance and catastrophe market (with respect to
hurricane and earthquake losses), under which the market is operational and solvent, which
therefore implies that a $100 billion threshold would be very high. Mr. Sapnar noted that this
threshold would also include the retention of primary insurers in addition to the reinsurance
market, and therefore it might be feasible. Chairwoman Peters suggested that the biggest issue
with this proposed mechanism is that it is currently difficult to know what the industry’s capacity
is. Mr. Driscoll agreed that there is a data issue and suggested it is important to understanding
capacity before laying down constructs.

With respect to capital markets, Mr. Seo suggested that a deliberate effort would be required to
open capital markets to support terrorism risk, but it would be feasible to do so. Mr. Driscoll
stated that terrorism risk is correlated to economic performance, as opposed to a risk such as a
hurricane, where a market downtown does not create the risk of triggering an event). However,
he noted that although non-correlation for other risks is a benefit, it does not drive the capital
markets, and therefore would not be an impediment to the creation of a market for terrorism risk.
Mr. Metropoulos also raised the concern that there are challenges with tail risks, such as liability
and workers’ compensation, in capital markets.

Director McRaith suggested that other paradigms may have components of interest and value for
the Committee, and suggested it would be helpful for individuals affiliated with other programs
to speak at future Committee meetings. Chairwoman Peters agreed that it would be helpful to
look at the reinsurance mechanisms supporting other programs. Mr. Sapnar suggested that the
subcommittee exploring other programs should also examine the strengths and weaknesses of the
current TRIP program.



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

December 15, 2016

The Advisory Committee on Risk Sharing Mechanisms was convened at 1:48 p.m. on December
15, 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 provisions 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 (represented by

proxy Emil Metropoulos)*

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

EDWARD RYAN, Senior Managing Director, Aon Benfield

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

JOHN SEO, Managing Principal, Fermat Capital Management LLC

Also Present:

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

*Represented by proxy
Introduction

Director McRaith welcomed the members of the Advisory Committee on Risk Sharing
Mechanisms (ACRSM) and convened the meeting. Director McRaith stated that although a
market currently exists for terrorism risk insurance, the Committee’s purpose is to determine if
there is a better way to structure terrorism risk insurance in the United States. If the Committee
finds a better way, the Committee should determine if there is a transition process that can occur
without disruption to the industry and economy. Director McRaith reiterated the importance of
wisely using the Committee’s time and expertise, and encouraged the Committee members to use
the meeting time to discuss issues that are most useful to them.


Director McRaith also encouraged the Committee to recognize the importance of consumer
interests,

Timeline

Director McRaith proposed that the Committee meet quarterly and hold a total of four meetings
before October 31, 2017, with subcommittee calls held between the meetings. The Committee
agreed to this meeting schedule.

Chairwoman Peters inquired about access to peripheral support services, such as external data
forms. Director McRaith that Treasury staff are available to assist and will draft the Report for
the Committee’s review, based on the conclusions developed by the Committee, however
external resources will not be paid to provide support.

Director McRaith suggested that the Committee members type up their thoughts on the first
questions that need to be answered by the Committee.

Subcommittees

Director McRaith proposed the creation of five subcommittees: Direct Insurers, Reinsurance,
Capital Markets, Exploration of Terrorism Risk Approaches in Other Countries, and Consumer
Interests.

Mr. Seo questioned whether the Consumer Interests subcommittee should be combined with the
Direct Insurers subcommittee. Mr. Metropoulos responded that although these two
subcommittees overlap, they serve different constituents and consumer interests are important.
Chairwoman Peters concurred that the subcommittees should remain separate.

Mr. Sapnar suggested that the work of the subcommittees may need to be sequential, with some
questions addressed before others can be considered.

Keith Wolfe (absent) was selected to chair the Direct Insurers subcommittee. Mr. Metropoulos
(on behalf of Mr. Clark), Mr. Ryan, and Chairwoman Peters volunteered to serve on the
subcommittee.

Mr. Driscoll was selected to chair the Reinsurance subcommittee. Mr. Sapnar and Mr. Seo
volunteered to serve on this subcommittee.

Mr. Seo was selected to chair the Capital Markets subcommittee. Additional subcommittee
members were not selected at the time of the meeting.

Mr. Sapnar was selected to chair the Exploration of Terrorism Risk Approaches in Other
Countries subcommittee. Chairwoman Peters and Mr. Seo volunteered to serve on this
subcommittee.


Data Availability

Director McRaith asked the Committee to provide feedback on the types of data that it will need
to move forward.

Chairwoman Peters stated that it is important for the Committee to have a fundamental
understanding of what data is currently available.

Director McRaith provided background on the voluntary data collection performed by the U.S.
Department of Treasury (Treasury) in 2016, and commented that the data collection will be used
to help inform policyholders about the current market and the effectiveness of the Program. The
data collection process will be mandatory going forward, and Director McRaith noted that
Treasury is cognizant of the need to respect the data collection burden on the industry while
meeting the Department’s statutory mandate. He also stated that although Treasury does not
collect individual company data, aggregated data will be available for the Committee’s use.

Chairwoman Peters suggested that take-up rates and premium volume are the most important
data points, and emphasized that it is important to understand the impact on the market and
demand if the program is changed. She also noted the importance of understanding who is
buying terrorism coverage, and understanding insureds’ profiles, locations, and the types of
coverage being purchased. Director McRaith confirmed that the data being collected by
Treasury should be able to provide answers to these questions.

Director McRaith asked whether it would be helpful to have data on whether insurers are issuing
policies with terrorism coverage built-in to the policy, or whether insureds are required to pay
extra for terrorism coverage. Chairwoman Peters stated that this information would be helpful,
and in general the more data that is available, the better of a position the Committee will be in.

Mr. Driscoll stated that there is a spectrum of possible alternatives to the current structure of the
Terrorism Risk Insurance Program (TRIP), however he believes the key question is market
capacity, as this is what drives affordability of the product. He suggested obtaining an
understanding of the probabilistic outcomes of different disaster scenarios, then framing capacity
questions in relation to these scenarios. He also noted that he supported the use of
Subcommittees to harvest the full knowledge of the Committee.

Mr. Seo expressed concern with analyzing capacity, noting that the current understanding of
market capacity is theoretical because there is no current understanding of what is being paid,
and therefore the market cannot react appropriately. He stated that although it is clear that
people are currently paying very little, it is more important to understand what insureds would be
willing to pay for coverage. Chairwoman Peters concurred and stated that artificial pricing
mechanisms are in place, and insurers are not actually pricing risk. Mr. Driscoll suggested that
an accurate estimate of price could be obtained by looking at exposure and policy in the data call.
He stated that by understanding probable maximum loss, it is possible to work backwards and
develop loss cost and an associated premium. This would then help the Committee understand
the feasibility of transitioning to a potential future state/program alternative. Mr. Ryan noted that



in looking at total insured value, it would be important to look at the location of exposure, as risk
is likely to be concentrated and some of the exposure probably should not have a charge.

Mr. Metropoulos agreed that data is critical to understanding if the current TRIP limits are high
enough, as well as understanding exposure, limits and take-up rates.

Proposed Project Plan
Overall Objectives

Director McRaith reviewed the proposed project plan with the Committee members. He first
reviewed the initial threshold question for the Committee of whether TRIP should be
restructured, and if so, what the potential alternative should be. If an alternative is identified, the
Committee will need to identify a transition plan. Director McRaith noted that a program that
disrupts economic activity will not receive support, even if the end goal is desirable.

In discussing whether TRIP should be restructured, Mr. Metropoulos noted that capacity in the
absence of the Terrorism Risk Insurance Act (TRIA) is untested, however TRIA and its
reauthorizations have allowed the industry to slowly absorb more capacity without economic
disruption. Mr. Sapnar agreed, and stated that it is unclear whether the industry can withstand an
event. He also stated that TRIP does have shortcomings on both ends, as it has a cap as well as
an industry retention amount. He therefore suggested it would be helpful to identify
shortcomings of the current Program and proceed from there.

Timeline

Director McRaith noted that the proposed timeline for the project was established to coincide
with the possible renewal of TRIA, so that the Committee would be able to conclude a report in
advance of the Program’s expiration and provide valuable information to policymakers
considering whether to renew the Program. He also stated that the timeline was not binding but
was proposed to serve as a guideline to help the Committee structure their work. Chairwoman.
Peters agreed that it was important to ensure that the Report reaches policymakers in time to be
valuable for considering the Program’s renewal.

Chairwoman Peters asked about whether the end of members’ appointments to the Committee
would affect the timeline, and Director McRaith confirmed that Committee members can be re-
appointed to the Committee, assuming they are interested in continuing to serve. Ms. Baldwin
also confirmed that most member appointments will end at the same time, as the majority of the
Committee members were appointed at the same time.

Considerations for Subcommittees
Director McRaith reviewed considerations for all subcommittees, and noted that the list

presented was not exhausted but was intended to serve as a starting point for discussion and
research. A list of these considerations, as well as questions posed for the specific proposed