TERRORISM RISK INSURANCE

SEPTEMBER 18, 2013

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        - 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
        - Marsh’s 2013 Terrorism Risk Insurance Report examines, in-depth, the continued demand for terrorism insurance based on take up rates, coverage nuances, and a number of other factors – data that supports an extension of TRIA

TERRORISM RISK INSURANCEThe Terrorism Risk Insurance Program Reauthorization Act (TRIPRA)

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Evolution of TRIA
|                                                       | 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                                                                                                               | 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.                         | No change                                                                                                               | 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                                                                                                                                           | No change                                                                                                               | No change                                                                                                                                   |
| Program trigger                                       | $5 million                                                                                                                                           | $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                                                                                              |
| 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 guarantyMedical malpracticeHealth or life insurance including group lifeFlood under NFIAReinsurance or retro | Added Exclusions: Commercial autoBurglary and theftSurety Professional liabilityFarm owners multiple peril              | No change                                                                                                                                   |
| Insurer Deductible (% of direct earned premium)       | 15 percent in 2005                                                                                                                                   | 17.5 percent in 200620 percent in 2007                                                                                  | 20 percent                                                                                                                                  |
| Federal reinsurance quota share                       | 90 percent in 2002-2005                                                                                                                              | 90 percent in 200685 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                                                                                                                                         | No change                                                                                                               | No change                                                                                                                                   |

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Summary of Proposed Legislation As of September 10, 2013

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| Stipulations           | Terrorism Risk Insurance Act of 2002 Reauthorization Act of 2013 (H.R. 508) | Terrorism Risk Insurance Program Reauthorization Act of 2013 (H.R. 2146)                                                                                                    | Fostering Resilience to Terrorism Act of 2013 (H.R. 1945)                                                                                                                                                                                                            |
|------------------------|-----------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Sponsorship            | 75 cosponsors, 35 Republicans and 40 Democrats                              | 31 cosponsors, 30 Democrats and 1 Republican                                                                                                                                | 6 Democratic cosponsors                                                                                                                                                                                                                                              |
| Term (Expiration)      | December 31, 2019                                                           | December 31, 2024                                                                                                                                                           | December 31, 2024                                                                                                                                                                                                                                                    |
| Recoupment Deadline    | September 30, 2024                                                          | September 30, 2027                                                                                                                                                          | September 30, 2024                                                                                                                                                                                                                                                   |
| Reporting Requirements | None                                                                        | 2013, 2017, 2020, and 2023 on the findings of the President’s Working Group on Financial Markets to determine long term affordability/availability of terrorism insurance   | 2013, 2017, 2020, and 2023 on the findings of the President’s Working Group on Financial Markets to determine long term affordability/availability of terrorism insurance                                                                                            |
| Other Key Changes      | None                                                                        | None                                                                                                                                                                        | DHS to provide Insureds with appropriately classified terrorism risk information and information on best practices, to “foster resilience” to a terrorist act Act Certification by Secretary of DHS (and not Sec. of State) in concurrence with Sec. of Treasury     |

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MARSH

How The Act Works2007 Renewal (Current In-Force)

Recoupment Process

For certified acts up to and including $27.5B, Treasury is “required to recoup 133% of the government coverage...through surcharges on property/casualty insurance policies” by Sep. 30, 2017

If the industry loss exceeds $27.5B, Treasury has discretionary authority to apply recoupment charges

Surcharge to policy not to exceed 3% of policy premium

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Property Terrorism Insurance Take-up Rates By Industry

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Property Terrorism Insurance Take-up Rates by Region

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        - Terrorism exposure presents a unique challenge for workers’ compensation insurance
        - Workers’ compensation coverage is compulsory – employers are  required to provide it to employees
        - Individual states regulate the line of business
        - Statutory / unlimited requirements for workers’ compensation loss
        - No option to exclude or sublimit any form of terrorism loss (i.e. conventional or NBCR) 

TRIPRA does not distinguish between attack modes
        - Coverage follows that afforded in the primary policy
        - Annual policies with expiration dates on or after 1/1/2015 may be negatively impacted

TRIPRA and Workers’ Compensation

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Small v. Large Carrier Concerns
        - 2012 industry surplus for insurance companies writing TRIPRA exposed business is $589B
        - Approximately 850+ carriers subject to program
        - A higher percentage of the surplus for smaller insurers is required to meet the deductible requirements of TRIPRA.  Consequently, smaller insurers tend to incorporate TRIPRA recoveries into their risk management strategies
        - Larger insurers with TRIPRA deductibles in the billions of dollars tend to manage their exposures to specific zone accumulations rather than incorporating TRIPRA recoveries 
        - Rating agencies are focusing on risk accumulation / aggregation profiles and are asking insurers for specific strategies if TRIPRA expires without a replacement
        - Reinsurers are able to provide more coverage for conventional weapons attacks than for NBCR attacks

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Efficacy of Private Market Reinsurance Capital

September 11, 2001
        - $32.5B (2001 dollars)
        - $42.9B (2013 dollars)1

Largest Modeled Conventional Weapon Loss

$38.6B2 – 10 ton truck bomb in Midtown Manhattan

Largest Modeled NBCR Loss
        - $941B2 – nuclear detonation Midtown Manhattan

(Re)Insurance Industry is not adequately capitalized to support NBCR Loss

Notes: 

2013 dollars based on Bureau of Labor statistics CPI Index

The loss figures above assume a 100% Property take-up rate among commercial insureds

Industry capital figures presented assume 100% of capital is available, or deployed, to cover terrorism. In reality, many (re)insurers – particularly capital/convergence markets – have little-to-no appetite to write terrorism because of correlation with financial markets loss. 

Source: Guy Carpenter Business Intelligence

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Private Industry Capital

Loss Scenarios

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Est. $195B

Global

Reinsurance

Dedicated Capital

Est. $700B3 P&C 

US (Re) Insurance 

Dedicated Capital

Est. $100B

North American

Reinsurance

Dedicated Capital

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© 2013 Marsh USA Inc.

MARSH

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Current Market Impacts 
        - Estimate $750M to $2B of individual risk capacity
        - Less capacity available and more expensive for terror exposed central business districts
        - Uncertainty around TRIPRA’s future and the possibility of late extension is creating capacity and pricing issues for insurance buyers
        - Large carriers have implemented “conditional TRIPRA endorsements” and pushing prices up on large accumulation risks
        - Market impact is expected to worsen starting on January 1, 2014
        - Carrier withdrawal and / or short term policies issued
        - Especially on the workers’ compensation line of business
        - Absence of TRIPRA or a substantial change, will
        - Increase cost to insurance buyers across many industries
        - Reduce availability of terrorism coverage in the private market
        - May cause some policyholders to go without insurance protection against terrorism exposures

Need to remove bullet on pools

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© 2013 Marsh USA Inc.

MARSH

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Considerations for Reauthorization of TRIPRA

Qualitative Changes
        - Inclusion of cyber terrorism as an enumerated covered line of business
        - Improve certification process and timing
        - Bi-furcated coverage:  Conventional (where more private market capacity is available) and NBCR perils (where it clearly is not)

Quantitative Changes – Range Estimates Based on Ongoing Debates

Company deductible
        - May be increased (incrementally) from 20% to 25% in line with growth in industry surplus

Aggregate threshold
        - May increase aggregate trigger from $100M to $250M over time. Impact on regional/mutual insurers should be considered

Company co-insurance
        - Potential for increase in insurers co-participation from 15% to  20%

Notes:
        - Restrictions of TRIPRA based on the ranges outlined above may cause some level of market disruption and / or increase the cost of insurance coverage
        - The numbers above do not constitute Marsh & McLennan Company’s recommendation and are intended to reflect the range of discussions on some possible changes in a reauthorization of TRIPRA

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© 2013 Marsh USA Inc.

MARSH

This document and any recommendations, analysis, or advice provided by Marsh (collectively, the “Marsh Analysis”) are not intended to be taken as advice regarding any individual situation and should not be relied upon as such. This document contains proprietary, confidential information of Marsh and may not be shared with any third party, including other insurance producers, without Marsh’s prior written consent. Any statements concerning actuarial, tax, accounting, or legal matters are based solely on our experience as insurance brokers and risk consultants and are not to be relied upon as actuarial, accounting, tax, or legal advice, for which you should consult your own professional advisors. Any modeling, analytics, or projections are subject to inherent uncertainty, and the Marsh Analysis could be materially affected if any underlying assumptions, conditions, information, or factors are inaccurate or incomplete or should change. The information contained herein is based on sources we believe reliable, but we make no representation or warranty as to its accuracy. Except as may be set forth in an agreement between you and Marsh, Marsh shall have no obligation to update the Marsh Analysis and shall have no liability to you or any other party with regard to the Marsh Analysis or to any services provided by a third party to you or Marsh. Marsh makes no representation or warranty concerning the application of policy wordings or the financial condition or solvency of insurers or reinsurers. Marsh makes no assurances regarding the availability, cost, or terms of insurance coverage.

Marsh is one of the Marsh & McLennan Companies, together with Guy Carpenter, Mercer, and Oliver Wyman.

Copyright 2013 Marsh Inc. 

All rights reserved.

MA13-12267

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