DEPARTMENT OF THE TREASURY 

FEDERAL INSURANCE OFFICE (FIO) 

ADVISORY COMMITTEE ON RISK-SHARING MECHANISMS (ACRSM) 

MINUTES -12 AUGUST 2019 

The Advisory Committee on Risk-Sharing Mechanisms (ACRSM) convened at 1:30 pm on 12 

August 2019 in the Cash Room at the U.S. Department of the Treasury, 1500 Pennsylvania

Ave. NW, Washington, D.C., with Mike Sapnar, Chair, presiding. 

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

Committee Members Present 

MIKE SAPNAR, TransRe, Chair 

KEAN DRISCOLL, AIG 

JOHN LUPICA, Chubb 

EMIL METROPOULOS, Guy Carpenter 

WENDY PETERS, Willis Towers Watson 

JOHN SEO, Fermat Capital 

KETTH WOLFE, Swiss Re 

Also Present 

LINDSEY BALDWIN, Senior Policy Analyst, FIO (Federal Insurance Office) (Designated 

Federal Officer) 

RICHARD IFFT, Senior Regulatory Insurance Policy Analyst, FIO 

BIMAL PATEL, Assistant Secretary, Financial Institutions, Treasury 

STEVEN SEITZ, Director, FIO 

TYLER WILLIAMS, Deputy Assistant Secretary, Financial Institutions Policy, Treasury 

Presenters 

JON BERGNER, NAMIC 

ROBERT GORDON, APCIA 

FRANK NUTTER, RAA 

STEF ZIELEZJENSKl, APClA 

Welcome and Opening Remarks 

Director Seitz welcomed everyone to the first 2019 meeting of the ACRSM. He provided a brief 

background on the ACRSM, which was formed under the Terrorism Risk Insurance Program 

Reauthorization Act of 2015 to provide advice, recommendations, and encouragement to 

Treasury regarding the creation and development of non-governmental risk-sharing mechanisms 

for protection against losses from acts of terrorism.
The ACRSM's work was highlighted in Treasury's October 2017 Report on Asset Management 

and Insurance, which encouraged the ACRSM to consider how to increase private market 

participation in the terrorism risk insurance marketplace with the goal of providing enhanced 

taxpayer protection in a way that does not result in market dislocations for either consumers or 

the providers of terrorism risk insurance. 

Director Seitz stated that the ACRM's membership has changed since the last meeting in 20 I 7, 

and introduced new members John Lu pica, Vice Chairman of Chubb and President of its North 

American Major Accounts and Specialty Operations, and Emil Metropoulos, Senior Vice 

President of Guy Carpenter and leader of its Workers' Compensation and Terrorism Specialty 

Practice. In addition, Mike Sapnar, the President of Transatlantic Reinsurance Company, agreed 

to serve as Committee Chair for the next period of operation. Director Seitz thanked Wendy 

Peters of Willis Towers Watson for serving as Committee Chair for the first two years of 

operation, and confirmed that Ms. Peters will continue to serve on the Committee. 

Director Seitz summarized the Committee's previous work. The ACRSM held several 

organizational meetings then formed five subcommittees: Direct Reinsurance, Reinsurance, 

Capital Markets, Other Insurance and Reinsurance Approaches to Terrorism and Other 

Catastrophic Risk Exposures, and Consumer Interests. The ACRSM decided to hold four 

meetings to consider information related to direct insurance, reinsurance, capital markets, and 

other (re)insurance approaches to terrorism risk. Consumer interests would be addressed in each 

meeting. 

To date, the ACRSM has held three meetings: those related to direct insurance, other 

(re)insurance approaches to terrorism risk, and capital markets. Materials from these meetings 

are available on the ACRSM website. The ACRSM has not yet held a meeting focusing on the 

reinsurance market. 

Chairman Sapnar welcomed everyone and thanked Director Seitz and FIO for the office' s 

continued work related to the insurance industry and working with the Committee to convene the 

meeting. He introduced Treasury's Assistant Secretary for Financial lnstitutions, Bimal Patel, 

and the Deputy Assistant Secretary for Financial Institutions, Policy, Tyler Williams. Chairman 

Sapnar also confirmed that this was Director Seitz's first ACRSM meeting as FI O's Director. 

Chairman Sapnar then welcomed new members Mr. Lupica and Mr. Metropoulos, and confirmed 

that two additional individuals have pending appointments to the Committee. Chairman Sapnar 

then introduced returning AC RSM members, Ms. Peters, Keith Wolfe of Swiss Re, Kean 

Driscoll of AIG, and John Seo of Fermat Capital. 

Treasury Update on Terrorism Risk Insurance Program Activities 

Chairman Sapnar introduced Assistant Secretary Patel to provide an update on Treasury's 

engagement efforts concerning the reauthorization of the Terrorism Risk Insurance Program 

(TRIP), which expires on December 31, 2020. 

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Assistant Secretary Pate l reported that at the end of 2018, Treasury identified six issues likely to 

be of interest to stakeholders in reauthorization discussions. The issues were originally identified 

by FIO and evaluated by Treasury leadership as re levant and appropriate for any likely debate 

over reauthorization. The six topics were: 

I. The length of any reauthorization. 

2. Potential changes in the mechanics of the program (i.e., sharing percentages between the 

public and private sectors). 

3. Changes to the Program Trigger (which will be $200 million per calendar year in 2020). 

4. Changes to the Program re lating to terrorism risk insurance for nuclear, biological, 

chemical, and radiological (NBCR) exposures. 

5. Changes to the Program re lating to cyber coverage. 

6. Whether any changes to the Program towards a pre-funding mechanism should be 

considered. 

Assistant Secretary Pate l added that Treasury issued guidance in 20 16 stating that cyberterrorism 

coverage can be written within the scope of the Program assuming it is written in lines of 

insurance subject to the Program, although no specific provision in the Terrorism Risk Insurance 

Act (TRIA) or the TRIP regulations currently address cyber coverage subj ect to the program. 

FIO and Treasury met with a large number of stakeholders, including policyholder 

representatives, direct insurers pa11icipating in TRIP, commercial re insurers that provide support 

to direct insurers with terrorism risk exposure, state insurance regulators and the National 

Association of Insurance Commissioners (NAIC), insurance rating agencies, and public policy 

think tanks. 

Assistant Secretary Patel stated that Treasury evaluated the views and analyses expressed during 

these meetings and found them helpful in developing Treasury's views on Program 

reauthorization (which remains ongoing). Assistant Secretary Patel confirmed that Treasury 

looks forward to participating in upcoming discussions about Program reauthorization and being 

a resource for policymakers in their deliberations about reauthorization. 

Mr. Ifft provided an update on the results of Treasury's most recent TRIP data call. As 

background, he said that the 20 15 Reauthorization Act requires the Program (through FIO) to 

collect data on the terrorism risk insurance market and use this data to prepare annual reports to 

Congress on TRIP. Treasury's two most recent reports were the 20 18 Program Effectiveness 

Report and the 201 9 Sma ll Insurer Report. The Small Insurer Report was provided to Congress 

on June 28, 2019. Both reports are ava ilable on the TRIP website. 

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Mr. Ifft described FIO's data collection process, which uses different collection forms depending 

on the type of responding insurer. The four types of insurers are: 

I. Small insurers below a certain premium threshold. 

2. Insurers above the premium threshold (identified as "non-small insurers"). 

3. Alien surplus lines insurers. 

4. Captive insurers. 

Mr. Ifft said that FIO has sought to minimize year-over-year changes to the data templates to 

improve data collection and reporting efficiency. Mr. Ifft added that Treasury has reporting 

exemptions for small insurers writing very limited amounts of TRIP-eligible lines premium, and 

captive insurers that write insurance in TRIP-eligible lines but do not provide terrorism risk 

coverage. All other entities are required to respond pursuant to the 20 15 Reauthorization Act 

and Treasury regulation. 

Mr. Ifft said that for the last two year, FIO has worked with state insurance regulators and the 

NAIC to establish a consolidated data call, with the goal of having the call satisfy the regulatory 

needs and objectives of both federa l and state officials. He said that this coordination has 

reduced the reporting burden on participating insurers, and added this burden is further reduced 

because FIO obtains most of the data call's workers' compensation data from the National 

Council of Compensation Insurers, the California Workers' Compensation Insurance Rating 

Bureau, and the New York Compensation Insurance Rating Board. 

FIO uses an outside data aggregator to collect and aggregate data in a consolidated anonymized 

format, as required under the 20 15 Reauthorization Act. FIO uses this data as the basis for its 

report analyses and does not seek information on particular identifiable insurers. 

Mr. [fft summarized the findings of the 20 18 Program Effectiveness report, which provided an 

overview of the Program and information analysis on the statutory topics outlined in the 20 15 

Reauthorization Act. The findings were as follows: 

• The Program generally has been effective in making terrorism risk insurance available 

and affordable in the insurance marketplace. 

• Treasury's 20 16 and 2017 data indicate that the market for terrorism was relatively stable 

over this two-year period, with few observable differences in benchmarks such as price 

and take-up rate. 

• FJO did not observe any aspects of the Program wh ich have the effect of discouraging or 

impeding insurers from providing property & casualty insurance (in general) or coverage 

for acts of terrorism specifically. 

• The Program remains an essential component of the market for workers' compensation, 

because under state law, workers' compensation insurance must cover terrorism risk, is 

not subject to limits of liabi lity, and can not exclude causes of loss posing extreme 

aggregation risk. 

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Mr. Ifft said that the 201 5 Reauthorization Act requires Treasury to include in each program 

effectiveness report an estimate of total earned premiums for terrorism risk insurance since the 

inception of the program in 2003. FIO determined that, for the period of 2003 to 20 17, this 

figure was approximately $37.6 billion, excluding premiums paid to captive insurers. This 

equals between I and 2 percent of total premiums earned in TRIP-eligible lines of insurance 

during that time period. 

Mr. Ifft summarized the findings of the 201 9 Small Insurer Report, which focused on the 

competitiveness of small insurers in the terrorism risk insurance marketplace. FIO observed that 

the results of the 20 19 TRIP data call were generally consistent with FIO' s observations on the 

terrorism risk insurance marketplace made in the 2018 Program Effectiveness Report. In 

addition, the findings were as follows: 

• Small insurers remain significant participants in the U.S. terrorism risk insurance market, 

but their market share has declined slightly over the last decade (as compared to larger 

insurers). 

• FIO analyzed the differences between the market participation of smal I insurers and 

larger insurers. Mr. Ifft referred attendees to the small insurer report for more details. 

• The mandatory availability requirement potentially causes small insurers (in some 

instances) to offer and write terrorism risk insurance when they might not do so 

otherwise. The financial backstop prov ided by TRIP provides support to mitigate the 

economi c impact of this requirement. If the federal backstop becomes insufficient 

because of changes in market conditions or Program mechanics, the mandatory 

availabil ity requirement could cause small insurers to withdraw from certain markets. 

This could reduce the overall availability of insurance in TRIP-eligible lines of insurance 

generall y (and not just in connection with the provision of terrorism risk insurance). 

• In some circumstances, the Program Trigger (which requires the government share not be 

paid until there are at least $ 180 million insured losses in 20 19) could prevent some 

insurers who have met their individual insurer deductibles from receiving the federal 

share of compensation. Treasury's data calls indicate that although some insurers may 

purchase reinsurance to avoid this potential risk, some do not purchase sufficient private 

reinsurance to fully address the issue. Small insurers do proportionately cede more (than 

large insurers) of their premium for the purchase of reinsurance. Small insurers have 

increased their reinsurance purchases covering terrorism since Treasury began coll ecting 

data, however reinsurance protection for terrorism risks arising from nuclear, biological, 

chemical, and radiological events is much more limits than other types of terrorism risk 

reinsurance. 

• The potential risk of un-reimbursed losses faced by in smal I insurers is most consistent in 

workers' compensation, which is not subject to limits of liability and poses significant 

aggregation risks. The price that insurers can charge for workers' compensation 

coverage is highly regulated, and insurers may find it difficu lt to afford reinsurance to 

cover their underwritten risk, particularly for nuclear, biological, chemical, or 

radiological losses. 

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Mr. Ifft concluded by stating that FI O's 2020 Program Effectiveness Report must be submitted 

to Congress by June 30, 2020. This report will address FIO's 2019 data call (which was 

completed this year) and the results of the 2020 TRIP data call. 

Direct Insurance Market Update 

Robert Gordon, head of the Policy Reinsurance, International Division for the American 

Property Casualty Insurance Association (APCIA), presented an update on the direct insurance 

market and the availability of terrorism coverage. Mr. Gordon said that A PC IA represents nearly 

60 percent of the primary and reinsurance marketplace in the United States. Mr. Gordon served 

as the main insurance counsel for the House Financial Services Committee during the initial 

drafting ofTRlA and worked with several of the Program' s reauthorizations. 

Mr. Gordon reported that most of APCIA's members find the current terrorism insurance 

marketplace to be rel atively stable, but added it is helpful to understand the Congressional intent 

of TRIA. These Congressional findings/goals were: 

I. The importance of having insurance available. 

2. The importance of a stable prope1ty/casualty insurance industry. 

3. The ability of the economy and industry to maintain stability after a terrorism event. 

4. The U.S. government should provide compensation for terrorist attacks while the private 

sector develops its own mechanisms. 

Mr. Gordon then discussed these findin gs in detail. First, TRIA has been extremely successful at 

making terrorism insurance available. 

Second, TRIA has a mixed record in keeping insurers stable. Mr. Gordon said the results are 

mixed because as the Program Trigger increases, smaller insurers are put at a growing risk of 

being pushed out of the marketplace (and a market share decline has been seen). Increasing 

deductibles also make large insurers less likely to receive any protection. He added that while 

the Program helps protect solvency, the credit ratings of insurers could decrease following major 

event(s) that destabilize large portions of the industry. 

Mr. Gordon said APCIA's view is that TRIA is most likely to fail in achieving its third goal of 

maintaining post-terrorism event market stability. The original Program was designed to create 

incentives for insurers to continuing deploying capital, even after a terrorist attack. Now, the 

Program primarily operates as a solvency mechanism, but no longer provides adequate 

incentives for insurers to stay in the marketplace following a major attack. 

Mr. Gordon said that the last finding underscores that the Program was always intended to have 

TRIA be a government responsibility until the private sector could normalize; after that, 

responsibility would revert entirely to the private sector. However, in APCIA's last member 

survey, 77 percent of insurers said they are still not able to better predict the likelihood of a 

terrorist attack, 84 percent said they are not interested in providing additional catastrophic 

terrorism insurance cover, and nearly three-fourths said they would entirely exclude terrorism 

6 
coverage if TRI A did not exist (and many of the remainder said they would supplement or 

exclude high-risk regions). 

Mr. Gordon said this indicates the marketplace is not prepared to re-take responsibility for the 

government, and many members do not desire to provide terrorism coverage, but do so because 

TRIA requires it. He stated that the thresholds created in TRIA were specifically designed by 

Congress based on industry practices to make terrorism a government responsibility that the 

private sector would manage on behalf of the government. He added that the intent was that the 

Program would provide appropriate incentives in exchange for the imposition of mandatory 

coverage. 

Mr. Gordon said TRJA' s initial Program Trigger was identical to the certification threshold of $5 

mill ion. This was intended to avoid triggering the program for smaller attacks (e.g. car bombs), 

which would be inefficient for the government to determine payouts and collect assessments or 

surcharges. 

Mr. Gordon said the Program design never anticipated that insurers would be mandated to offer 

terrorism coverage while being at risk of becoming completely insolvent before a large 

magn itude event even triggered the Program. He indicated this was not the intent of the Program 

and the Program has surpassed the rational threshold in balancing efficiency of triggering the 

Program and market stability. 

Mr. Gordon said that the separation of the certification trigger and the Program trigger has 

created marketplace conflicts, so when the government declines to certify an event, policyholders 

who decline to purchase terrorism coverage get claims paid and policyholders who bought 

coverage did not. He said this was not intended but was a consequence of separating the trigger 

and certification threshold. 

Mr. Gordon said that TRIA 's deductible was designed to increase from I percent in the first year 

of the Program (when insurers were still recovering from 9/ 11 and hadn't collected much 

terrorism premium) up to IO percent of direct earned premiums. He added that the IO percent 

deductible was intentionall y chosen based on established industry practice for capital 

management to avoid exposing more than IO percent of your surplus to any particular risk. Mr. 

Gordon said this IO percent deductible was intended to incentivize insurers to underwrite 

terrorism and require policyholder risk management and mitigation while the Program would 

backstop losses beyond what insurers would normally cover under prudent capital management 

standards. 

Mr. Gordon said TRIA was originally designed with a IO percent co-chare, which was intended 

to be high enough to ensure diligent claims adjudicati on by insurers but low as possible to 

otherwise limit uncertainty resulting from exposure resulting from the mandatory offer 

requirement. Mr. Gordon provided several examples: regul ators reviewing fronting 

arrangements often require a fronting insurer to retain at least IO percent of the risk; and a 5-10 

percent co-chare was (and is) the standard in catastrophic reinsurance programs. 

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Mr. Gordon stated that the TRIA recoupment mechanism was specifically designed to collect as 

much money as possible without overtaxing a post-event stressed marketplace. The original 

surcharge cap was 3 percent annually, which reflected the most common practice of guarantee 

funds and other catastrophe insurance backstops to avoid further injuring an already-wounded 

marketplace. 

Mr. Gordon next identified technical operational flaws in TRIA that concern insurers. He said 

the biggest concern is that TRIA is only fully achieving its first goal, while post-even market 

stability is questionable given TRIA's coverage mandate and the mismatch between TRIA's 

thresholds and required industry capital standards. 

Mr. Gordon concluded by stating that "as the TRIA threshold dials are arbitrarily spun upward, 

while the marketplace may currently be stable on the terrorism high wire, the safety net has been 

lowered now too close to the ground, and a fall might not kill the performers, but they would not 

be able to climb back up afterwards." 

Mr. Gordon then introduced Jon Bergner, Assistant Vice President for Public Policy and Federal 

Affairs with the National Association of Mutual Insurance Companies (NAMIC). NAMIC 

represents 1,400 companies that collectively write approximately 58 percent of the homeowners' 

market, 46 percent of the auto market, and approximately one-third of the commercial market. 

Members range from smal I mutual insurers up to the largest national writers. 

Mr. Bergner said that NAMIC members who write in TRIA-covered commercial lines have 

overall said that arbitrarily changing the Program thresholds would unnecessarily destabilize the 

market, which at present seems to be relatively balanced. He added that the Program's current 

threshold levels are the highest they can get before individual carriers will careful reassess their 

ability to write certain coverages (or in certain areas at all). Mr. Bergner said that further 

arbitrary increases would jeopardize the Program's success with the Program's availability goal 

because it is in many ways depended on the goal of ensuring insurer stability. 

Mr. Bergner said that TRIP's mechanics are designed with individual companies in mind, so 

TRlP's failure to ensure insurer stability will probably lead to a failure in achieving the stable 

marketplace that has existed since the Program was instituted. In this sense, discussions about 

aggregated industry capacity are not relevant, because collective industry capacity does not 

matter if pressure on individual companies is too great and they are unable to write certain 

coverages (particularly in high-risk areas). 

Mr. Bergner said that rising levels under the Program have generally made companies institute 

increasingly strict underwriting, risk management, and exposure management guidelines (even 

under existing Program levels). Although discipline in these areas is desirable, at a certain point 

it impacts the market. Mr. Bergner provided an example of some NA MIC member companies 

who non-renewed lucrative workers' compensation contracts in several major urban areas due to 

the exposure created by the current Program thresholds. He added this problem is equally valid 

(if not more so) for smaller companies. Member companies have also explained that they have 

left and/or not entered certain markets and must use strict underwriting guidelines to entirely 

8 
avoid certain types of risk. He provided the example of one insurer that will no longer take on 

exposure from shopping malls. 

Mr. Bergner said that companies that write across business lines (e.g. workers' compensation and 

property) can exhaust their aggregation limits very quickly, which ultimately restricts their 

potential offerings. He added that the reduction in overall capacity being deployed in these 

markets puts pressure on availability and therefore affordability. 

Mr. Bergner provided an example of how the Program Trigger puts pressure on the ability of 

particularly small insurers to participate in TRIP. The Program Trigger for 2020 is $200 million. 

If a single event (with $200 million in losses) impacts a single company that writes $200 million 

in TRIA-covered lines, the Program is triggered. The insurer's individual deductible would be 

$40 million (20 percent) and it would also pay its co-share (20 percent) above this deductible, 

putting the insurer's total share at $72 million. The government's initial outlays would be $ 128 

million. Mandatory recoupment would be applied at a rate of 140 percent, resulting in 

repayment of $179.2 million to the government (a net gain to the government of $51.2 million). 

Mr. Bergner highlighted that the government begins participating at $72 million, below the $200 

million trigger, and also recoups initial outlays at a rate of 140 percent. 

Mr. Bergner noted that in comparison, if the event was $199 million then TRIA would not be 

activated and the insurer would pay a single event loss the size of its entire book of business. 

Some NAMIC companies facing this type of issue will purchase standalone reinsurance coverage 

to protect against these potential outcomes. Mr. Bergner said that NAM IC members have 

generally experienced availability of reinsurance, but this availability is relatively constrained 

and the market seems very sensitive (particularly in high-risk areas). 

Mr. Bergner said that each time the TRIA renewal date approaches, companies have reported 

affordability and availability issues and the reinsurance market seems to tighten a little bit. He 

added that reinsurance costs are not automaticall y allowed to be passed along to the privacy 

policy, and any rate increases must be first approved by regulators. 

Mr. Bergner concluded by stating there are difficulties with the existing Program, particularly as 

related to the Program Trigger, but NAMIC's members feel that these challenges are generally 

manageable. NAMIC's view is that any effective terrorism loss management plan needs broad 

participation by insurers of all sizes and structures in order to be effective. 

Following Mr. Bergner, Stef Zielezienski, Executive Vice President and Chief Legal Officer for 

APCIA di scussed the impact ofa catastrophic attack. Mr. Zielezienski said that the current 

marketplace is stable because there has not been a catastrophic event since TRIA was 

established, and Treasury 's report has not thoroughly considered to what extent investors and 

reinsurers would pull back after a major event, particularly until the marketplace had a better 

sense of event frequency and the capability and fl exibility of industry models. TRIA was created 

in large part because of significant insurance and reinsurance market retraction following 9/ 11 , 

and Mr. Zielezienski expressed industry concerns about reinsurance capacity shrinking 

9 
considerably again in the aftermath of another attack, given that the mandatory availability 

requirement would place 9/ I I -level annual exposure on the private sector. 

Mr. Zielezienski said that the constriction of voluntary capacity after an event would suddenly 

halt economic growth and economy, and the mandatory availabi lity requirement wou ld force 

some insurers to consider overall terrorism exposure and its impact on financial solvency in 

order to manage new terrorism exposure resulting from a pullback in reinsurance capacity. Mr. 

Zielezienski said that, in other words, a catastrophic terrorism event under program levers could 

impact availability for both terrorism risk and other property/casualty risks. 

Mr. Zielezienski said APCIA recognizes the political pressure to increase TRIA thresholds in the 

interest of protecting taxpayers, but said the Program is already one of the most fiscallyresponsible government programs ever enacted and it is important to remember that the 

Program's greatest value is meant to be realized both before and after the United States faces a 

major catastrophic attack. 

Mr. Zielezienski said that even when Congress does not raise thresholds, the thresholds 

effectively increase automatically as general market growth occurs. Insurer deductibles are 

calculated as a percentage of the prior year's direct earned premium (DEP), so both DEPs (and 

TRIA deductibles) will grow as insurers experience business growth and inflation. Mr. 

Zielezienski also said that as the value of insured property and potential liability rises, so do the 

costs of insurers responsible for paying a co-share under the Program. Mr. Zielezienski said that 

although lawmakers may view this increasing industry exposure and reduced taxpayer exposure 

as a positive development, there will be a different view if TRIA fa ils to provide an orderly 

economic recovery after the next catastrophic terrorist event. 

The ACRSM's primary mission is to consider whether there are alternative risk transfer 

mechanisms that can help to protect against terrorism risk. Mr. Zielezienski said that some 

mechanisms exist, but have limits. As an example, Mr. Zielezienski described how the United 

Kingdom's Pool Re sold the first terrorism catastrophe bond earlier in 20 17 valued at £75 

million ($99 million USD). Although Mr. Zielezienski identified this as a positive development, 

he noted that the value of the bond is not large when compared to the tens of billions of dollars of 

loss that could occur in a major event. He said that Pool Re officials told APCIA that it was 

challenge to put together a bond for the issued amount, and they did not anticipate substantial 

additional cat bond capacity materializing soon. Mr. Zielezienski said this reinforces APCIA 's 

view that TRIA will continue to be critical to the stability of U.S. insurance markets for the 

foreseeable future, but urged the ACRSM, Treasury, and other policymakers to carefully 

consider whether the current Program works to provide economic stability in the aftermath of 

another catastrophe. 

Mr. Zielezienski said that the ACRSM can help the Adm inistration and Congress to understand 

the importance of TRIA to the current marketplace and the dangers to post-event stability due to 

dialing-back the Program thresholds beyond industry capital management practices. 

No Committee members asked questions of the presenters. 

10 
Reinsurance Update 

Frank Nutter of the Reinsurance Association of America provided an update on reinsurance 

market conditions. Mr. Nutter said the reinsurance market has been pretty stable since the last 

program reauthorization, and market participants have commented that the Program is a 

stabilizing factor that facilitates the reinsurance market. 

Mr. Nutter said that the vast majority of Program coverage in the private market are property 

catastrophe trees, aggregate covers, and individual risk covers. He said the standalone market 

has somewhat retrenched (not eliminated) and coverage for domestic terrorism has somewhat 

increased in the market. 

Mr. Nutter said capacity is a function of exposures in major cities, and that focus on 

underwriting, aggregates, and sub-limits are common within the reinsurance industry. He said 

that reinsurance coverage fo r regional/smaller insurers has not been problematic unless the 

insurer has a particular focus in a major area. 

Mr. Nutter said nuclear, biological, chemical, and radiological (NBCR) coverage is somewhat 

limited, and there is a particular concern about aggregates in the case of workers' compensation, 

so capacity is somewhat more limited. 

Mr. Nutter said market participants provided the feedback that the reinsurance market related to 

cyber coverage is still evolving and issues related to physical versus non-physical loss are 

commonly discussed. Also discussed are concerns about defining cyber terrorism versus cyber 

warfare. Mr. Nutter said that further clarifi cation from FIO on these topics would be helpful. 

Mr. Nutter indicated that some have said uncertainty about the Program's reauthorization at the 

end of 2020 is driving some demand fo r private reinsurance, and if uncertainty continues it will 

continue to drive demand (notably for smaller companies with concerns about exposing their 

capital and surplus as a result of an event). Mr. Nutter added that if the Program lapses, market 

participants will focus on "preferred locations" and have even greater sensitivity about aggregate 

losses. 

No Committee members asked questions of the presenter. 

Capital Markets Update 

Mr. Seo provided an overview of the Baltic PCC Ltd. catastrophe bond issued by Pool Re, which 

provided standalone terror coverage. Earlier in 201 9, a three-year terrorism risk cover was 

placed for Pool Re at a value of £75 million. The bond covered a loss layer of £200 mi Ilion in 

excess of £500 million. The bond carried an approximate three percent expected loss with a 5.9 

percent coupon spread. It was an indemnity annual aggregate coverage and covered all of Pool 

Re's exposures except for their merging non-damage business interruption exposure, which is 

fa irly small at this time. Mr. Seo said that although nothing is excluded, explicit cover was 

11 
provided in offering materials for investors. This included IEDs, aircraft, property damage, 

NBCR damage, cyber, and physical damage. 

Mr. Seo identified noteworthy features of the bond. He said it is the first standalone terrorism 

catastrophe bond to hit the market, and the first cat bond to be issued in pound sterling. It was 

also the first CAT bond issued onshore in the United Kingdom under the UK's 2017 risk 

transformation regulations (which were meant to enable onshore insurance-linked securities 

transactions). He also believes it provided the coverage for cyber physical damage in the !LS 

market. 

The deal used no third-party risk modeling; Pool Re revealed its own modeling to investors 

(calibrated by Cranfield University). Mr. Seo sa id that this disclosure was sufficiently detailed 

that investors could remodel the deal and perform stress tests and "what-if' analyses, and this 

enabled the detail to be completed. Mr. Seo identified this as another noteworthy feature. 

Mr. Seo said that the implications for the !LS market from this deal are positive; due to pricing, 

terms, and good support in the secondary market. He acknowledged that £75 million is not a 

significant amount, but small amounts can nonetheless help build new markets and is therefore 

promising. He added that the bond was placed during a fairly difficult time for both the 

traditional and ILS markets, as it followed two years of bad losses (2017 and 2018). Despite 

somewhat limited capacity, the deal could still be placed and is about as widely-syndicated as 

many mature ILS placements. 

Chairman Sapnar asked Mr. Seo to comment on the historical perception that there is a hurdle to 

place terrorism risk through !LS due to correlation with capital markets. Mr. Seo concurred that 

this is a very common perception and serves as a hurdle for some investors, but this serves as a 

proxy for investors who aren't seeking anything "exotic." In contrast, large institutional 

allocators will include this type of risk into a portfolio allocation machine and the machine will 

indicate that it is an attractive bond. Mr. Seo said that it is attractive because standard portfolios 

would not be compensated if thei r portfolio is impacted by an event, so when a dollar of 

exposure is moved from stocks and bonds to a terrorism bond that is compensated, the allocation 

machine approves of the investment. In comparison, Mr. Seo said that high net worth 

individuals may have a more "emotional" response about how they want to invest, but 

institutional investors are the backbone of the capital market, and their main concern is being 

compensated. He added that the general perception (which is not very informed) is that terrorism 

risk cannot be modeled, but this deal explained in a straightforward manner how the risk is 

modeled by Pool Re. 

Chairman Sapnar asked whether most typical cat bonds cover only natural perils (and therefore 

would not include terrorism) or all peril s. Mr. Seo responded that he looked at this several years 

ago, and at that time approximately IO percent of the capital markets mentioned terrorism, 

however this included extreme mortality bonds which do not exclude death by terrorism (which 

are a material part of the market). 

12 
Mr. Driscoll commented that the issuance of the Pool Re bond is a good start to the development 

of the ILS market for terrorism risk. He said that one of the constraints in both the insurance and 

reinsurance market is with respect to density concentration issues (presumably in large urban or 

metropolitan areas), but this dynamic in the !LS market for natural perils is generally less of an 

issue than in vertical stack, capitalized, rated (re)insurance companies. He added that it seems 

the I LS market has more of an abi I ity to own more volati I ity as a portion of its portfolio, and 

asked Mr. Seo if this dynamic would also apply to terrorism. Mr. Seo agreed that ILS markets 

are able to accept more concentration risk, because a large institutional allocator is putting only 

one or two percent of its capital at risk, and it is common for an institutional allocator to be 

willing to lose half(or more) of its allocation to the ILS market in a single event. This would 

also apply to terrorism as a risk. 

Mr. Driscoll said that currently, in the natural peril market, ILS is approximately 20 percent of 

total capitalization in the market, which is significantly higher than the low single-digit 

percentages IO years ago. He said this has had a relatively profound impact on the stabi I ity of 

pricing. Mr. Driscoll then said that one of the goals of TRIA is to have stable pricing, and asked 

whether ILS capacity supporting terrorism (either standalone or embedded within follow 

coverages) could experience similar pricing dynamics in the future. Mr. Seo responded that this 

remains to be seen but he would expect it, because the capital base is very large (over $100 

trillion on the fixed-income side alone). He added that ILS capacity is often quoted as being 

roughly 20 percent of the market, but with respect to severely catastrophic events, he believes the 

ILS market is actually double traditional market capacity. Mr. Seo said that Florida has the 

largest exposure in the I LS market, with $1 of every $2 of capital exposed to Florida (therefore 

approximately $50 billion in Florida exposure if there is a $100 billion [LS market). His firm 

has reviewed annual reports of public reporting insurance companies and has assessed the 

traditional reinsurance market in Florida offers approximately $40 billion in limits. This shows 

that the I LS market has roughly doubled the capacity for insurance within Florida, and these 

levels create price stabilization. 

Mr. Metropoulos asked Mr. Seo to comment on the interest and further challenges that might 

exist to include workers' compensation in capital markets ILS. Mr. Seo responded that workers' 

compensation risk in the ILS exists, primarily via earthquake coverage (in California). The ILS 

market references the amount of workers' compensation exposure and describe losses that would 

be driven by an event, therefore changing language from earthquake to act of terrorism would 

not be a significant change because an investor is generally not considering the shift from 

property coverage to workers ' compensation. Mr. Seo noted that he spoke with the Government 

Accountability Office (GAO) around 2002 and was asked about parallels between 9/11 and 

earthquake risk, because one insurer had commented to GAO that 9/11 was a little like a highlyfocused earthquake event in terms of damage but an earthquake removes the emotional 

component. 

Mr. Metropoulos responded that the earthquake bonds have limits of approximately $200 million 

to $250 million, whereas private reinsurance markets (and markets backstopped by TRIA) are 

valued at hundreds of billions. He asked Mr. Seo whether there is another market that might be 

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measured at the same magnitude as terrorism. Mr. Seo responded that the size of the ILS market 

for risks such as extreme mortality, workers' compensation, and catastrophe are driven by 

market demand rather than reflecting the willingness of the ILS market to take on the risk. When 

there is little demand for these types of coverage in the ILS market, it is an indirect signal that 

the risk is adequately handled by the traditional reinsurance market. The types of coverages in 

the I LS market are in an experimental change where certain sponsors are interested in developing 

the market, rather than because of an urgent need due to the inadequacy of traditional 

reinsurance. 

Discussion of Future Committee Activities 

Chairman Sapnar opened discussion about the Committee's future agenda and timelines for 

delivering a report to FIO. He suggested that all Committee members should obtain copies of 

Ff O's most recent reports. FI O's next Program Effectiveness report is due at the end of June 

2020, and Chairman Sapnar recommended that the Committee finalize its recommendations no 

later than April 30, 2020. Director Seitz added that the Committee should consider the issues it 

wants to address, and stated that the issues outlined by Assistant Secretary Patel may have more 

relevance to the Committee's work than others. Director Seitz said that FIO would defer to the 

Committee's determination of which issues are more important, but said that receiving a written 

work product in April would be helpful as it would provide the team time to incorporate the 

Committee's findings into the Program Effectiveness Report. Mr. Seo suggested that a more 

aggressive timeframe be adopted to provide more individuals with the opportun ity to comment. 

Director Seitz suggested the Committee hold a few more meetings before delivering a final 

product to FIO. Chairman Sapnar suggested the Committee should aim to complete its initial 

draft at the end of the first quarter and distribute the document for comment before distributing a 

final document to FIO on Apri l 30. 

Chairman Sapnar opened discussion to the Committee about specific areas of focus to be 

examined, and requested input from FlO. Director Seitz responded that the information about 

Pool Re presented by Mr. Seo was useful background for FIO and said that the rest of the 

Committee's focus should be on how to increase private market participation. Mr. Ifft added that 

it would be helpful to have the Committee's opi nion on how changes in the Program mechanics 

(deductible, program Trigger, co-pay) would impact both the direct insurance and reinsurance 

markets. 

Chairman Sapnar asked FIO for a summary of what activities the Committee needed to perform 

in public meetings and what could be done outside of meetings. Mr. Wolfe asked if there are 

other areas (beyond those discussed by Assistant Secretary Patel) that the Committee wanted to 

focus on in addition to narrowing the list of six items. Mr. Driscoll suggested the Committee 

focus on the nexus of cyber coverage under TRIA, potential ambiguities between war and terror, 

and clarification around the certification process. 

Chairman Sapnar asked if FIO was expecting market data or commentary with respect to 

changing Program dynamics. Director Seitz responded that both qua I itative and quantitative 

information would be usefu l. He added that FIO analyzes various aspects of the market through 

14 
its yearly data call (as published in the Program Effectiveness and Small Insurer reports) and it 

would be helpful for the Committee to provide information on other markets as well. Mr. Ifft 

added that although FIO analyzes how the market currently operates, it wou ld be helpful to have 

the Committee's projections on how the Program wou ld work under different conditions. 

Chairman Sapnar suggested the Committee meet no more than three times before March 31 and 

suggested holding meetings in October, December, and February. He said the Committee would 

make a decision about future meeting dates after the meeting, and information would be posted 

on the ACRSM website. 

Mr. Seo asked whether Committee members are able to communicate with each other between 

meetings. Lindsey Baldwin, the Designated Federal Officer (DFO) outlined the requirements of 

the Federal Advisory Committee Act. She confirmed that the Committee can perform 

preparatory work, including correspondence needed to prepare work products. Before making a 

final decision on advice or recommendations, the Committee would be required to fully discuss 

and vet the proposed recommendation in a public forum. Ms. Baldwin also requested that when 

Committee members correspond between meetings, they should copy Director Seitz, Mr. Ifft, 

and Ms. Baldwin. 

Mr. Driscoll requested clarification on the Committee's areas of focus. Chairman Sapnar said 

that in addition to discussion of the Program mechanics, the Committee would discuss how 

maintaining the status quo beyond 2020 wou ld affect the marketplace. He also suggested 

looking at the issues of cyber, NBCR, and alternative risk-sharing or funding sources such as the 

purchase of reinsurance by the federa l government. Ms. Peters added that the Committee had 

discussed the certification as well. Mr. Driscoll suggested discussing the immed iate market 

implications if the Program is not extended beyond December 3 1, 2020, and Director Seitz 

responded that if the Committee believes it is an important factor as the reauthorization process 

continues it would be potentially helpful for FIO to have this information. He added that it may 

also be helpful to have information based on dynamic modeling that varies the Program's 

mechanics. 

Mr. Ifft concurred that although f 10 has made general conclusions that terrorism risk insurance 

would cost more and be less available in the absence of the Program, it does not have a data set 

to provide more detail on the implications of non-renewal. Mr. Wolfe questioned whether the 

Committee would be able to provide value in this area, noting that the last reauthorization 

demonstrated what would happen in the absence of the program (for several weeks) and he 

would expect a similar outcome this time. Mr. Ifft replied that the market dynamics cou ld 

change ifthere was an expectation that the Program was permanently going away (as opposed to 

being temporarily suspended). 

Mr. Metropoulos asked whether data collected in Fl O's TRIP data call would be available to the 

Committee. Mr. [fft replied that FIO would need to confirm this but he believed FIO would be 

able to direct the Committee to the proper information or provide some access to the data. 

15 
Chairman Sapnar concluded the meeting by suggesting the Committee finalize a date for the next 

meeting and assign Committee members to work on specific agenda items before the next 

meeting. He added that the Committee would decide the agenda over the next month as 

members worked to prepare for the next meeting (in terms of whether the Committee would 

bring in outside speakers or begin debating the issues). 

At 3:21 pm, Chairman Sapnar concluded the meeting. 

I hereby certify these minutes of the August 12, 20 19 Advisory Committee on Risk-Sharing 

Mechanisms public meeting are true and correct to the best of my knowledge. 

Mike Sapnar 

Chairman 

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