Terrorism Risk Insurance Program
Reauthorization Act of 2007
Illusions and Realities
Casualty Actuarial Reinsurance Seminar
Boston, MA
May 19 – 20, 2008
Tom Kusmierczyk
Senior Property Treaty Officer
Munich Reinsurance America, Inc.
Agenda
• The Challenge of Terrorism
• The TRIA Solution
• TRIPRA 2007 – Comparison vs. 2005
• Market Update
2
The WTC attacks- What went wrong?
Geographical accumulation within and between lines of
business
Damage to buildings
Undamaged
Required cleaning
Damaged but stable
Severe structural damage
Destroyed
Danger of collapse
Degree of effect
3
The WTC attacks - Total Losses
(Insured Damage plus Victims Compensation Fund)
WTC insured damage in m. US $
Total: 39,159
Life, 1,010, 3%
VCF (under TPL),
7,049, 18%
Workers
Compensation,
1,890, 5%
General Liability +
Personal Accident,
4,010, 10%
Aviation**, 3,520,
9%
Property Damage +
Business
Interruption +
Event Cancellation,
21,680, 52.7%
* Compensation for Losses from the 9/11 Terrorist Attacks, Source: Risk Wharton Centre with Data from Insurance Information Institute
4
Analyzing Tactics, Skills and Means
Threat Levels by Kind and Probability of Attack
Probability / Feasibility
High
Conventional
Radioactive
Biological
Low
Chemical
Nuclear
Low
High
Possible Damage
5
Terrorism Risk Insurance Program
TRIA Illusions
1. TRIA provides broad coverage with no
limitation on coverage for NBCR.
2. TRIA provides a backstop of US$ 100
billion in federal monies per year.
3. TRIA will provide marketing conditions
so that at expiration, the insurance
and reinsurance industries will have
evolved into a vigorous private sector
provider of terrorism coverage.
6
Terrorism Risk Insurance Program
TRIEA 2005 Primer/Review
1. The Terrorism Risk Insurance Act (TRIA) of 2002 was extended by
amendment on December 26, 2005. The Terrorism Risk Extension Act
(TRIEA) expired effective 12/31/07.
2. TRIA required insurance carriers to “make” terrorism risk insurance
“available” in its Property & Casualty policies.
3. TRIA is triggered when the Treasury Secretary, in concurrence with the
Secretary of State and the Attorney General, certifies that an incident meets
the TRIA definition of an act of terrorism.
4. To be certified for federal funding, an event must cause at least $100 million
in aggregate property and casualty insurance losses, have been perpetrated
by a foreign person or on behalf of a foreign interest, and take place on U.S.
soil.
7
Terrorism Risk Insurance Program
TRIEA 2005 Primer/Review
1. Each participating insurer is responsible for paying out a certain amount in
claims – a 20% deductible – before Federal assistance becomes available.
2. For losses above a company’s deductible, the federal government will cover
85%, while the insurance carrier contributes 15% in “coinsurance.
3. For 2007, the aggregate insurance industry deductible is $27.5 billion, an
increase of 66.6% since 2005.
4. Losses covered by the program are capped at $100 billion.
5. TRIA does not cover Auto, Professional Liability, Life, Health or other
Personal Lines of Insurance or Reinsurance.
8
TRIPRA 2007
$100bn
15%
TRIPRA
85% TRIPRA
TRIPRA Coinsurance
Coverage
TRIPRA Terrorism Coverage
TRIPRA Deductible
Co-Ins
Original Policy Deductible
Program Trigger
Summary of Key Changes in TRIPRA 2007 Extension
Bill
Individual Company AAD 20%
of gross direct earned
premium
(prior year)
Original Policy Deductible
•Includes “domestic” terrorist acts in the definition of a
Certified TRIA Event
•Provides for a seven (7) year term with no changes to
current TRIEA 2005 Deductibles, Coinsurance or Loss
Trigger thresholds
•No change in covered Property & Casualty lines
•Clarifies that insurers are “capped” at their respective
retention levels for deductibles and coinsurance exposures
9
Terrorism Risk Insurance Program. Recoupment Example
$40B Insured Loss
Discretionary
Recoupment
$12.5B
TRIP
$28.9B
Mandatory
Recoupment
$16.4B
Assumptions
Loss occurs 2008
$27.5B
Industry Aggregate
Retention
100 Insurers Impacted
TRIA covered DEP 100
Insurers = $30B
20% Deductible = $6.0B
15% Coinsurance = $5.1B
100 Companies Pay $11. 1B
$11.1B Paid by 100 Companies
Payment Trigger Event $100M
10
Terrorism Risk Insurance Program
Illusion of US$ 100 billion Federal Back-Stop
(US$)
Insurer DWP
Amount of Loss
Top 10
80,000,000,000
20,000,000,000
Insurer Retention
20.00%
Insurer Co-Payment
15.00%
Insurer Retention
Loss Before Insurer Co-Payment
Insurer Co-Payment
16,000,000,000
4,000,000,000
600,000,000
Total Insurer Payments
16,600,000,000
Total Federal Payments
3,400,000,000
11
Terrorism Risk Insurance Program
Illusion of US$ 100 billion Federal Back-Stop
(US$)
Insurer DWP
Amount of Loss
All
150,000,000,000
40,000,000,000
Insurer Retention
20.00%
Insurer Co-Payment
15.00%
Insurer Retention
30,000,000,000
Loss Before Insurer Co-Payment
10,000,000,000
Insurer Co-Payment
1,500,000,000
Total Insurer Payments
31,500,000,000
Total Federal Payments
8,500,000,000
12
TRIPRA
Comparison
TRIA
TRIEA
TRIPRA
Deductible
15% DWP
17.5 Y4 – 20% Y5
20%
Expiration
12/31/2005
12/31/2007
12/31/2014
Payment Trigger
>US$5m
>$50m (4/1/04) –
>$100m
>$100m (1/1/06)
Federal share
90%
90% Y4 - 85% Y5
85%
Comp. Deduct.
7% Y1, 10% Y2, 15% Y3
17.5% Y4, 20% Y5
20%
Lines Covered
All Commercial P&C,
Excludes Comm. Auto,
Excludes Comm. Auto
incl. Workers Comp.
Burglary & Theft, Surety,
Burglary & Theft, Surety
Farm Owners MP, PL
Farm Owners MP, PL
*$25B Y4, >$27.5B Y5
*$27.5B
Recoupment
*$10B Y1, >$12.5B Y2,
*$15B Y3
Covered TR
Foreign acts only
Foreign acts only
All Terrorism events
* Up to
13
TRIPRA 2007
Comparison: TRIEA 2005 vs. TRIPRA 2007
Issue
TRIEA 2005
TRIPRA 2007
Term/Timeline
2 Year Term – Extension
effective 1/1/06 – 12/31/07
7 Year Term – Extension effective
for 1/1/08 – 12/31/2014
Latest Action by
Congress/White House
December 22, 2005 – TRIEA
2005 signed into law
December 18, 2007 – House
passes Senate version of TRIA
extension legislation
December 26, 2007 – TRIPRA
2007 signed into law
14
TRIPRA 2007
Comparison: TRIEA 2005 vs. TRIPRA 2007
Issue
Covered Terrorist
Events (definition of a
“certified” TRIA event)
TRIEA 2005
TRIPRA 2007
Acts by or on behalf of foreign
terrorists only – no domestic
terrorism event coverage
To be certified, an event must
cause at least $5 million in
aggregate property and
casualty insurance losses,
have been perpetrated by a
foreign person or on behalf of
a foreign interest, and take
place on U.S. soil (limited
foreign exposure exceptions)
Program Trigger 2006 $50M;
2007 $100M
Changed: Any terrorism act,
including domestic terrorism (done
by eliminating “acting on behalf of
any foreign person or foreign
interest”) – domestic is a new
change
To be certified, an event must
cause at least $5 million in
aggregate property and casualty
insurance losses and take place
on U.S. soil (limited foreign
exposure exceptions)
Program trigger $100M
15
TRIPRA 2007
Comparison: TRIEA 2005 vs. TRIPRA 2007
Issue
Loss Limit (Annual
Aggregate amount of
funds available to fund
losses)
TRIEA 2005
TRIPRA 2007
USD100 bb annual aggregate
(including insurance industry
aggregate retentions)
Losses above USD100 bb to
be funded as determined by
Congress – no specific cap on
insurer liability to USD100 bb
loss limit
No change: USD100 bb annual
aggregate (including insurance
industry aggregate retentions)
Changed: Clarifies that insurers
are “capped” at their respective
retention levels for deductibles and
coinsurance exposures
16
TRIPRA 2007
Comparison: TRIEA 2005 vs. TRIPRA 2007
Issue
Make Available
(mandatory offer of
coverage)
TRIEA 2005
TRIPRA 2007
Required for all covered P&C
lines
Terrorism Mandatory
Disclosure Form (prerequisite
to claims payments) requires
insurers to indicate premium
charge and federal share of
losses
No change: Required for all
covered P&C lines
Changed: Terrorism Mandatory
Disclosure Form (prerequisite to
claims payments) now adds
reference to USD100 bb annual
aggregate and requires insurers to
indicate premium charge and
federal share of losses
17
TRIPRA 2007
Comparison: TRIEA 2005 vs. TRIPRA 2007
Issue
Recoupment Provision
(forcing insurers to
repay funds below
certain annual
aggregate loss
thresholds)
TRIEA 2005
TRIPRA 2007
For 2007 Program Year,
USD27.5 bb – if aggregate
losses are below this
threshold, insureds assessed
a surcharge on all in-force
P&C policies of up to 3% with
insurers remitting these funds
to Fed. Govt.
Recoupment above this
threshold is also available at
discretion of Congress
See “Funding Change” below.
USD27.5 bb – if aggregate losses
are below this threshold, insureds
assessed a surcharge on all inforce P&C policies (no cap on
surcharge) on with insurers
remitting these funds to Fed. Govt.
Recoupment above this threshold
is also available at discretion of
Congress
18
TRIPRA 2007
Comparison: TRIEA 2005 vs. TRIPRA 2007
Issue
Funding TRIA “Costs”
(as a result of CBO
estimates ranging from
USD5.1 bb to USD8.4
bb over ten years for
the Senate and House
Bills, respectively
TRIEA 2005
No cost estimate issue for
TRIA to date (new issue with
extension beyond 2007)
TRIPRA 2007
Change. Accelerate Recoupment
Provision (see above) payment by:
1)Removing 3% cap on surcharges
and mandatory recoupment level
set at 133% of the mandatory
recoupment amount for a given
Program Year);
2)Requiring repayment for losses
below the USD27.5 bb aggregate
loss threshold over two terms
(losses between 2007 – 2013
repaid by 2013 and losses after
2011 repaid by 2017)
19
TRIPRA 2007
Comparison: TRIEA 2005 vs. TRIPRA 2007
Issue
Reporting and Study
Provisions
TRIEA 2005
TRIPRA 2007
September 2006 President’s
Working Group (PWG) Report
– analysis re the affordability
and availability of terrorism
insurance including the need
for NBCR and Group Life
Changed: Requires:
Two PWG Reports in 2010 and
2013 with same scope as 2006
Report
Report re affordability and
availability of NBCR insurance
Reset
Report for markets and geographic
regions with terrorism capacity
issues
20
TRIPRA 2007
Comparison: TRIEA 2005 vs. TRIPRA 2007
Issue
Loss Notification
Procedures
TRIEA 2005
In the event of a claim that
exceeds USD100 bb annual
aggregate, Terrorism Risk
Insurance Program office to
issue pro rata claims
procedures
TRIPRA 2007
Change: U.S. Treasury to advise
Congress following an event if
there is a potential to exceed the
USD100 bb Loss Limit
Treasury to issue pro rata claims
guidelines during Program Year
2008 (report within 120 days of
enactment, regulations within 240
days of enactment)
21
Insured Loss Estimates: Large NBCR Attack ($ Billions)
Type of Coverage
New York
Washington
San Francisco
Des
Moines
Group Life
$82.0
$22.5
$21.5
$3.4
General Liability
14.4
2.9
3.2
0.4
Workers Comp
483.7
126.7
87.5
31.4
Residential Prop.
38.7
12.7
22.6
2.6
Commercial Prop.
158.3
31.5
35.5
4.1
Auto
1.0
0.6
0.8
0.4
Total
$778.1
$196.8
$171.2
$42.3
Source: American Academy of Actuaries, Response to President’s Working Group, Appendix II, April 26, 2006
22
Managing the uncertainty of Terrorism Risk Nov. 1, 2007
Marsh J. Dalton, B. Tucker
23
Managing the uncertainty of Terrorism Risk Nov. 1, 2007
Marsh J. Dalton, B. Tucker
24
Terrorism Risk Insurance Program
Possible justification for a permanent
Government-industry Partnership for
Terrorism Insurance:
1. The unpredictability of Terrorism
impedes the ability of the private
insurance market to take on the
financial risk without governmental
support,
2. A government-industry partnership can
support the use of the private insurance
market to provide some terrorism
insurance, and
3. A government-industry partnership to
provide this protection is consistent
with national interests.
25
Thank you for your attention.