TRIA: If a Tree Falls in the Woods
Recording of this session via any media type is strictly prohibited.
Page 1
Janice Ochenkowski
Managing Director - Global Risk Management, Jones Lang LaSalle
• Vice Chair - RIMS External Affairs Committee
• Former President of RIMS
Emil Metropoulos
Senior Vice President - Guy Carpenter LLC
• Workers’ Compensation & Terrorism Specialty Practices
• Strategic & Rating Agency Advisory
• Marsh / Guy Carpenter Terrorism Task Force
Recording of this session via any media type is strictly prohibited.
Page 2
What to Expect
Through the session you will gain a better understanding of the
uncertainty non-reauthorization of TRIA is having on risk
managers (and not just on their insurance programs), the
insurance marketplace and how to prepare for live without TRIA
We will discuss :
• Impact on insurance and renewals
• Impact on financial obligations
• The challenges to Risk Managers and Insurers/reinsurers
• Alternatives in the in the event of non-reauthorization
Recording of this session via any media type is strictly prohibited.
Page 3
TRIA – A Risk Manager’s View
Recording of this session via any media type is strictly prohibited.
Page 4
A Risk Manager’s View
•
•
•
•
•
TRIA is not an insurance policy
TRIA is the backstop that allows insurers to measure their
exposures to an event
Because their risk can be quantified, insurers can offer
policies that includes terrorism coverage
If TRIA is not reauthorized, the backstop goes away and
insurers have no safety net to fund aggregated losses
Insurers then must limit the number of policies and their
aggregate exposure
Recording of this session via any media type is strictly prohibited.
Page 5
A Risk Manager’s View
•
•
•
•
•
But, risk managers’ needs are not lower, so the result is more
competition in the marketplace for fewer policies and lower
limits of coverage
The natural result of increased competition is higher prices
Which means that the insurance limits required to fund an
organization’s internal risk assessments and external
contractual requirements may not be available
Or, the limits required may be available, but only at
non-commercially acceptable prices
Which leaves the Risk Manager with a problem
Recording of this session via any media type is strictly prohibited.
Page 6
A Risk Manager’s View
Workers’ Compensation - A Special Case
•
•
•
•
•
•
•
State and territorial laws do not differentiate between terrorism and
other causes of loss
An insurer that writes a Workers’ compensation policy must cover losses
from terrorism risks
If the insurer determines that it has too high a concentration of risk in a
particular area, it will not write a policy or renew an existing policy
Employers with large concentration of lives in major urban areas or
target areas may not be able to find insurers willing to offer coverage
If an alternate insurer is found, premium may be higher than the
expiring program
If an insurer is not identified, or premium is too high, self-insurance or
the assigned risk pool may be the only options for a risk manager
The ultimate consequence of these choices may be higher costs, loss of
specialized loss control and specialized claim handling
Recording of this session via any media type is strictly prohibited.
Page 7
A Risk Manager’s View
•
Risk managers who have high risk operations or whose offices are in major
urban areas such as NY, LA, SF, Chicago, or Boston may have difficulty
purchasing adequate property insurance with terrorism coverage
• So, is just going bare for the risk so bad?
There haven’t been many incidents, so it may be a risk worth taking…that
analysis is what a good risk manager does.
However,
• Many mortgages require terrorism insurance and some landlords require
terrorism insurance of tenants
• Loans for leased equipment (office furniture and equipment) may require
terrorism coverage
• Importantly, some corporate lines of credit require terrorism insurance
• So, price and availability of terrorism insurance is not just a real estate risk
manager’s problem, many risk managers will have to create solutions for
their organizations
Recording of this session via any media type is strictly prohibited.
Page 8
Impact on the Insurance Marketplace
Recording of this session via any media type is strictly prohibited.
Page 9
Efficacy of Private Market Capital
Private Industry Capital
Estimated
$700B3 P&C
US (Re)Insurance
Dedicated
Capital
Estimated
$322B
Global
Reinsurance
Dedicated
Capital
Estimated
$100B
North American
Reinsurance
Dedicated
Capital
Loss Scenarios
 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 large NBCR
Losses
Notes:
1. 2013 dollars based on Bureau of Labor statistics CPI Index
2. The loss figures above assume a 100% Property take-up rate among commercial insureds
3. 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
Recording of this session via any media type is strictly prohibited.
Page 10
Who benefits from TRIA: P&C Profile by PHS
•
•
2012 industry surplus for P&C carriers writing TRIA exposed business$590B
Approximately 850+ carriers are subject to the Federal program
< 50M
Company Count
AVG. YE 2012 Comm. DEP
Avg. TRIPRA Deductible
Avg. Deducitble as % of PHS
487
7,993
1,598
17.03%
TRIPRA Statistics by Policyholder Surplus ($000s)
50M to 100M 100M to 300M 300M to 500M 500M to 1B
83
129
41
40
40,872
88,920
191,811
354,906
8,174
17,784
38,362
70,981
11.65%
10.29%
9.63%
10.42%
1B to 5B
> 5B
50
847,944
169,589
7.90%
24
3,913,612
769,862
6.51%
Source: SNL 2012 YE data & Guy Carpenter Business Intelligence
• A higher % of the held capital for smaller to mid-sized insurers is required to meet
the deductible requirements of TRIA (75+ have a TRIA deductible > 25% PHS)
• This group tends to depend on TRIA recoveries and contemplates TRIA protection
notably more in their risk management strategies
• Many use the reinsurance to “buy down” their TRIA deductibles and cede some
program co-insurance
• Carriers with TRIA deductibles > $500M tend to manage their exposures to City and
Zonal accumulations, rather than contemplating TRIA recoveries
Recording of this session via any media type is strictly prohibited.
Page 11
Rating Agency Impact on Carrier’s Terrorism Exposure
•
•
Terrorism modeling requests tend to be more punitive relative to those for Nat Cat
A.M. Best focuses on 5-ton truck bomb deterministic losses at the carriers largest
accumulations (regardless of proximity to landmarks and/or designated targets)
o
o
It then applies its “probabilities” to these worst case scenarios based on location
There are BCAR implications as losses exceed certain defined terror stress test limits
•
Through briefings and annual rating meetings, A.M. Best, S&P, Fitch have been direct in
expressing the importance of solid risk management strategies on terrorism risk
aggregations: “Overreliance on TRIA is not a substitute for sound risk management”
•
A.M. Best had identified 34 carriers with significant terrorism
exposure and TRIA dependency - subject to negative outlooks and
potential rating downgrades
Solid actionable contingency plans continue to be requested
Additional negative watch concern for carriers having large loss <
$100M industry loss TRIA trigger - and no TRIA cover
More recently, the rating agencies have increased their requests
on NBCR accumulation monitoring and loss scenarios (as % PHS)
•
•
•
Recording of this session via any media type is strictly prohibited.
Page 12
The Impact on P&C Renewals Started in 2013
and continues…
•
•
•
•
•
13
Implementation of conditional TRIA endorsements (excl. NY, FL, GA)
Tier 1 insureds have been facing increased costs, and/or greater Deductibles / SIRs
o Workers’ Compensation accumulation issues drove the earliest movement
o Notable large account movement among the top 15 P&C carriers
o A few carriers opportunistically writing business, while others non-renew
o Some large accumulation risks are moving to the state funds
Short-term or six month policies have been issued as a stop gap measure
o WC: published NCCI form allows for price Δ mid-term should act expire*
o Property: policies endorsed (manuscript form) allowing for price Δ if TRIA were
to expire*
Initial impact being felt most among smaller mutuals and regional writers that are
highly TRIA dependent and have limited PHS relative
All of the above and increased quoting and binding activity in the Stand Alone /
Specialty terrorism market
*These policy endorsements are subject to state and federal regulation
Recording of this session via any media type is strictly prohibited.
*These policy endorsements are subject to state and federal regulation.
Page 13
Terrorism Insurnace Purchasing (Property)
•
•
•
•
•
•
•
Approximately 95% of Marsh clients that purchased terrorism insurance did so as
part of their property policies. The remainder used:
Captives
Standalone terrorism policies can be an important supplement to TRIA coverage
A combination of approaches
The primary industry segments purchasing standalone policies include:
o Hospitality, Real estate, Financial institutions
Smaller but significant amounts were purchased by the following segments:
o Retail, Media, Transportation, Public entity
Terrorism Take Up rates have been
fairly consistent in the mid 60% range
Notable take-up rate variation by industry
Source: Marsh 2014 Terrorism Risk Insurance Report
Recording of this session via any media type is strictly prohibited.
*These policy endorsements are subject to state and federal regulation.
Page 14
Unique Challenges of Workers’ Compensation
Impact on Carriers is compounded
• Workers’ Compensation is a state regulated compulsory line:
o terrorism cannot be excluded, policies are written on an unlimited basis
o NBCR perils are covered - and a significant concern to WC insurers
– Arguably the most uninsurable risk(s)
– Limited reinsurance capacity
• Modeled PMLs can easily pyramid into amounts greater than 10-20% of a carriers PHS
• Insurers continue to limit or reduce their exposure to large-scale terrorism events:
o Pushing for higher prices anticipating TRIA expires or is reauthorized with
significant changes
o Reducing exposure by limiting the policies issued or the amount of capacity they
will deploy in certain geographic areas
o Less willing to underwrite the risks of employers in high-profile industries
o Attaching endorsements that allow (subject to regulatory approval) for a unilateral
mid-term re-underwriting and pricing if TRIA sunsets or is materially altered
o Setting the policy expiration dates to coincide with TRIA’s anticipated expiration
15
Recording of this session via any media type is strictly prohibited.
*These policy endorsements are subject to state and federal regulation.
Page 15
(Re)Insurers reactions
To a Reduced Federal Role on TRIA
•
•
Individual carriers reaction to notable changes to TRIA are difficult to predict
Without a backstop (or a notably curtailed TRIA program), carriers may have to manage
their exposure by reducing it - in order to preserve their financial condition
Some rating agencies report that some insurers are scaling back (where permitted) as
they renew policies when not covered under the current law
The insurance industry's aggregate TRIA retention is 20% of the entire DWP of the lines
subject to the program:
o Currently at $34B  increasing to nearly $40B (if TRIRA renews with little Δ’s)
Private market (re)insurance capacity available for terrorism:
o Approximately $6B  $8B on a individual per risk basis
o Treaty reinsurance: Typically up to $2.5B  decreasing down to about $1B for
Tier I risks and/or Workers’ Compensation
– NBCR Capacity : Approximately $1B in Tier I locations
With limited means to manage/spread the risk, primary insurers have little choice
absent TRIA but to manage only the exposures they can handle
•
•
•
•
16
Source: Marsh 2014 Terrorism Risk Insurance Report
Recording of this session via any media type is strictly prohibited.
*These policy endorsements are subject to state and federal regulation.
Page 16
Possible Remedies to Consider
Recording of this session via any media type is strictly prohibited.
Page 17
A Risk Manager’s View
What can a risk manager do?
• First, and most importantly, communicate internally,
communicate, and then communicate
• Be sure that you ask your finance group to look at existing
lines of credit and corporate loans to determine your
requirements
• Meet with all relevant internal groups such as procurement,
office services, etc. Ask them to review documents so you
understand obligations, prepare them for higher budget
costs in 2015, especially if TRIA is not reauthorized and you
have to purchase stand alone policies
Recording of this session via any media type is strictly prohibited.
Page 18
A Risk Manager’s View
•
•
•
•
•
Meet with your insurance brokers and underwriters to
understand what to expect at your renewal
Work with your insurance broker to create a plan and to
price options; present them internally with plenty of time for
discussion of the issues and consequences
With the approval of your organization’s management, create
a strategy to deal with possible loss or reduction of insurance
Network with risk managers in your industry groups and in
your local RIMS chapter to learn more about solutions that
are working for your peers
Attend the RIMS Legislative Summit
Recording of this session via any media type is strictly prohibited.
Page 19
Strategies for handling the potential expiration of TRIA
Property Programs
•
Align property programs with insurers that will continue to
support terrorism coverage if TRIA expires
Standalone terrorism policy as an alternative to embedded
TRIA ones
Bind standalone terrorism product(s) to lock in market
capacity prior to possible TRIA sunset
Standalone capacity reservation approach – use standalone
capacity in excess position with option to “flip” to be primary
if TRIA is not extended
o Conversion premium to be identified within quote
TRIA captive: pre-agreed terms in 2014 to “flip” standalone
terrorism reinsurance to be primary and/or enhanced delayed
payment coverage conversion
Standalone capacity commitment contracts
•
•
•
•
•
Source: Marsh 2014 Terrorism Risk Insurance Report
20
Recording of this session via any media type is strictly prohibited.
*These policy endorsements are subject to state and federal regulation.
Page 20
Captive Strategies
for Handling the Potential Expiration of TRIA
• Captive TRIA Certified Policy: U.S. based captives can
act as TRIA authorized insurers and access the federal
backstop
• TRIA reinsurance offered excess of captive TRIA
retention
• Captive share can either be retained, subject to
sufficient capital, or reinsured with the standalone
terrorism market
• Standalone Terrorism TRIA “wrap”:
A: $100 million TRIA trigger reinsurance
B: TRIA deductible reinsurance
C: 15% Co-participation reinsurance
D: Option -delayed TRIA certification
/payment coverage
Source: Marsh 2014 Terrorism Risk Insurance Report
21
Recording of this session via any media type is strictly prohibited.
*These policy endorsements are subject to state and federal regulation.
Page 21
Why Does Employee Concentration Data Matter?
• Carriers monitor their WC concentrations of insured employees
on a portfolio basis as well as on a multi-line basis
• Those that are “PML over-lined” in certain key Central Business District areas or Tier I
cities could decline risks or surcharge premiums
• Concentration data and terrorism catastrophe models have improved, allowing them to:
o Manage their potential exposures to various deterministic terrorism loss scenarios
o Achieve pricing more reflective of the assumed risk
o Satisfy rating agency requirements
•Insureds with large concentrations of employees - especially in major metropolitan areas
o Should be prepared to provide insurers with very detailed and specific information
o Examples of data that can accurately reflect an insureds cat exposure include
- total number of employees, employees working during peak shifts
- actual buildings where the employees are located on campus / corporate park settings
- % of the workforce in the field or telecommuting, rather than at the location the payroll is
assigned
Source: Marsh 2014 Terrorism Risk Insurance Report
22
Recording of this session via any media type is strictly prohibited.
*These policy endorsements are subject to state and federal regulation.
Page 22
Using High Quality Data as a Market Differentiator
Examples of some additional data elements include:
• Building level employee data
• Employee marital / dependency status
• Employee telecommuting practices and impact on concentration
• Physical security of the building: i.e. guards, surveillance cameras, parking areas, HVAC
• How access to the building is controlled
• Construction of the building and location of the offices.
• Management policies around workplace violence, weapons, and employment screening.
• Employee security procedures / staff.
• Emergency response / crisis management plan and procedures.
• Fire / life safety program.
Source: Marsh 2014 Terrorism Risk Insurance Report
23
Recording of this session via any media type is strictly prohibited.
*These policy endorsements are subject to state and federal regulation.
Page 23
RIMS is going to Capitol Hill and we want you to come with us. Join us and lobby for the
interests of risk management—your interests.
This is your chance to not only see what goes on in Washington, but to actively participate
in your government. We’ll have experts to walk you through the lobbying process and
instruct you on how to present your issues. Then you’ll take your new skills to Capitol Hill.
"Attending this event has become one of my favorite Society events. Not only do you have the opportunity to meet fellow risk managers and
RIMS members, it is a real life civics lesson on how the Federal government works. Being able to better understand the Society’s legislative
platforms and having the opportunity to explain to members of Congress why these issue are important to the Society and the risk management
community becomes a very tangible value of membership and advocacy. If you have an interest in these topics, I highly recommend attending. It
will provide a different perspective of how the democratic process works."
Scott B. Clark - Risk and Benefits Officer, Miami-Dade County Public Schools
"On my last visit, I met with a member of the House leadership. As it turns out, we had a common acquaintance. The Congressman was a
regular guy and understood our issues. He already was backing one piece of legislation and agreed to sign onto another of RIMS' supported
legislation."
Richard E. Rabs, AIC, ARM - Vice President – Insurance & Risk, Veolia North America
Recording of this session via any media type is strictly prohibited.
Page 24
And In Conclusion
Life without TRIA – or terrorism insurance – is a
risk
Good risk managers
•
•
•
•
•
anticipate risks
assess the consequences to their organizations
communicate the issues and the strategies
create an approved plan to deal with them
manage them
Recording of this session via any media type is strictly prohibited.
Page 25
Questions, Final Comments and
Contact Information
Speakers
Janice Ochenkowski
Jones Lang LaSalle
janice.ochenkowski@am.jll.com
Emil Metropoulos
Guy Carpenter LLC
emil.metropoulos@guycarp.com
Other
Nathan Bacchus
Sr. Government Affairs Manager – RIMS
nbacchus@rims.org
Recording of this session via any media type is strictly prohibited.
Page 26