TERRORISM REINSURANCE
YESTERDAY AND TODAY
Ed Hochberg
May 7, 2007
© 2007 Towers Perrin
TERRORISM REINSURANCE
AGENDA:
 History of Terrorism Reinsurance
 USA
 Europe – UK, France, Germany, Spain
 Terrorism Reinsurance Today
 Major Categories of Coverage
 Major Elements Influencing Pricing and Terms
 Emerging Issues
© 2007 Towers Perrin
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History of Terrorism Reinsurance - USA
Pre-September 11, 2001
 (Re)insurance functions well when individual losses are
random, uncorrelated and not enormous since risks can
be spread over a large population
 Terrorism losses pre-9/11were generally small, random
and uncorrelated, so private (re)insurance markets were
able to cover terrorism risk effectively and without fanfare
 Insurance against terrorism risk was included in most
commercial lines without extra premium
 Stand-alone terrorism market was mainly limited to
providing solutions for property owners and
trade/investment exposures in countries with elevated
terrorism risk (UK, Colombia, Sri Lanka, etc.)
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History of Terrorism Reinsurance - USA
Post-September 11, 2001
 The perceived and real potential for enormous and/or a
sustained run of smaller correlated terrorism losses
meant risk spreading would no longer work as smoothly
 The correlation of terrorism risk exists on two levels,
(1) multiple lines affected instantaneously and (2)
several catastrophic attacks can occur simultaneously
 High risk of private (re)insurer insolvency
 Policyholders suffering losses might not be paid
coverage due under policies
 The inability of (re)insurance industry to predict number,
scale, frequency or correlation of future terror attacks
resulted in widespread imposition of exclusion clauses
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History of Terrorism Reinsurance - USA
Post-September 11, 2001 (continued)
 Demand: Commercial insurance customers wanted
and needed terror coverage
 Supply: Insurers were reluctant to provide terror
coverage
 Outcome: Urgent need for a solution
 After much private and public research and debate, the
only immediate way to ensure compensation of
terrorism victims was through governmental
guarantees
 Enter Terrorism Risk Insurance Act (TRIA)
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History of Terrorism Reinsurance - USA
Terrorism Risk Insurance Act (TRIA)
 Passed by Congress November 19, 2002, signed into
law November 26, 2002, to expire December 31, 2005
 Acknowledgement by Government that terror risk is
too unpredictable, with too severe a loss potential, for
(re)insurance industry to safely handle
 Provides federal backstop for certain acts of terrorism
via temporary federal program for sharing risk of loss
from foreign terrorist attacks with insurance industry
 Temporary measure to allow time for private markets
to stabilize, resume pricing of such insurance and build
capacity to absorb future losses while preserving State
insurance regulation and consumer protection
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History of Terrorism Reinsurance - USA
Terrorism Risk Insurance Extension Act (TRIEA)
 Approved by Congress on December 17, 2005 to expire
December 31, 2007 – may not renew
 Under the Act(s) carriers are required to:
 Offer terrorism coverage
 Retain a (staggering) increasing portion of their prior
year’s DEP for covered lines (20% in 2007)
 Carry increasing co-participations (15% in 2007)
 Growing number of private industry products
 However, private (re)insurance industry continues to
work with the federal government and policyholders to
establish an on-going, viable private-public solution
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History of Terrorism Reinsurance - USA
Alternatives to TRIA or further extensions thereof:
 The federal government as a retrocessionaire or a
finite reinsurer?
 Federal securitization of terrorism loss options?
 No role for federal government?
 Capital markets – bonds/securitizations?
 On-going public/private partnership?
 Mutual insurance organization similar to UK?
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History of Terrorism Reinsurance – UK
Pre-September 11, 2001
 1993: Government-backed terrorism reinsurance pool,
“Pool Re”, established in response to property losses
from bombings by IRA
 Mutual insurance organization
 HM Treasury acts as reinsurer of last resort
 Participating (re)insurers must be properly authorized
 (Re)insurer coverage by/participation in pool optional
 Coverage generally limited to property policies
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History of Terrorism Reinsurance - UK
Post-September 11, 2001
 Coverage expanded to include more risks (e.g., NBC)
 Premiums, generally based on location and amount of
coverage purchased, doubled due to more participation
 Annual and per event losses of (re)insurers capped
 Retentions based on degree of pool participation
 Industry-wide retentions escalate over time
 No surcharge after losses to Pool Re
 Facets of Pool Re encouraging competition:
 Max deductible raised to encourage private reinsurer
re-entry into market
 Insurers free to set premiums for underlying policies
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History of Terrorism Reinsurance - France
Pre-September 11, 2001
 France suffered several waves of deadly terrorist attacks
during the 1980s and 1990s
 French law does not allow commercial property insurers to
dissociate terrorism coverage from commercial property
 September 9, 1986: French law obligates insurers to
provide terrorism coverage up to the overall limits of a
property policy
 Post September 11, 2001, in light of the perceived
increased in terrorism risk, many insurers stopped
covering terrorism, which meant they had to stop
covering commercial property
 The French government urgently need to find a solution
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History of Terrorism Reinsurance - France
Post-September 11, 2001
 December 10, 2001: France established temporary
terrorism reinsurance pool, “GAREAT”
 All property owners must purchase coverage
 All insurers must join pool
 Premiums set on basis of amount of coverage
purchased – rates don’t vary by industry or location
 Insurers bear initial losses, private reinsurance bears
middle layers of loss, government bears catastrophic
losses (without cap)
 Government shares in premiums
 Extended - in effect until December 31, 2007
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History of Terrorism Reinsurance - Germany
Pre-September 11, 2001
 Insurance against terrorism risk included in most
commercial lines without extra premium
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History of Terrorism Reinsurance - Germany
Post-September 11, 2001
 September 3, 2002: Germany established temporary
terrorism reinsurance pool, “Extremus AG”
 Coverage optional
 Premiums set on basis of amount of coverage
purchased – rates don’t vary by industry or location
 Insurers bear initial losses, private reinsurance bears
middle layers of loss, government bears catastrophic
losses (with cap)
 Government shares in premiums
 Extended - in effect until December 31, 2007
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History of Terrorism Reinsurance - Spain
Pre-September 11, 2001
 1941-1954 (During Spanish Civil War): State established
permanent insurance pool, “Consorcio de Compensacion
de Seguros”
 Covers natural disaster and terrorism losses
— Property damage only
 Integrated into policies issued by private insurers that
collect premiums on Consorcio’s behalf
 Mandatory insurer participation
 Premiums set on basis of amount of coverage
purchased – rates don’t vary by industry or location
© 2007 Towers Perrin
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History of Terrorism Reinsurance - Spain
Post-September 11, 2001
 Coverage against complete range of risks expanded to
include business interruption
 Spain’s pool paid losses from the March 11, 2004
bombings of several train stations in Madrid
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Terrorism Reinsurance Today
 The market has come a long way since 2001
 Many reinsurers in London, Bermuda, and Continental
Europe provide terrorism cover on some basis
 However, the market for terrorism reinsurance is
estimated to have only approximately $6 to $8 billion in
global capacity and only $1 to $2 billion for NBCR1
 This compares to estimated potential losses in
excess of $100 billion
 Also by way of comparison, the global property
catastrophe market, which excludes terrorism, is in
excess of $120 billion of capacity
1 Based upon the testimony of Christopher Nassetta, CEO of Host Hotels and Resorts, on behalf of the Coalition to Insure Against Terrorism, to the Subcommittee
on Capital Markets, Insurance, and Government Sponsored Enterprises and the Subcommittee on Oversights and Investigations of the House Committee on
Financial Services on September 27, 2006.
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Major Categories of Coverage
 Property – TRIEA (Certified) and Non-Certified
 Property – Stand-alone
 Workers’ Compensation/Personal Accident
 Other and Miscellaneous Exposures
 Personal lines
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Major Categories of Coverage
Property – TRIEA (Certified) and Non-Certified
 Capacity: Substantial, in the hundreds of millions
 Markets: Primarily London and Bermuda for stand-
alone cover
 Sometimes “thrown in” on mainframe treaties,
depending upon the nature of the exposure (e.g. “main
street” businesses outside of major metro areas),
although in this case NBCR is not typically included
 Sometimes terrorism is excluded in mainframe
treaties, but coverage for the “fire following” exposure
is provided
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Major Categories of Coverage
Property – Stand-Alone
 There have been treaties placed for specific terrorism
insurance (outside of TRIEA)
 Such treaties tend to be E&S situations – trophy
properties, etc.
 Capacity: More restricted since these tend to be higher
risk situations involving somewhat broader cover tend to be more “clashy”
 Many entities who reinsure this exposure write it
directly
 Markets: Dominated by London, Bermuda, and
Berkshire
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Major Categories of Coverage
Workers’ Compensation/Personal Accident
 Issues similar to TRIEA Property
 Issues revolve around PML measurement (e.g. how
many employees/people are actually in a location at a
single time?)
 Capacity: Relatively plentiful for non-CBI and non-
NBCR exposures
 Markets: London market tends to lead in this space
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Major Categories of Coverage
Other and Miscellaneous Exposures
 Aviation – For US carriers, terrorism is presently
covered by the Department of Transportation
 Hull – Aviation War, which is typically reinsured in
the marine market
 Passenger and Third Parties – Excluded with war
risk via AVN 48, with a “write back” via AVN 52
 Marine – typically handled in the marine war market
 Contingency, etc. – coverage is available, and is
handled various ways…
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Major Categories of Coverage
Personal Lines
 Frequently “thrown in” on mainframe treaties
 Particularly true outside of CBI’s
 Not perceived as a major exposure
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Major Elements Impacting Price and Terms
 New York, New York
 Other CBI’s
 Outside of NY and other CBI’s, capacity is relatively
plentiful and inexpensive
 Analogous to peak zone exposures in property, but
without reliable modeling
 NBCR
 Makes PML/RDS evaluation relatively difficult
 Potential range of exposure much bigger
 Contingent Business Interruption
 Viruses/Cyber Terror
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Emerging Issues
 Sunset of TRIEA –
 What will the market look like after 12/31/07?
 More exposure?
 Even if TRIEA sunsets, what about the run-off?
What about “fire following”? What about workers’
comp?
 Rating Agencies –
 Views are evolving
 Typically used if larger than property PML’s
 If rating agencies step up “concern”, it will spur
demand
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