Terrorism Insurance and Modeling Jack Seaquist September 21, 2007

© 2007 AIR Worldwide Corporation CONFIDENTIAL Discussion Agenda  Development of terrorism insurance  Terrorism modeling  Status of the federal backstop extension  Key issue for the future – NBCR exposure

© 2007 AIR Worldwide Corporation CONFIDENTIAL Terrorism Insurance  Prior to 9/11/2001 – no recognition of terrorism as a peril – it’s covered  After 9/11 – terrorism exclusion added to policy terms  Approved in most states  November 2002 – Terrorism Risk Insurance Act of 2002 (TRIA)  Mandatory availability in covered commercial lines  Covers certified acts by international terrorists  Company deductible and co-share  Limited reinsurance market  Some stand-alone coverage  December 2005 – Terrorism Risk Insurance Extension Act of 2005 (TRIEA)  Extension through end of 2007  September 2007 – active legislative activities to extend Terrorism Risk Insurance Program

© 2007 AIR Worldwide Corporation CONFIDENTIAL Analytic Developments to Support Terrorism Risk Management  September 2002 – introduction of probabilistic terrorism models  Spring 2003 – use of probabilistic loss results in ISO advisory loss cost filings  February 2004 – A.M. Best adds Terrorism Section to Supplemental Rating Questionnaire (SRQ)  Insurance companies begin measuring and managing terrorism risk  Exposure concentrations  Worst-case modeled loss scenarios - deterministic

© 2007 AIR Worldwide Corporation CONFIDENTIAL AIR Terrorism Model Components Probabilistic Loss Estimate Event Loss Weapons Terrorism Events Policy Conditions ENGINEERING HAZARD FINANCIAL Frequency Estimate Weapon Damage and Injury Models Exposure Information Targets/ Landmarks

© 2007 AIR Worldwide Corporation CONFIDENTIAL AIR Models Possible Future Conventional Weapon Attacks Where They Could Occur  Commercial facilities  Prominent buildings  Corporate headquarters  Transportation  Airports  Rail; Bus  Bridges; Ports  Chemical plants  Energy facilities  Retail centers and malls  Hotels and casinos  Amusement parks and sports venues  Government facilities  Federal office buildings and courthouses  Embassies  State capitols  Educational, medical, and religious institutions, etc. Comprehensive Set of Possible Targets

© 2007 AIR Worldwide Corporation CONFIDENTIAL NBCR  Chemical*  Sarin (GB)  VX Nerve  Biological*  Anthrax  Small pox  Radiological  Cesium 137  Cobalt 60  Nuclear* AIR Models a Range of Weapon Types and Sizes CONVENTIONAL  Vehicle bombs  Portable  Car  Van  Delivery Truck  Large Truck  Airplane crash  General aviation  Large commercial airliner * Includes small, medium, and large

© 2007 AIR Worldwide Corporation CONFIDENTIAL Building Physical Damage Outcome Also Contributes to the Distribution of Injury Severity Levels

© 2007 AIR Worldwide Corporation CONFIDENTIAL Injury Severity Model Accounts for the Full Range of Possible Damage States and Resulting Injuries 1234 Complete Damage Collapse Complete Damage No Collapse Extensive Damage Moderate Damage Minor Damage Building Event Damage Distribution Fatality Life Threatening Moderate Minor None Fatality Life Threatening Moderate Minor None Fatality Life Threatening Moderate Minor None Fatality Life Threatening Moderate Minor None Fatality Life Threatening Moderate Minor None

© 2007 AIR Worldwide Corporation CONFIDENTIAL AIR Terrorism Model Components Probabilistic Loss Estimate Event Loss Weapons Terrorism Events Policy Conditions ENGINEERING HAZARD FINANCIAL Frequency Estimate Weapon Damage and Injury Models Exposure Information Targets/ Landmarks

© 2007 AIR Worldwide Corporation CONFIDENTIAL AIR Terrorism Model Components Probabilistic Loss Estimate Event Loss Weapons Terrorism Events Policy Conditions ENGINEERING HAZARD FINANCIAL Frequency Estimate Weapon Damage and Injury Models Exposure Information Targets/ Landmarks Event scenario: 6-ton truck bomb – Midtown Manhattan Event loss: $3.5 billion property loss $4.5 billion workers’ compensation loss Deterministic Loss Analysis

© 2007 AIR Worldwide Corporation CONFIDENTIAL National Intelligence Estimate – July 2007 “We assess that al-Qa’ida’s Homeland plotting is likely to continue to focus on prominent political, economic, and infrastructure targets with the goal of producing mass casualties, visually dramatic destruction, significant economic aftershocks, and/or fear among the US population. The group is proficient with conventional small arms and improvised explosive devices, and is innovative in creating new capabilities and overcoming security obstacles. We assess that al-Qa’ida will continue to try to acquire and employ chemical, biological, radiological, or nuclear material in attacks and would not hesitate to use them if it develops what it deems is sufficient capability.”

© 2007 AIR Worldwide Corporation CONFIDENTIAL Limited Statistics Are Available, But UK’s MI5 Released Terrorist Plot Statistics  We are tracking almost 30 terrorist plots involving 1,600 suspects and 200 cells  Five major plots foiled since the July 2005 London transit bomb attacks Dame Eliza Manningham-Buller, Director General, MI5, November 10, 2006

© 2007 AIR Worldwide Corporation CONFIDENTIAL Operational Threat Assessment Considerations of the Terrorism Expert Group  Objectives  Mass casualties?  Economic impact?  Symbolic?  Punish a group, industry, company, government?  Capabilities and Resources  Weapon availability  NBCR efforts  Coordinated attacks  Manufacture vs. buy  Financial  Technical expertise  Operational skills  Deployment  Locales with presence  Financial vs. operational  Local target surveillance opportunity  Local support  Historical attacks  Targets  Weapons  Locales  Reaction to Security  Federal  State  Local  Private

© 2007 AIR Worldwide Corporation CONFIDENTIAL AIR Terrorism Model Components Probabilistic Loss Estimate Event Loss Weapons Terrorism Events Policy Conditions ENGINEERING HAZARD FINANCIAL Frequency Estimate Weapon Damage and Injury Models Exposure Information Targets/ Landmarks

© 2007 AIR Worldwide Corporation CONFIDENTIAL AIR Terrorism Model Components Probabilistic Loss Estimate Event Loss Weapons Terrorism Events Policy Conditions ENGINEERING HAZARD FINANCIAL Frequency Estimate Weapon Damage and Injury Models Exposure Information Targets/ Landmarks 500,000-year simulation catalog: Excedance Probability Distribution Probabilistic Loss Analysis

© 2007 AIR Worldwide Corporation CONFIDENTIAL Terrorism Risk Management Best Practices  Focus on quality of exposure data  Improve location details  Understand local targets  Exposure concentration analysis  Identify points of accumulation through ring analyses  Determine proximity to target locations  Deterministic loss estimation  Incorporate physical damage models  Examine concentration points and target locations  Fully probabilistic loss analysis  Manage surplus and reinsurance  Estimate loss potential under varying conditions

© 2007 AIR Worldwide Corporation CONFIDENTIAL Rating Agencies Are Forcing Terrorism Risk Management A.M. Best Summary  Exposure data quality  Exposure concentration, including cost of lives  Single location exposure  500-foot ring exposure  Deterministic loss scenarios  Delivery truck bomb  Zonal aggregations (reinsurers)  Percent of policyholder surplus exposed  With and without reinsurance and TRIA  Within and outside 11 high risk cities  See AIR white paper for detailed instructions

© 2007 AIR Worldwide Corporation CONFIDENTIAL Rating Agencies Are Forcing Terrorism Risk Management Standard & Poor’s Summary  Modeled loss exposure within a 500 foot circle  ton truck bomb  ton truck bomb  25 ton truck bomb  Modeled loss exposure within a 1-mile circle  ton truck bomb  ton truck bomb  25 ton truck bomb  Modeled loss exposure (range various)  Anthrax or biological kg  Anthrax or biological – greater than kg  Airplane crash  Small nuclear – 1 kiloton  Large Nuclear – kiloton  Top 10 single address exposures  Full limit net exposure

© 2007 AIR Worldwide Corporation CONFIDENTIAL Through 2007, TRIEA Protects Insurers from Large Losses  2007 Terms  Commercial P&C lines  Deductible 20% of applicable premium  15% insurer co-pay  $100 million event trigger  “Make available” provision  $100 billion aggregate limit  Post-funded  Terrorism cannot be excluded from workers’ compensation  Existing exclusions in a policy can apply to terrorism coverage  NBCR Impact on a hypothetical company with a loss equal to its premium base 100%

© 2007 AIR Worldwide Corporation CONFIDENTIAL The American Academy of Actuaries Determined That Potential Large Losses Are Uninsurable ScenarioNew YorkWashington San Francisco Des Moines Truck bomb$12$6$9$3 Chemical$447$106$92$27 Biological$778$197$171$42 Insured Losses*, in $ billions Terrorism Risk Insurance Subgroup * Deterministic loss results provided by AIR

© 2007 AIR Worldwide Corporation CONFIDENTIAL GAO Reported CBRN Coverage Problems to Congress in September 2006  TRIA will cover losses from certified terrorism events irrespective of the weapon type  Risks continue to be unattractive to insure  Property insurers believe they have excluded NBCR coverage by interpreting existing exclusions to apply  Workers’ compensation provides coverage because it is required by states  Rating agencies have not looked at NBCR exposure  Models have been found useful for managing insurers’ exposure to terrorism risks “Given the challenges faced by insurers in providing coverage for, and pricing NBCR risks, any purely market-driven expansion of coverage is highly unlikely in the foreseeable future.”

© 2007 AIR Worldwide Corporation CONFIDENTIAL President’s Working Group on Financial Markets Sees TRIA Going Away  Insurers have allocated additional capacity  Prices have declined  Take-up rates have increased  Better risk measurement and management is available  Terrorism risk modeling has improved  Greater reinsurance capacity is available  Insurer financial health has recovered  State regulation does not appear to have a significant impact on capacity  But there may be little potential for future CNBR market development “Further improvements in insurers’ ability to model and manage terrorism risk, and the other factors noted above, will likely contribute to the long-term development of the terrorism risk insurance market.”

© 2007 AIR Worldwide Corporation CONFIDENTIAL Status of Pending Legislation  House of Representatives - H.R  Approved with amendments by Financial Services Committee on August 1  Costs assessed by Congressional Budget Office on September 6  Resulted in Pay-As-You-Go Roadblock  Rules Committee established ground rules for the debate on September 17  Passed by full House on September 19 ( )  Senate  Intent to create legislation with long term extension  Minority party seeks short term extension  White House – Statement of Administration Policy – September 17  President’s senior advisors would recommend a veto of H.R  The program should be temporary and short-term  There should be no expansion of the program  Private sector retentions should be increased

© 2007 AIR Worldwide Corporation CONFIDENTIAL Key Provisions of H.R  15-year extension  Adds group life and farm-owners multiple peril lines  Covers domestic terrorism  Reduces event trigger back to $50 million from $100 million in 2007  Post-event reset of deductible after years with significant industry loss  Adds “make available” provision for NBCR  With reduced company deductible, starting at 3.5%  Implementation to begin in 2009

© 2007 AIR Worldwide Corporation CONFIDENTIAL H.R Addresses the Gap in NBCR Coverage “…as nuclear, biological, chemical or radiological acts of terrorism (known as NBCR terrorism) present a threat of loss of life, injury, disease and property damage potentially unparalleled in scope and complexity by any prior event, natural or man-made, the Federal Government’s responsibility in providing for and preserving national economic security calls for a strong Federal role in ensuring financial compensation and economic recovery in the event of such an attack.” The current H.R adds to the mandatory availability provision: “…shall make available, in insurance policies for covered lines for which the coverage described in subparagraph (A) is provided, exceptions to the pollution and nuclear hazard exclusions of such policies that render such exclusions inapplicable only as to insured losses arising from acts of NBCR terrorism.”

© 2007 AIR Worldwide Corporation CONFIDENTIAL Current NBCR Exclusions  Chemical and biological exclusions are found in pollution exclusions  Exceptions to the exclusion may apply in certain attack modes  Pollution exclusions are not universal  Nuclear and radiological attacks subject to nuclear hazard exclusion  Excludes property damage from radioactive contamination  Does not exclude fire and blast damage from a bomb  Workers’ compensation has no exclusions

© 2007 AIR Worldwide Corporation CONFIDENTIAL Nuclear Damage Effects  Blast and shock  Thermal radiation  Initial nuclear radiation  Residual nuclear radiation contamination (fallout) 0.5 to 3 mile damage radius

© 2007 AIR Worldwide Corporation CONFIDENTIAL Residual Radioactive Contamination from Surface Nuclear Bursts  Earth, dust, and debris from the earth’s surface are taken up into the fireball and contaminated  Contaminated particles range in diameter from less than 1 micron to several millimeters  The larger ones begin to fall back to earth even before the radioactive cloud has attained its maximum height  The very smallest ones may remain suspended in the atmosphere for long periods – they may circle the earth many times before reaching the ground  The early fallout hazard represents the larger particles reaching the ground within 24 hours – this can contaminate large areas and represent an immediate biological hazard

© 2007 AIR Worldwide Corporation CONFIDENTIAL Decontamination and Restoration  Cleanup of contaminated areas, like  Chernobyl  Three Mile Island  Contaminated material will need removed from the scene  Radioactive particles may chemically bind to concrete and asphalt  Radioactive particles may become lodged in crevices of building exteriors and surroundings  Affected areas could be unavailable for many years  Cleanup may be feasible, but demolition and rebuilding may be the most cost-effective approach  Contamination level decreases with the distance from the event

© 2007 AIR Worldwide Corporation CONFIDENTIAL DHS Planning Scenario – 10-kT Nuclear Attack  Infrastructure damage – total within 0.5 to 1.0 miles  Contamination – approximately 3,000 square miles  Economic impact – Hundreds of billions  Recovery timeline – years

© 2007 AIR Worldwide Corporation CONFIDENTIAL DHS Planning Scenario – Radiological Dispersal Devices (Cesium)  Infrastructure damage – near the explosion  Contamination – 36 city blocks (0.25 mile radius)  Economic impact – up to billions of dollars  Recovery timeline – months to years

© 2007 AIR Worldwide Corporation CONFIDENTIAL Nuclear Regulatory Commission Fact Sheet  Biological Effects of Radiation  Average annual radiation exposure is 360 mrem.  Above background levels of radiation exposure, the NRC requires that its licensees limit maximum radiation exposure to individual members of the public to 100 mrem per year  And limit occupational radiation exposure to adults working with radioactive material to 5 rem per year  NRC regulations and radiation exposure limits are consistent with recommendations of national and international scientific organizations and with practices in other developed nations  Reference point: full set of dental X-rays = 40 mrem

© 2007 AIR Worldwide Corporation CONFIDENTIAL DHS Proposed Protective Action Guides for Radiological Dispersion and Improvised Nuclear Devices  Posted in Federal Register for comment – 3 January 2006  Revised version scheduled for August 2007 in the Federal Register  The need for federal guidance was established during TOPOFF 2  Previous EPA guidance (1992) was for nuclear plant spills “Because of the extremely broad range of potential impacts that may occur from RDDs and INDs (e.g., ranging from light contamination of one building to widespread destruction of a major metropolitan area), a pre-established numeric guideline is not recommended as best serving the needs of decision makers in the late phase. Rather, a process should be used to determine the societal objectives for expected land uses and the options and approaches available, in order to select the most acceptable criteria.”

© 2007 AIR Worldwide Corporation CONFIDENTIAL Health Physics Society – Specialists in Radiation Safety  Background Information on “Guidance for Protective Actions Following a Radiological Terrorist Event”, 31 January 2007  Protective Actions for the Late (Recovery) Phase  The EPA’s PAG Manual does not have any protective actions for this phase  Recommends that continued cleanup during the late phase should be subject to the principles of ALARA (as low as reasonably achievable), economic and social factors being taken into account, with a minimum level of continued cleanup of 100 mrem per year  At this dose, risks of radiation-induced health effects are either non- existent or too small to be observed.

© 2007 AIR Worldwide Corporation CONFIDENTIAL Potential Range of Cleanup Guidance for a Radiological Contamination Event 15 mrem/yearEPA, “Establishment of Cleanup Levels for CERCLA Sites With Radioactive Contamination” (e.g., Hanford Site) 25 mrem/yearNRC, Final Rule on Radiological Criteria for License Termination (10 CFR Part 20 Subpart E) 100 mrem/yearHealth Physics Society Position Statement, “Guidance for Protective Actions Following a Radiological Terrorist Event” 500 mrem/yearEPA, “Manual of Protective Action Guides and Protective Actions for Nuclear Incidents,” 400-R ,…”doses in any single year after the first will not exceed 0.5 rem” 2 rem/yearEPA, “Manual of Protective Action Guides and Protective Actions for Nuclear Incidents,” 400-R ,…”doses in in first year will not exceed 2 rem” 5 rem/yearNRC, “Standards for Protection Against Radiation,” recommendation and established dose limit for workers (10 CFR 20 Subpart C)

© 2007 AIR Worldwide Corporation CONFIDENTIAL Pacific Northwest National Laboratory Study on Cleanup Standards – Nuclear Bomb Blast

© 2007 AIR Worldwide Corporation CONFIDENTIAL Summary  Terrorism insurance has not developed as a viable market without the federal government  Modeling tools have been incorporated into terrorism risk management best practices  The future of the federal Terrorism Risk Insurance Program is highly uncertain  House H.R  Senate  White House  Significant new exposure to NBCR could result  The extent of insurer exposure to a radiation contamination event could depend on the standards selected by local stakeholders after the event occurs  See for this information in AIR White Paperwww.air-worldwide.com