1. Harry Shuford, Ph.D. Jonathan Evans, FCAS, MAAA
Modeling the Solvency Impact of TRIA on the Workers Compensation Insurance Industry
Harry Shuford, Ph.D.
Jonathan Evans, FCAS, MAAA

2. Basic Features of TRIA Covers terrorist attacks of foreign origin
Limits total P&L commercial lines direct loss liability to $100b
Reinsurance for 90% of annual terrorism losses above a certain percentage (7%, 10%, 15% in 2003, 2004, 2005, respectively) of total commercial lines direct premium within total liability limit.

3. Solvency Statistics of Interest (with TRIA vs without TRIA)
Market share insolvent
Number of insurers insolvent
Market share impaired (surplus < 1/3 net premium)
Number of insurers impaired
Expected policyholder deficit (max guarantee fund loss)
Total recapitalization cost
Years to pay back guarantee fund at 2% assessment

4. Modeling Objective
Transform a loss exceedance curve into distribution curves for industry insolvency statistics.

5. Available Model Inputs
National and Statewide (16 states) workers compensation loss exceedance curves for terrorist attacks produced by EQECAT
Financial data (surplus, premium by line of business by state) from Thomson Financial

6. Modeling Challenges
Statewide loss exceedance curves with no more specific geographical detail
Insurer premiums by state by line of business with no more specific geographical detail
Consistent total surplus available at group level, not company level
Reinsurance and alternative risk transfer (ART) details unavailable and impossibly complex to model
Model must be relatively simple, minimal resources for development and maintenance

7. Model Assumptions Exactly 1 event in a year
28% loss reduction from absenteeism, etc.
WC is 25% of all commercial loss
Losses allocated by group DWP market share
Surplus is reduced by loss amount
Retention is 10% of group commerical DWP
10% copayment
$100b total liability limit
Insolvency is 0 group surplus
Impairment is group surplus < 1/3 group P&C NWP

8. Uneven Loss Allocation, Reinsurance, ARTs
Proportional most unrealistic model assumption
Causes insolvency impact on individual insurers and TRIA recoveries to be underestimated
However, insolvency underestimation somewhat offset since reinsurance and ARTs not modeled

15. Conclusions Model demonstrates TRIA working as intended
Extreme terrorist events, as contemplated by catastrophe models, could effectively bankrupt the US workers compensation insurance industry (and similarly the entire P&L insurance industry) without TRIA
TRIA generally does not respond to small and medium events
TRIA provides greater solvency protection to small regional insurers and state funds