1. TERRORISM RISK INSURANCE
SEPTEMBER 18, 2013

2. TERRORISM RISK INSURANCE The Terrorism Risk Insurance Program Reauthorization Act (TRIPRA)
The September 11, 2001, terrorist attacks created a severe market shortage for terrorism insurance
The US Congress passed the Terrorism Risk Insurance Act (TRIA) as a federal “backstop” for insurance claims related to terrorism events in the US and US interests abroad
It has been extended (with amendments) twice and the current Act is scheduled to expire on December 31, 2014, if not renewed
Marsh’s 2013 Terrorism Risk Insurance Report examines, in-depth, the continued demand for terrorism insurance based on take up rates, coverage nuances, and a number of other factors – data that supports an extension of TRIA
February 24, 2019

3. Evolution of TRIA TRIA 2002 TRIA Extension 2005 TRIPRA 2007
TRIA
2002
TRIA Extension
2005
TRIPRA
2007
Termination
December 31, 2005
December 31, 2007
December 31, 2014
Make-available provision
Must make coverage available for certified acts of terrorism on same terms and conditions as for other covered risks
No change
Covered acts
Foreign terrorism in the U.S. and on U.S. interests abroad. Includes an act of war for workers’ compensation policies only.
Foreign and Domestic terrorism in the U.S. and on U.S. interests abroad. Includes an act of war for workers’ compensation policies only.
Certification level
$5 million
Program trigger
$5 million in 2006 (thru March 31, 2006)
$50 million in 2006 (after March 31, 2006)
$100 million in 2007
$100 million in insured loss in a Program Year
Covered Lines
Commercial property and casualty (P&C) insurance (including excess insurance, workers’ compensation and surety insurance)
Commercial P&C insurance (including excess insurance, workers’ compensation and directors and officers insurance)
Excluded
Federal crop
Private mortgage
Financial guaranty
Medical malpractice
Health or life insurance including group life
Flood under NFIA
Reinsurance or retro
Added Exclusions:
Commercial auto
Burglary and theft
Surety
Professional liability
Farm owners multiple peril
Insurer Deductible
(% of direct earned premium)
15 percent in 2005
17.5 percent in 2006
20 percent in 2007
20 percent
Federal reinsurance quota share
90 percent in
90 percent in 2006
85 percent in 2007
85 percent
Insurance industry retention for mandatory recoupment
$15 billion in 2005
$25 billion in 2006
$27.5 billion in 2007
$27.5 billion
Cap on liability
$100 billion
February 24, 2019

4. Summary of Proposed Legislation As of September 10, 2013
Stipulations
Terrorism Risk Insurance Act of 2002 Reauthorization Act of 2013 (H.R. 508)
Terrorism Risk Insurance Program Reauthorization Act of 2013 (H.R. 2146)
Fostering Resilience to Terrorism Act of 2013 (H.R. 1945)
Sponsorship
75 cosponsors, 35 Republicans and 40 Democrats
31 cosponsors, 30 Democrats and 1 Republican
6 Democratic cosponsors
Term (Expiration)
December 31, 2019
December 31, 2024
Recoupment Deadline
September 30, 2024
September 30, 2027
Reporting Requirements
None
2013, 2017, 2020, and 2023 on the findings of the President’s Working Group on Financial Markets to determine long term affordability/availability of terrorism insurance
Other Key Changes
DHS to provide Insureds with appropriately classified terrorism risk information and information on best practices, to “foster resilience” to a terrorist act
Act Certification by Secretary of DHS (and not Sec. of State) in concurrence with Sec. of Treasury
February 24, 2019

5. How The Act Works 2007 Renewal (Current In-Force)
Recoupment Process
For certified acts up to and including $27.5B, Treasury is “required to recoup 133% of the government coverage…through surcharges on property/casualty insurance policies” by Sep. 30, 2017
If the industry loss exceeds $27.5B, Treasury has discretionary authority to apply recoupment charges
Surcharge to policy not to exceed 3% of policy premium
February 24, 2019

6. Property Terrorism Insurance Take-up Rates By Industry
February 24, 2019

7. Property Terrorism Insurance Take-up Rates by Region
February 24, 2019

8. TRIPRA and Workers’ Compensation
Terrorism exposure presents a unique challenge for workers’ compensation insurance
Workers’ compensation coverage is compulsory – employers are required to provide it to employees
Individual states regulate the line of business
Statutory / unlimited requirements for workers’ compensation loss
No option to exclude or sublimit any form of terrorism loss (i.e. conventional or NBCR)
TRIPRA does not distinguish between attack modes
Coverage follows that afforded in the primary policy
Annual policies with expiration dates on or after 1/1/2015 may be negatively impacted
February 24, 2019

9. Small v. Large Carrier Concerns
2012 industry surplus for insurance companies writing TRIPRA exposed business is $589B
Approximately 850+ carriers subject to program
A higher percentage of the surplus for smaller insurers is required to meet the deductible requirements of TRIPRA. Consequently, smaller insurers tend to incorporate TRIPRA recoveries into their risk management strategies
Larger insurers with TRIPRA deductibles in the billions of dollars tend to manage their exposures to specific zone accumulations rather than incorporating TRIPRA recoveries
Rating agencies are focusing on risk accumulation / aggregation profiles and are asking insurers for specific strategies if TRIPRA expires without a replacement
Reinsurers are able to provide more coverage for conventional weapons attacks than for NBCR attacks
February 24, 2019

10. Efficacy of Private Market Reinsurance Capital
Private Industry Capital
Loss Scenarios
Est. $700B3 P&C
US (Re) Insurance
Dedicated Capital
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 NBCR Loss
Notes:
2013 dollars based on Bureau of Labor statistics CPI Index
The loss figures above assume a 100% Property take-up rate among commercial insureds
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
Est. $195B
Global
Reinsurance
Dedicated Capital
Est. $100B
North American
Reinsurance
Dedicated Capital
February 24, 2019

11. Current Market Impacts
Estimate $750M to $2B of individual risk capacity
Less capacity available and more expensive for terror exposed central business districts
Uncertainty around TRIPRA’s future and the possibility of late extension is creating capacity and pricing issues for insurance buyers
Large carriers have implemented “conditional TRIPRA endorsements” and pushing prices up on large accumulation risks
Market impact is expected to worsen starting on January 1, 2014
Carrier withdrawal and / or short term policies issued
Especially on the workers’ compensation line of business
Absence of TRIPRA or a substantial change, will
Increase cost to insurance buyers across many industries
Reduce availability of terrorism coverage in the private market
May cause some policyholders to go without insurance protection against terrorism exposures
Need to remove bullet on pools
February 24, 2019

12. Considerations for Reauthorization of TRIPRA
Qualitative Changes
Inclusion of cyber terrorism as an enumerated covered line of business
Improve certification process and timing
Bi-furcated coverage: Conventional (where more private market capacity is available) and NBCR perils (where it clearly is not)
Quantitative Changes – Range Estimates Based on Ongoing Debates
Company deductible
May be increased (incrementally) from 20% to 25% in line with growth in industry surplus
Aggregate threshold
May increase aggregate trigger from $100M to $250M over time. Impact on regional/mutual insurers should be considered
Company co-insurance
Potential for increase in insurers co-participation from 15% to 20%
Notes:
Restrictions of TRIPRA based on the ranges outlined above may cause some level of market disruption and / or increase the cost of insurance coverage
The numbers above do not constitute Marsh & McLennan Company’s recommendation and are intended to reflect the range of discussions on some possible changes in a reauthorization of TRIPRA
February 24, 2019

13. This document and any recommendations, analysis, or advice provided by Marsh (collectively, the “Marsh Analysis”) are not intended to be taken as advice regarding any individual situation and should not be relied upon as such. This document contains proprietary, confidential information of Marsh and may not be shared with any third party, including other insurance producers, without Marsh’s prior written consent. Any statements concerning actuarial, tax, accounting, or legal matters are based solely on our experience as insurance brokers and risk consultants and are not to be relied upon as actuarial, accounting, tax, or legal advice, for which you should consult your own professional advisors. Any modeling, analytics, or projections are subject to inherent uncertainty, and the Marsh Analysis could be materially affected if any underlying assumptions, conditions, information, or factors are inaccurate or incomplete or should change. The information contained herein is based on sources we believe reliable, but we make no representation or warranty as to its accuracy. Except as may be set forth in an agreement between you and Marsh, Marsh shall have no obligation to update the Marsh Analysis and shall have no liability to you or any other party with regard to the Marsh Analysis or to any services provided by a third party to you or Marsh. Marsh makes no representation or warranty concerning the application of policy wordings or the financial condition or solvency of insurers or reinsurers. Marsh makes no assurances regarding the availability, cost, or terms of insurance coverage.
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