1. Renewing TRIA: Political and Actuarial Issues Michael G. McCarter, FCAS, MAAA Vice President, AIG Session CMT 1: Update on Terrorism CAS CLRS, September 11, 2007

2. Introduction Background Background Academy Analysis Academy Analysis Treasury Department Treasury Department Congress – H.R. 2761 and CBO Congress – H.R. 2761 and CBO Political Issues Political Issues Outlook Outlook Actuarial Issues Actuarial Issues

3. Background September 11, 2001 September 11, 2001 Precursor events Precursor events Aftermath Aftermath November 2002: TRIA November 2002: TRIA December 2005: TRIEA December 2005: TRIEA 2006 Elections 2006 Elections

4. Academy Analysis Terrorist use of WMDs could cause insurable losses in excess of $700 billion Terrorist use of WMDs could cause insurable losses in excess of $700 billion Insurance industry has insufficient capital to bear such a loss and continue functioning Insurance industry has insufficient capital to bear such a loss and continue functioning There are significant limitations on the insurance industry’s ability to control its own exposure There are significant limitations on the insurance industry’s ability to control its own exposure

5. Treasury Department Represents administration’s perspective; opposed to government interference in marketplace Represents administration’s perspective; opposed to government interference in marketplace June 2005 report June 2005 report Secretary chairs President’s Working Group on Financial Markets Secretary chairs President’s Working Group on Financial Markets September 2006 report September 2006 report

6. Congress Prior to 2007, the House generally favored extending and expanding TRIA while the Senate generally opposed both Prior to 2007, the House generally favored extending and expanding TRIA while the Senate generally opposed both Control of both the House and the Senate changed hands as a result of the 2006 elections Control of both the House and the Senate changed hands as a result of the 2006 elections

7. U.S. House House Financial Services Committee now chaired by Rep. Barney Frank (D-Mass.) House Financial Services Committee now chaired by Rep. Barney Frank (D-Mass.) Favors longer term (5 years or more) extension Favors longer term (5 years or more) extension Has indicated willingness to expand coverage to Group Life and Domestic Terrorists Has indicated willingness to expand coverage to Group Life and Domestic Terrorists Interested in more CNBR coverage Interested in more CNBR coverage Has introduced H.R. 2761 Has introduced H.R. 2761

8. H.R. 2761 Approved by the House Financial Services Committee Approved by the House Financial Services Committee Now expected to be voted on by the full House next week Now expected to be voted on by the full House next week In general, expands and extends the federal terrorism backstop In general, expands and extends the federal terrorism backstop Current issue: CBO cost estimate and House PAYGO rules Current issue: CBO cost estimate and House PAYGO rules

9. H.R. 2761 Features - 1 Extends TRIA for 15 years to 2022 Extends TRIA for 15 years to 2022 Covers domestic as well as foreign terrorism Covers domestic as well as foreign terrorism Reduces event trigger to $50 million ($5 million after large attack) Reduces event trigger to $50 million ($5 million after large attack) At January 1, 2009 requires making available NBCR coverage At January 1, 2009 requires making available NBCR coverage NBCR coverage starts with a 3.5% insurer deductible as compared with a 20% insurer deductible for conventional attacks NBCR coverage starts with a 3.5% insurer deductible as compared with a 20% insurer deductible for conventional attacks Larger NBCR attacks reduce insurer co-payment shares Larger NBCR attacks reduce insurer co-payment shares

10. H.R. 2761 Features - 2 Provides additional legal certainty regarding the $100 billion insurance industry insured loss cap Provides additional legal certainty regarding the $100 billion insurance industry insured loss cap Adds group life as a covered line with certain special features including a separate recoupment pool and use of “amount at risk” instead of premium as the metric Adds group life as a covered line with certain special features including a separate recoupment pool and use of “amount at risk” instead of premium as the metric Requires Treasury market condition reports biannually Requires Treasury market condition reports biannually Blue-ribbon 21 member commission to report on long- term solutions to terrorism risk. Interim report in 5 years, final report in 8 years. Blue-ribbon 21 member commission to report on long- term solutions to terrorism risk. Interim report in 5 years, final report in 8 years.

11. H.R. 2761 Features - 3 Adds Farmowners Multiperil as a covered line Adds Farmowners Multiperil as a covered line Adds “reset” mechanism to lower deductibles and triggers after significant terrorist attack Adds “reset” mechanism to lower deductibles and triggers after significant terrorist attack Creates voluntary terrorism buy-down fund at Treasury Creates voluntary terrorism buy-down fund at Treasury Makes $100 billion cap “net” of industry participation Makes $100 billion cap “net” of industry participation Small insurers can apply for NBCR exemption Small insurers can apply for NBCR exemption

12. CBO Cost Estimate Uses an expected cash flows approach to estimate spending and revenue impact of H.R. 2761 for the next 10 years Uses an expected cash flows approach to estimate spending and revenue impact of H.R. 2761 for the next 10 years Estimates H.R. 2761 would increase budget deficit by $200 million in 2008, $3.5 billion from 2008 to 2012, and $8.4 billion in 2008 to 2017 Estimates H.R. 2761 would increase budget deficit by $200 million in 2008, $3.5 billion from 2008 to 2012, and $8.4 billion in 2008 to 2017 Revenues from recoupments total $23.6 billion but extend well past 2017 Revenues from recoupments total $23.6 billion but extend well past 2017

13. U.S. Senate Senate Banking Committee now chaired by Senator Christopher Dodd (D-Conn.) Senate Banking Committee now chaired by Senator Christopher Dodd (D-Conn.) Favors “permanent” extension of terrorism insurance program Favors “permanent” extension of terrorism insurance program Former chair Sen. Shelby (R-Ala.), now the Committee’s ranking member, still opposed to such extensions Former chair Sen. Shelby (R-Ala.), now the Committee’s ranking member, still opposed to such extensions Majority of only one seat as we speak Majority of only one seat as we speak

14. CBO Paper on Terrorism Issues - 1 Requested by Senate Banking Committee and delivered in August 2007 Requested by Senate Banking Committee and delivered in August 2007 Explores economic effects of TRIA and of various options regarding reauthorization including extending, expanding, charging premiums, or allowing to expire Explores economic effects of TRIA and of various options regarding reauthorization including extending, expanding, charging premiums, or allowing to expire Does not reach conclusions, but expresses arguments “on the one hand, on the other” Does not reach conclusions, but expresses arguments “on the one hand, on the other”

15. CBO Paper on Terrorism Issues - 2 TRIA’s subsidies may reduce incentives to mitigate risks of terrorism TRIA’s subsidies may reduce incentives to mitigate risks of terrorism TRIA may help preserve “agglomeration economies” arising from clusters of related businesses concentrated in specific areas TRIA may help preserve “agglomeration economies” arising from clusters of related businesses concentrated in specific areas TRIA may encourage construction in areas of greatest risk, possibly increasing losses from terrorism TRIA may encourage construction in areas of greatest risk, possibly increasing losses from terrorism

16. Political Issues Desire for more CNBR coverage Desire for more CNBR coverage Unwillingness to be perceived as increasing taxpayer obligations Unwillingness to be perceived as increasing taxpayer obligations Desire for maximum use of market mechanisms Desire for maximum use of market mechanisms Unwillingness to set up new federal bureaucracy Unwillingness to set up new federal bureaucracy TRIA/TRIEA commercial lines oriented; successful in supporting economy TRIA/TRIEA commercial lines oriented; successful in supporting economy CNBR only for commercial lines? CNBR only for commercial lines?

17. Outlook Many other issues, insurance and otherwise, competing for Congressional attention Many other issues, insurance and otherwise, competing for Congressional attention Insurance issues are complex and subject to over-simplification Insurance issues are complex and subject to over-simplification 2007 Congressional calendar is now very tight; potential “Christmas Tree” effect given support for renewal 2007 Congressional calendar is now very tight; potential “Christmas Tree” effect given support for renewal Congress is aware of the importance of the issue to the economy Congress is aware of the importance of the issue to the economy

18. Outlook Given intentions, appears highly likely that legislation should pass this year Given intentions, appears highly likely that legislation should pass this year But – many potential contingencies could work to slow or defeat legislation But – many potential contingencies could work to slow or defeat legislation Net outlook – legislation appears more likely than not, but the details of that legislation are hard to forecast Net outlook – legislation appears more likely than not, but the details of that legislation are hard to forecast

19. Actuarial Issues Continue post-funding approach? Continue post-funding approach? Include domestic terrorists? Include domestic terrorists? Treatment of CNBR events? Treatment of CNBR events? Mandate “make available” for which coverages? Mandate “make available” for which coverages? Include Group Life? Include Group Life? Restructure various limits? Restructure various limits? Actuarial participation in new TRIA structures? Actuarial participation in new TRIA structures?