TERRORISM RISK INSURANCESEPTEMBER 18, 2013

MARSH 2April 18, 2023

• 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

TERRORISM RISK INSURANCEThe Terrorism Risk Insurance Program Reauthorization Act (TRIPRA)

MARSH 3April 18, 2023

Evolution of TRIA

  TRIA 2002

TRIA Extension 2005

TRIPRA  2007

Termination December 31, 2005  December 31, 2007 December 31, 2014

Make-available provisionMust make coverage available for certified acts of terrorism on same terms and conditions as for other covered risks

No change No change

Covered actsForeign terrorism in the U.S. and on U.S. interests abroad.  Includes an act of war for workers’ compensation policies only.

No change

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  No change No change

Program trigger  $5 million

$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)

No change

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 autoBurglary and theftSurety Professional liabilityFarm owners multiple peril

No change

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 2002-2005 90 percent in 200685 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  No change No change

MARSH

Summary of Proposed Legislation As of September 10, 2013

StipulationsTerrorism 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 December 31, 2024

Recoupment Deadline  September 30, 2024 September 30, 2027 September 30, 2024

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

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 None None

− 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

4April 18, 2023

MARSH

How The Act Works2007 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

5April 18, 2023

$100B

Maximum w/outadditional action

by Congress

85% TRIPRACoverage

CompaCompany Retention

$100M 20% of Commercial Lines PremiumAggregate

Minimum >

$5M Event> Certification

Original Policy Deductible

15%

 Com

pany

 Co-

Parti

cipa

tion

MARSH 6April 18, 2023

Property Terrorism Insurance Take-up Rates By Industry

MARSH

59%

77%

63%

53%

59%

78%

63%

56%58%

74%

59%57%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Midwest Northeast South West

2010 2011 2012

7April 18, 2023

Property Terrorism Insurance Take-up Rates by Region

MARSH 8April 18, 2023

• 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

TRIPRA and Workers’ Compensation

MARSH

TRIPRA Statistics by Policyholder Surplus ($000s)< 50M 50M to 100M 100M to 300M 300M to 500M 500M to 1B 1B to 5B > 5B

Company Count 487 83 129 41 40 50 24AVG. YE 2012 Comm. DEP 7,993 40,872 88,920 191,811 354,906 847,944 3,913,612

Avg. TRIPRA Deductible 1,598 8,174 17,784 38,362 70,981 169,589 769,862Avg. Deducitble as % of PHS 17.03% 11.65% 10.29% 9.63% 10.42% 7.90% 6.51%

9April 18, 2023

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

MARSH

Efficacy of Private Market Reinsurance 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: 1. 2013 dollars based on Bureau of Labor statistics CPI Index2. The loss figures above assume a 100% Property take-up rate among

commercial insureds3. 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

April 18, 2023

Est. $195BGlobal

ReinsuranceDedicated Capital

Est. $700B3 P&C US (Re) Insurance Dedicated Capital

Est. $100BNorth American

ReinsuranceDedicated Capital

Private Industry Capital Loss Scenarios

10

MARSH 11April 18, 2023

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

MARSH 12April 18, 2023

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 Debates1.Company deductible

– May be increased (incrementally) from 20% to 25% in line with growth in industry surplus

2.Aggregate threshold– May increase aggregate trigger from $100M to $250M over time.

Impact on regional/mutual insurers should be considered3.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

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.

Marsh is one of the Marsh & McLennan Companies, together with Guy Carpenter, Mercer, and Oliver Wyman.

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