Casualty Actuarial Society 2002 Seminar on Ratemaking

The Impact of Terrorism on the P&C Market Place

March 7, 2002

P&C Pricing Considerations

Net Premium Growth

1

2

3

91 92 93 94 95 96 97 98 99 00 (est.)

4.4

0

4

5

6

908988

3.2

4.4

2.42.0

6.1

3.7 3.63.4

2.82.3

1.9

5.0

Underwriting vs. Investment Income

0

20

91 92 93 94 95 96 97 98 99 00 (est.)-40

90

30

-21.7

-20.5

-36.7

-18.1

-22.1

-17.7

-16.7

-5.8

-16.8

-23.1

-32.2

(US $B)

-30

-20

-10

10

40

11.3

13.8

-2.5

14.6

11.6

19.5

20.8

35.5 23.4

14.4

8.8

32.9

34.2 33.7 32.6 33.7 36.8 38.041.5 39.9 38.9 40.3

Underwriting Gain/Loss

Pretax Operating Income

Investment Income

Consolidated P/C Industry Combined Ratio

105

110

115

91 92 93 94 95 96 97 98 99 00 (est.)100

120

90

109.6

108.8

115.7

106.9

108.5

106.5

105.8

101.6 105.6

107.8

110.3

Combined Ratios by Coverage Line

50

70

90

30

110

Workers

Compe

nsati

on

108

1998

1999130

Commerc

ial

Packa

ges

Genera

l Liab

ility

Commerc

ial Auto

Medica

l Malp

ractice

Person

al Auto

Fire & Allie

d

Inlan

d Mari

ne

All Othe

r

Lines

115 11

8 120

118

112

109 11

7

115 11

811

9

114

130 13

4

116

104 10

9

101 10

810

4107

102

9697 103

104

100

2000 (estimate)

Workers’ Compensation Accident Year 2000 Combined Ratio Near Highest Ever

80

90

100

110

120

130

14019

91

1992

1993

1994

1995

1996

1997

1998

1999

2000

PCalendar Year Accident Year

Calendar Year vs. Ultimate Accident Year Countrywide-Private Carriers

Impact of Catastrophe Losses on Combined Ratio

100

105

110

115

90 91 92 93 94 95 96 97 98 99 00 (est.)

108.2

106.3

103.2102.5 102.4

103.3 103.35

101

102.6

104.9

108.9

109.6108.8

115.8

106.9

108.5

106.5 106

101.6

105.6

107.8

110.3

CatastrophePre-Catastrophe

Policyholders Surplus

0

50

100

150

90 91 92 93 94 95 96 97 98 99 00 (est.)

138.4

158.7 163.1182.3 193.3

230.0

255.5

308.5333.3 334.3 320.0

200

250

300(US$B)

Changes to Policyholders Surplus

0

10

20

69 7071 72 7374 75 76 77 79

-10

30

68

40

50

78 8081 82 84 85 86 87 88 8990 91 92 9483 93 95 96 9798 99 00(est.)

1.03.6

-2.0

1.0

4.7

-2.4-5.1

3.44.9 4.7 6.17.0

9.8

1.6

6.65.2

-1.8

11.7

18.8

9.7

14.2 15.8

4.4

20.3

4.4

19.2

11.1

36.7

25.5

53.0

1.4

-14.3

24.8

Start of Hard Market

Start of Hard Market

Start of Hard Market

P&C Coverage Considerations

Types of “Terrorism” exclusions in Property Insurance

Over 17 different Terrorism exclusions seen; most contain a broad definition encompassing some or all of following conditions:– any person or group(s) of persons;

– acting alone or on behalf of or in connection with any organization(s) or government(s);

– committed for political, religious, ideological or similar purposes;

– with the intention to influence any government and/or put the public, or any section of the public, in fear.

Many may be interpreted to exclude certain acts or losses previously covered such as vandalism, malicious mischief, riot, & civil commotion.

Types of “Terrorism” exclusions (… cont’d)

Some specifically exclude the use or release of chemical, biological or nuclear materials, but all exclusions encompass this intent.

Burden of proof on insured;

Except for ISO language, a concurrent causation exclusion applies. i.e., direct or indirect loss or damage caused by Terrorism, including other events or causes contributing concurrently or in any sequence to the loss is also excluded.

ISO CGL Terrorism Definition

“Terrorism’ means activities against persons, organizations or property of any nature that involve the following or preparation of the following: (a) use or threat of force or violence; or (b) commission or threat of a dangerous act; or (c) commission or threat of an act that interferes with or disrupts an electronic, communication, information or mechanical system.”

However, “dangerous act” is not defined

ISO CGL Terrorism Definition (cont’d)

“When one or both of the following applies: (a) the effect is to intimidate or coerce a government or the civilian population or any segment thereof, or to disrupt any segment of the economy; or (b) it appears that the intent is to intimidate or coerce a government, or to further political, ideological, religious, social or economic objectives, or to express (or express opposition to) a philosophy or ideology.”

Who will determine the intent of such acts?

ISO CGL Terrorism Exclusion Triggers

NBC “When pathogenic or poisonous biological or chemical

materials are released, and it appears that one purpose of the terrorism was to release such materials.”

“appears” could be a problem. Who’s perception? Insurer or insured.

The Workers’ Compensation Conundrum

Primary carriers can not exclude one of the biggest catastrophe risks they face

Treaty reinsurance markets are excluding terrorism coverage

Underwriting solutions?– Self insured retention's– Per claimant vs. per occurrence– Underwriting discipline

Legislative Proposals / Considerations

Top Five Costliest Terrorist Acts

Ranked by insured property losses including business interruption and aviation hull losses, in millions of dollars (2001 price levels)

Date Country EventInsured

property loss Injured Fatalities

9/11/01United States

World Trade Center, Pentagon attacked by hijacked airliners $19,000 2,250 3,122

4/24/93United

KingdomBomb explodes near NatWest tower in

London $907 54 1

6/15/96United

KingdomIRA car bomb explodes near Manchester shopping mall $744 228 0

2/26/93United States

Bomb explodes in garage of World Trade Center $725 1,000 6

4/10/92United

KingdomBomb explodes in London's financial

district $671 91 3

Insurance Programs Established by Federal Statute

The Price-Anderson Act of 1957, providing coverage for catastrophic nuclear accident.

The Overseas Private Investment Corp., formed in 1971, providing insurance against overseas political risk.

The National Insurance Development Program, authorized in 1968, providing insurance against urban riots and civil disorder

The National Flood Insurance Program, also in 1968, providing coverage in critical flood plains.

U.S. requests for stand-alone Terrorism

Numerous requests for stand-alone Terrorism cover from U.S. based clients, including “trophy” buildings or what insurers consider “target” risks such as stadiums, dams, bridges & tunnels.

To this point:– approx. 15% of clients have elected to purchase cover;– no client has been declined a quote outright;– approx. 12% of clients have declined to purchase cover;

Reasons for not purchasing have included:– clients waited to see what Federal action would be taken;– limited capacity;– expensive pricing.

Requests for cover now increasing.

Market Conditions Pre - 9/11

Industry Was Experiencing Pressures Prior to 9/11

Expedited time to trial in many venuesAsbestos

– “P&C Industry Underreserved by $30 Billion”

A.M. Best, July 2001Surprise awards/high profile settlements Increased awareness of claim trends causing

quicker settlements

Emerging Claim Challenges

Expanded Asbestos Environmental

(Sudden and Accidental) Lead Paint Construction Defects EIFS (Synthetic Stucco) Pharmaceuticals Class Actions Tobacco

Mold and Mildew Cell Phones Nursing Homes Automotive Tires Big Box Retailers MTBE (Fuel Additive) Ohio UM/UIM Internet-derived exposures

Market Conditions Post - 9/11

Demand for Terrorism insurance: Pre & Post WTC

Pre 9/11 - limited demand

– UK Terrorism;

– Specific countries (Colombia, Indonesia);

Post 9/11 - significant demand

– Worldwide Terrorism

USA & Canada

Europe

Rest of World

Main Sources of Requests

USA

Mexico

Canada

UK Eire

Singapore Australia

New Zealand

Colombia

Italy

Main Issues

Risk of future attacks still exists; Changing marketplace + structuring Terrorism programs complicated:

– Provides aggregate limit for declared locations only;– Values declared significantly affects price (rating on values);– Any cover for non-U.S. locations in less expensive local government schemes

(e.g. UK’s Pool Re.)? Avoid duplicating values declared. Policy forms involve complex language:

– Definition of Terrorism. Cover for physical loss or damage;– War exclusion. Need to understand policy limitations; – No cover for nuclear, chemical, or biological release;– No cover for damage from strike, riot, & civil commotion;– Cancellation provisions;– Non-concurrency between T3 and AIG form;– Business Interruption, Loss of Rent, Extra Expense.

Overview – The Post 9/11 Agenda The insurance industry is vulnerable to any large event in a

dense urban area

There is a correlation of multiple lines coming from multiple production sources

There is not a clear understanding of where exposures are located

New external demands from:– Investors– Regulators– Rating Agencies– Reinsurers

Density & Concentration Concerns Sample Questions Answered by Proposed

Portfolio Management Functionality

How much exposure do I have in each of the country’s largest XX office tower complexes? What is my exposure both gross and net of reinsurance at each of these locations?

How much exposure, by line of business, do I have within 0.25 miles of any office building greater than 40 stories?

How much exposure do I have within a one-block radius of an office building which just experienced an explosion?

Where in my portfolio do I have a concentration of value or limit that exceeds $XYZ in any 0.5 mile zone?

What urban risk load should I apply to my pricing of certain concentration zones?

World Trade Center Loss

Industry loss estimates now range as high as $60 billion. This will be the largest insured single event loss in

history:– Inflation Adjusted - Hurricane Andrew $20 billion,

Northridge EQ $14 billion Remembering Northridge Earthquake:

– Early estimates of insured losses were in the $2 billion range.

– The final loss amount was more than $10 billion.– Northridge was straightforward and simple compared

to WTC.

Overall Implications of World Trade Center Loss

Insolvencies should be expected Uncollectible reinsurance is going to be an issue Reinsurance and insurance capacity will shrink

significantly Prices for reinsurance and insurance will rise Coverage restrictions will be imposed Government pools may be necessary New entrants may emerge

Cause for Rise in Insurance and Reinsurance Pricing

WTC has made underwriters aware of new types of risks and larger potential losses

Standard deviation of loss is wider than previously expected

Amount of risk capital required to support insurance is greater than formerly understood

Industry’s liquidity needs are greater than previously understood

Capacity being reduced results in supply versus demand pressures

Insurance Demand After 9/11

The WTC attack will increase risk aversion

Buyers will rediscover the value of insurance

Demand for traditional risk transfer will rise

Financial stability of insurance carriers will be valued

A Grain of Salt

Insurance market conditions affected by:

– Investment results

– Catastrophe losses

– Investor psychology