TRIA Renewal—Action & Reaction

David PriebeVice ChairmanGuy Carpenter & Company

A Brief History on TRIA and the Delayed 2014 Actions by Congress

Since 2002, TRIA has been effective and essential in making terrorism risk insurance available and commercially viable in the U.S.

Terrorism typically included in “all risk”

policies

Prior to 9/11 9/11 - 2002 2002 2014 - 20202003 - 2013 Dec. 31, 2020

Insurers attempted to exclude terrorism on

new/renewal

Given the economic disruption/uncertainty,

Congress passed and President Bush signed into law the Terrorism

Risk Insurance Act [TRIA] of 2002

TRIA was extended for three years, and then for

another seven to 2014

Several states prohibited carriers from

excluding coverage, most notable being

Workers Compensation

TRIA scheduled to expire

TRIA’s renewal debated throughout 2014 by

both houses of Congress

TRIA Recertification lapsed into January

2015 and then extended for seven

years

Cedent individual TRIA deductibles, retentions

and the minimum industry trigger increased

Coverage expanded to Foreign & Domestic and

Act of War for Workers Compensation

TRIP Sec. 111 mandatory data

collection requirement added

2015 TRIA Federal Insurance Backstop Legislation Program Recap

TRIA provides up to nine levels of carrier retentions and U.S. taxpayer protection. It has supported the private (re)insurance markets in providing needed capacity for 18 years.

Layers of U.S. Taxpayer Protection

1. U.S. Treasury Certification

2. $5M Minimum Certification Threshold

3. Minimum $180M Industry Event Threshold ( $200M in 2020)

4. Individual Cedent TRIA Deductibles (20% DEP)

5. 19% Cedent Co-Participation ( 20% in 2020)

6. Industry Aggregate TRIA Deductible(est. $46B including WC est. $17B)

7. 140% Mandatory Federal Recoupment Below $37.5B Market Aggregate Deductible

8. Discretionary Federal Recoupment Excess of the Market Aggregate Deductible

9. $100B TRIA Protection Cap Source: Guy Carpenter

9/11 Terrorist Attack Insurance Loss Distribution by Line of Business

Contemplating other modeled scenarios, the 9/11 Workers Compensation losscould have been substantially higher - eclipsing all other lines of business.

Source: Insurance Information Institute; All figures adjusted to 2018 dollars using U.S. Department of Labor BLS data

World Trade Center

• 65,000 maximum peak time occupancy

• 17,400 actual occupancy; 2,977 fatalities

• 1 WTC impacted at 8:46 am

• 2 WTC impacted at 9:03 am

• Occupancy well below typical peak

• Classic “clash event”

• Note (*): 9/11 loss excludes 2010 NYC $658M loss settlement compensating approximately 10,000 Ground Zero workers

Total Insured Losses Estimate: $46.3 Billion

*

The Intersection of Terrorism Risk and Workers Compensation

Terrorism Peril

• Similar to Act of War

• Intentional non-random acts

• Greatest unpredictability

• Lack of historical event data

• Concentrated and difficult to pool

• Smaller conventional footprints

• Significantly larger NBCR footprints

• Among the highest loss potential

• ILS market development potential

Workers Compensation

• Cannot be excluded or sub-limited

• No conditional TRIA endorsements

• Statutory policy limits

• Highly concentrated accumulations

• Modeled losses can exceed 10-20% PHS

• Among the longest tail loss payout

• Additional model variability/uncertainty

• High TRIA non-renewal economic impact

• Notable ILS market challenges

Terrorism is particularly challenging for Workers Compensation.

Workers Compensation represents the largest TRIA eligible line of business.Yet, virtually all foreign terrorism pools do not cover this exposure.

Role of Global Public/Private Terrorism Risk-Sharing Mechanisms

Sources: Marsh, Guy Carpenter, U.S. Government Accountability Office, World Forum of Catastrophe Programs, Organization for Economic Co-operation and Development

Countries with no Public/ Private Terrorism Risk-Sharing Pools

Public/Private Terrorism Pools not covering Workers Compensation

Public/Private Terrorism Pools inclusive of Workers Compensation

Public/Private Terrorism Pools that exclude Workers Compensation

Public/Private Terrorism Pools that exclude Employers Liability

September 11, 2001• $46.3B (2018 dollars)1

Largest Modeled Conventional Terrorism Losses2

• 10-ton Truck Bomb $44.8B (Los Angeles)• Workers Compensation: over 150 losses > $10BLargest Modeled NBCR Losses2

• Nuclear Detonation $807B (New York)• Biological (Anthrax) $624B (New York)• Chemical (Sarin Gas) $ 15B (Chicago)• Radiological: $134B (New York)Notes: 1.2018 dollars based on Bureau of Labor statistics CPI Index2.Modeled in RMS v18, Occurrence loss figures assume 100% Property & WC take-up rates among commercial insureds. All other

lines of business: Life, Liability, Business Interruption etc., are excluded.3.Industry capital figures presented assume 100% 12/31/2018 of capital is available, or deployed, to cover terrorism. In reality,

many (re)insurers – particularly capital/convergence markets – have limited appetite to write terrorism due to the correlation with a financial markets loss.

4.Estimated dedicated capital figure is a joint estimate with A.M. Best and includes capital dedicated to both P&C and L&H lines5.Estimated capital for North American P&C lines estimate uses current ceded premiums as the base level

Total Private Industry Capital

Estimated $779B3 P&C U.S. (Re)insurance Dedicated Capital

Estimated $440B4

Global ReinsuranceDedicated Capital

Estimated $120B - $140B5

North AmericanReinsurance Dedicated Capital

1

Source: Guy Carpenter

The (Re)insurance industry is adequately capitalized for most conventional attacksbut not adequately capitalized to support large NBCR Losses

The Efficacy of Private Market Capital for TerrorismLarge Loss Scenario Consideration

A.M. Best’s current Terrorism Stress Test Methodology continues to disproportionally impactWorkers Compensation carriers and “small insurers.”

Nearly 800 P&C Carriers Benefit From TRIA

2013 A.M. Best findings on carrier over reliance of TRIA:• 226 carriers determined to be “terrorism exposed”• 34 failed the stress tests

- Workers Compensation dominated - Virtually all had statutory surplus < $500M

• Required to present terrorism exposure reduction “action plans”• An increasing Industry trigger subjects more carriers to the “TRIA gap”

Fatalities Total InjuriesWTC 9/11 2,996 6,000 Bali Bombing 202 410Madrid Bombing 191 2,0007/7 London 56 784Ankara bombing 105 400

Fatalities Total InjuriesParis - Bataclan 137 368Brussels Airport 35 330France / Nice 85 300Berlin Germany 12 56Manchester U.K. 23 139Orlando Pulse 50 230San Bernardino, CA 14 22 NYC Truck Attack 8 12

Events

Global Terrorism Trends

Global trends directed at western countries point to an increase in the frequency of mixed focus and human mass casualty terrorism attacks.

Sources: Guy Carpenter & JLT 2018 Terrorism Reports, Casualty Loss Data: 2018 Global Terrorism Database

Attack TypeLandscape

Threat Landscape

2001 - 20142015 - Present

TRIA 2014 Renewal Timeline: Workers Compensation Oct – Dec 2013 Jan – Mar 2014 Apr – Jun 2014 Oct – Dec 2014Jul – Sept 2014

Carriers began to issue policies < 12 months

Carriers began to issue policies < 6 months

Carriers increase efforts in refining/correcting data for accumulation

management and Catastrophe Modeling

A.M. Best SRQ terrorism cat sections

due

Jan 12, 2015

TRIA signed into

law retroactive to 1/1/2015

Carriers began to issue policies < 3 months

2014 A.M. Best terrorism SRQ stress

testing began

Select Insureds with large concentrations non-renewed and begin to move to

state funds and residual markets

Additional A.M. Best negative watches issued to carriers having material exposure -

in the absence of TRIA

A.M. Best identifies 37 carriers subject to negative terrorism outlooks/potential ratings downgrades

Carriers begin seeing reinsurance treaty

terms > 1 yr

Carriers pursued facultative and contingent reinsurance/reserving capacity

Select insureds with notable Tier I accumulations begin movement among the top 25 P&C carriers

Industry responded to U.S. Treasury and

President’s TRIA working groups

Uncertainty in TRIA’s 2015 renewal resulted in notable movement of Workers Compensation insureds among carriers – more than any other line of business.

Carriers continued to present action plans to

rating agencies

P&C Industry Group Actions Rating Agency Actions P&C Carrier Actions Impact on Insureds

Early indications point to a TRIA reauthorization that should benefit from 2014’s uncertainty.However, details on how the program covers and features may change are unknown.

May – June 2019 July – Sept 2019 Oct – Dec 2019 July – Dec 2020Jan – June 2020 Dec. 31, 2020

2019 Mandatory TRIP Section 111 Data Call

Due

A.M. Best to contact rating impacted carriers

and request risk mitigation action plans.

Based on responses -rating units may be

placed under review

Carriers likely to implement action plans and mitigation options as they did in 2014

A.M. Best to identify carriers whose ratings

assessments would change in absence of

TRIA

TRIA scheduled to expire

TRIA 2019/2020 Renewal Timeline: What We Know

F.I.O./U.S. Treasury to commence meetings with industry stakeholders on

proposed changes to TRIA

TRIA renewal hearings by U.S. Congress and

Senate

TRIA’s reauthorization and changes to be debated by both Congress and Senate

Continued A.M. Best potential rating warnings and actions - pending TRIA renewal changes F.I.O. Advisory

Committee on Risk-Sharing Mechanisms

to commence meetings

Key Risk Management Considerations

Workers Compensation carriers can benefit from improved data/accumulationmanagement, enhanced modeling output and reinsurance protection.

Accumulation Data Procurement and Refinement1Terrorism Catastrophe Model Suitability Analysis2Terrorism Applications/Methodology Consideration3

Multi-Line Terrorism Portfolio/Accumulation Mgmt.4

Reinsurance Protection (Treaty, Facultative)5

(Re)insurance Markets

RatingAgencies

Optimally Represent

Output

ERM Risk Tolerances

Click on the image to view the

GC SunstoneTM 3-D CFD Model

Key Terrorism Modeling Considerations

Highly sophisticated Terrorism Modeling has evolved that cancontemplate the complexities of Workers Compensation data.

Pre-2005Concentric Circle Concentration Analysis

Distance x Proxy for Workers Compensation Benefits

2005 - PresentRMS/AIR Simple and VRG Model Footprints

Extended Distance and Building Shielding

2017 - PresentComputational Fluid Dynamics (CFD)

3-D Blast Modeling

Distance, Height, Angle, Shielding Reflections and Confinement

Source: RMS

Click on the image to view the

GC SunstoneTM 3-D CFD Model

Key Reinsurance Considerations

With the continued support of the TRIA federal backstop, capacity for Terrorism Reinsurance should remain adequate to meet increased demand.

Treaty TRIA Buy-Down/Co-Participation Buy-Out • xNBCR or including NBCR

TRIA Gap Industry Trigger Covers

Terrorism only Treaty Layers• Mono-Line Workers Compensation• Multi-Line, Global, Cyber• Occurrence and Aggregate Covers

Facultative Reinsurance• Single Risk or Multi-Risk

Multi-year Terrorism Covers

Ongoing Alternative Capital Market development…

Important DisclosureGuy Carpenter & Company, LLC provides this report for general information only. The information and data contained herein is based on sources we believe

reliable, but we do not guarantee its accuracy, and it should be understood to be general insurance/reinsurance information only. Guy Carpenter & Company, LLC makes no representations or warranties, express or implied. The information is not intended to be taken as advice with respect to any individual situation and cannot

be relied upon as such. Please consult your insurance/reinsurance advisors with respect to individual coverage issues.

Readers are cautioned not to place undue reliance on any calculation or forward-looking statements. Guy Carpenter & Company, LLC undertakes no obligation to update or revise publicly any data, or current or forward-looking statements, whether as a result of new information, research, future events or otherwise. The rating

agencies referenced herein reserve the right to modify company ratings at any time.

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