Terrorism Insurance and Modeling

www.air-worldwide.com

Terrorism Insurance and Modeling

Jack Seaquist

September 21, 2007

© 2007 AIR Worldwide Corporation CONFIDENTIAL

Discussion Agenda

Development of terrorism insurance Terrorism modeling Status of the federal backstop extension Key issue for the future – NBCR exposure


Terrorism Insurance

Prior to 9/11/2001 – no recognition of terrorism as a peril – it’s covered After 9/11 – terrorism exclusion added to policy terms

Approved in most states

November 2002 – Terrorism Risk Insurance Act of 2002 (TRIA) Mandatory availability in covered commercial lines Covers certified acts by international terrorists Company deductible and co-share Limited reinsurance market Some stand-alone coverage

December 2005 – Terrorism Risk Insurance Extension Act of 2005 (TRIEA)

Extension through end of 2007

September 2007 – active legislative activities to extend Terrorism Risk Insurance Program


Analytic Developments to Support Terrorism Risk Management

September 2002 – introduction of probabilistic terrorism models Spring 2003 – use of probabilistic loss results in ISO advisory loss

cost filings February 2004 – A.M. Best adds Terrorism Section to Supplemental

Rating Questionnaire (SRQ) Insurance companies begin measuring and managing terrorism risk

Exposure concentrations Worst-case modeled loss scenarios - deterministic


AIR Terrorism Model Components

ProbabilisticLoss

Estimate

ProbabilisticLoss

Estimate

Event LossEvent Loss

WeaponsWeapons

TerrorismEvents

TerrorismEvents

PolicyConditions

PolicyConditions

ENGINEERING

HAZARD

FINANCIAL

FrequencyEstimate

FrequencyEstimate

WeaponDamage andInjury Models


ExposureInformation

ExposureInformation

Targets/Landmarks

Targets/Landmarks


AIR Models Possible Future Conventional Weapon Attacks Where They Could Occur

Commercial facilities Prominent buildings Corporate headquarters Transportation

Airports Rail; Bus Bridges; Ports

Chemical plants Energy facilities Retail centers and malls Hotels and casinos Amusement parks and sports venues

Government facilities Federal office buildings

and courthouses Embassies State capitols

Educational, medical, and religiousinstitutions, etc.

Comprehensive Set of Possible Targets


NBCR Chemical*

Sarin (GB) VX Nerve

Biological* Anthrax Small pox

Radiological Cesium 137 Cobalt 60

Nuclear*

AIR Models a Range of Weapon Types and Sizes

CONVENTIONAL Vehicle bombs

Portable Car Van Delivery Truck Large Truck

Airplane crash General aviation Large commercial

airliner

* Includes small, medium, and large


Building Physical Damage Outcome Also Contributes to the Distribution of Injury Severity Levels


Injury Severity Model Accounts for the Full Range of Possible Damage States and Resulting Injuries

1 2 3 4

CompleteDamage Collapse

CompleteDamage

No Collapse

ExtensiveDamage

ModerateDamage

MinorDamage

Building EventDamage Distribution Fatality

Life Threatening

Moderate

Minor

None

Fatality

Life Threatening

Moderate

Minor

None

Fatality

Life Threatening

Moderate

Minor

None

Fatality

Life Threatening

Moderate

Minor

None

Fatality

Life Threatening

Moderate

Minor

None



ProbabilisticLoss

Estimate

ProbabilisticLoss

Estimate


WeaponsWeapons

TerrorismEvents

TerrorismEvents

PolicyConditions

PolicyConditions

ENGINEERING

HAZARD

FINANCIAL

FrequencyEstimate

FrequencyEstimate



ExposureInformation

ExposureInformation

Targets/Landmarks

Targets/Landmarks



ProbabilisticLoss

Estimate

ProbabilisticLoss

Estimate


WeaponsWeapons

TerrorismEvents

TerrorismEvents

PolicyConditions

PolicyConditions

ENGINEERING

HAZARD

FINANCIAL

FrequencyEstimate

FrequencyEstimate



ExposureInformation

ExposureInformation

Targets/Landmarks

Targets/Landmarks

Event scenario:

6-ton truck bomb – Midtown Manhattan

Event loss:

• $3.5 billion property loss

• $4.5 billion workers’ compensation loss

Deterministic Loss Analysis


National Intelligence Estimate – July 2007

“We assess that al-Qa’ida’s Homeland plotting is likely to continue to focus on prominent political, economic, and infrastructure targets with the goal of producing mass casualties, visually dramatic destruction, significant economic aftershocks, and/or fear among the US population. The group is proficient with conventional small arms and improvised explosive devices, and is innovative in creating new capabilities and overcoming security obstacles.

• We assess that al-Qa’ida will continue to try to acquire and employ chemical, biological, radiological, or nuclear material in attacks and would not hesitate to use them if it develops what it deems is sufficient capability.”


Limited Statistics Are Available, But UK’s MI5 Released Terrorist Plot Statistics

We are tracking almost 30 terrorist plots involving 1,600 suspects and 200 cells

Five major plots foiled since the July 2005 London transit bomb attacks

Dame Eliza Manningham-Buller, Director General, MI5, November 10, 2006


Operational Threat Assessment Considerations of the Terrorism Expert Group

Objectives Mass casualties? Economic impact? Symbolic? Punish a group, industry,

company, government? Capabilities and Resources

Weapon availability NBCR efforts Coordinated attacks Manufacture vs. buy Financial Technical expertise Operational skills

Deployment Locales with presence Financial vs. operational Local target surveillance

opportunity Local support

Historical attacks Targets Weapons Locales

Reaction to Security Federal State Local Private



ProbabilisticLoss

Estimate

ProbabilisticLoss

Estimate


WeaponsWeapons

TerrorismEvents

TerrorismEvents

PolicyConditions

PolicyConditions

ENGINEERING

HAZARD

FINANCIAL

FrequencyEstimate

FrequencyEstimate



ExposureInformation

ExposureInformation

Targets/Landmarks

Targets/Landmarks



ProbabilisticLoss

Estimate

ProbabilisticLoss

Estimate


WeaponsWeapons

TerrorismEvents

TerrorismEvents

PolicyConditions

PolicyConditions

ENGINEERING

HAZARD

FINANCIAL

FrequencyEstimate

FrequencyEstimate



ExposureInformation

ExposureInformation

Targets/Landmarks

Targets/Landmarks

500,000-year simulation catalog:

Excedance Probability Distribution

Probabilistic Loss Analysis


Terrorism Risk Management Best Practices

Focus on quality of exposure data Improve location details Understand local targets

Exposure concentration analysis Identify points of accumulation through ring

analyses Determine proximity to target locations

Deterministic loss estimation Incorporate physical damage models Examine concentration points and target locations

Fully probabilistic loss analysis Manage surplus and reinsurance Estimate loss potential under varying conditions


Rating Agencies Are Forcing Terrorism Risk ManagementA.M. Best Summary

Exposure data quality Exposure concentration, including cost of lives

Single location exposure 500-foot ring exposure

Deterministic loss scenarios Delivery truck bomb

Zonal aggregations (reinsurers) Percent of policyholder surplus exposed

With and without reinsurance and TRIA Within and outside 11 high risk cities

See AIR white paper for detailed instructions


Rating Agencies Are Forcing Terrorism Risk ManagementStandard & Poor’s Summary

Modeled loss exposure within a 500 foot circle 2 - 5 ton truck bomb 6 - 10 ton truck bomb 25 ton truck bomb

Modeled loss exposure within a 1-mile circle 2 - 5 ton truck bomb 6 - 10 ton truck bomb 25 ton truck bomb

Modeled loss exposure (range various) Anthrax or biological -- 0.1 - 1 kg Anthrax or biological – greater than 1 - 10 kg Airplane crash Small nuclear – 1 kiloton Large Nuclear – 5 - 20 kiloton

Top 10 single address exposures Full limit net exposure


Through 2007, TRIEA Protects Insurers from Large Losses

2007 Terms Commercial P&C lines Deductible 20% of applicable premium 15% insurer co-pay $100 million event trigger “Make available” provision $100 billion aggregate limit Post-funded

Terrorism cannot be excluded from workers’ compensation

Existing exclusions in a policy can apply to terrorism coverage

NBCR Com

pany

Ret

entio

n

2005 2006 2007 2008

Impact on a hypothetical company with a loss equal to its premium base

100%


The American Academy of Actuaries Determined That Potential Large Losses Are Uninsurable

Scenario New York WashingtonSan

FranciscoDes

Moines

Truck bomb $12 $6 $9 $3

Chemical $447 $106 $92 $27

Biological $778 $197 $171 $42

Insured Losses*, in $ billions

Terrorism Risk Insurance Subgroup

* Deterministic loss results provided by AIR


GAO Reported CBRN Coverage Problems to Congress in September 2006

TRIA will cover losses from certified terrorism events irrespective of the weapon type

Risks continue to be unattractive to insure Property insurers believe they have excluded NBCR coverage by interpreting

existing exclusions to apply Workers’ compensation provides coverage because it is required by states Rating agencies have not looked at NBCR exposure Models have been found useful for managing insurers’ exposure to terrorism

risks

“Given the challenges faced by insurers in providing coverage for, and pricing NBCR risks, any purely market-driven expansion of coverage is highly unlikely in the foreseeable future.”


President’s Working Group on Financial Markets Sees TRIA Going Away

Insurers have allocated additional capacity Prices have declined Take-up rates have increased Better risk measurement and management is available Terrorism risk modeling has improved Greater reinsurance capacity is available Insurer financial health has recovered State regulation does not appear to have a significant impact on capacity But there may be little potential for future CNBR market development

“Further improvements in insurers’ ability to model and manage terrorism risk, and the other factors noted above, will likely contribute to the long-term development of the terrorism risk insurance market.”


Status of Pending Legislation

House of Representatives - H.R. 2761 Approved with amendments by Financial Services Committee on August 1 Costs assessed by Congressional Budget Office on September 6

Resulted in Pay-As-You-Go Roadblock Rules Committee established ground rules for the debate on September 17 Passed by full House on September 19 (312-110)

Senate Intent to create legislation with long term extension Minority party seeks short term extension

White House – Statement of Administration Policy – September 17 President’s senior advisors would recommend a veto of H.R. 2761 The program should be temporary and short-term There should be no expansion of the program Private sector retentions should be increased


Key Provisions of H.R. 2761

15-year extension Adds group life and farm-owners multiple peril lines Covers domestic terrorism Reduces event trigger back to $50 million from $100 million in 2007 Post-event reset of deductible after years with significant industry loss Adds “make available” provision for NBCR

With reduced company deductible, starting at 3.5% Implementation to begin in 2009


H.R. 2761 Addresses the Gap in NBCR Coverage

“…as nuclear, biological, chemical or radiological acts of terrorism (known as NBCRterrorism) present a threat of loss of life, injury, disease and property damage potentiallyunparalleled in scope and complexity by any prior event, natural or man-made, the FederalGovernment’s responsibility in providing for and preserving national economic security callsfor a strong Federal role in ensuring financial compensation and economic recovery in theevent of such an attack.”

The current H.R. 2761 adds to the mandatory availability provision:

“…shall make available, in insurance policies for covered lines for which the coverage

described in subparagraph (A) is provided, exceptions to the pollution and nuclearhazard exclusions of such policies that render such exclusionsinapplicable only as to insured losses arising from acts of NBCR terrorism.”


Current NBCR Exclusions

Chemical and biological exclusions are found in pollution exclusions Exceptions to the exclusion may apply in certain attack modes Pollution exclusions are not universal

Nuclear and radiological attacks subject to nuclear hazard exclusion Excludes property damage from radioactive contamination Does not exclude fire and blast damage from a bomb

Workers’ compensation has no exclusions


Nuclear Damage Effects

Blast and shock Thermal radiation Initial nuclear radiation Residual nuclear radiation contamination (fallout)

0.5 to 3 mile damage radius


Residual Radioactive Contamination from Surface Nuclear Bursts

Earth, dust, and debris from the earth’s surface are taken up into the fireball and contaminated

Contaminated particles range in diameter from less than 1 micron to several millimeters

The larger ones begin to fall back to earth even before the radioactive cloud has attained its maximum height

The very smallest ones may remain suspended in the atmosphere for long periods – they may circle the earth many times before reaching the ground

The early fallout hazard represents the larger particles reaching the ground within 24 hours – this can contaminate large areas and represent an immediate biological hazard


Decontamination and Restoration

Cleanup of contaminated areas, like Chernobyl Three Mile Island

Contaminated material will need removed from the scene Radioactive particles may chemically bind to concrete and asphalt Radioactive particles may become lodged in crevices of building

exteriors and surroundings Affected areas could be unavailable for many years Cleanup may be feasible, but demolition and rebuilding may be the

most cost-effective approach Contamination level decreases with the distance from the event


DHS Planning Scenario – 10-kT Nuclear Attack

Infrastructure damage – total within 0.5 to 1.0 miles Contamination – approximately 3,000 square miles Economic impact – Hundreds of billions Recovery timeline – years


DHS Planning Scenario – Radiological Dispersal Devices (Cesium)

Infrastructure damage – near the explosion Contamination – 36 city blocks (0.25 mile radius) Economic impact – up to billions of dollars Recovery timeline – months to years


Nuclear Regulatory Commission Fact Sheet

Biological Effects of Radiation Average annual radiation exposure is 360 mrem. Above background levels of radiation exposure, the NRC requires

that its licensees limit maximum radiation exposure to individual members of the public to 100 mrem per year

And limit occupational radiation exposure to adults working with radioactive material to 5 rem per year

NRC regulations and radiation exposure limits are consistent with recommendations of national and international scientific organizations and with practices in other developed nations

Reference point: full set of dental X-rays = 40 mrem


DHS Proposed Protective Action Guides for Radiological Dispersion and Improvised Nuclear Devices

Posted in Federal Register for comment – 3 January 2006 Revised version scheduled for August 2007 in the Federal Register The need for federal guidance was established during TOPOFF 2 Previous EPA guidance (1992) was for nuclear plant spills

“Because of the extremely broad range of potential impacts that may occur from RDDs and INDs (e.g., ranging from light contamination of one building to widespread destruction of a major metropolitan area), a pre-established numeric guideline is not recommended as best serving the needs of decision makers in the late phase. Rather, a process should be used to determine the societal objectives for expected land uses and the options and approaches available, in order to select the most acceptable criteria.”


Health Physics Society – Specialists in Radiation Safety

Background Information on “Guidance for Protective Actions Following a Radiological Terrorist Event”, 31 January 2007

Protective Actions for the Late (Recovery) Phase The EPA’s PAG Manual does not have any protective actions for

this phase Recommends that continued cleanup during the late phase should

be subject to the principles of ALARA (as low as reasonably achievable), economic and social factors being taken into account, with a minimum level of continued cleanup of 100 mrem per year

At this dose, risks of radiation-induced health effects are either non-existent or too small to be observed.


Potential Range of Cleanup Guidance for a Radiological Contamination Event

15 mrem/year EPA, “Establishment of Cleanup Levels for CERCLA Sites With Radioactive Contamination” (e.g., Hanford Site)

25 mrem/year NRC, Final Rule on Radiological Criteria for License Termination (10 CFR Part 20 Subpart E)

100 mrem/year Health Physics Society Position Statement, “Guidance for Protective Actions Following a Radiological Terrorist Event”

500 mrem/year EPA, “Manual of Protective Action Guides and Protective Actions for Nuclear Incidents,” 400-R-92-001,…”doses in any single year after the first will not exceed 0.5 rem”

2 rem/year EPA, “Manual of Protective Action Guides and Protective Actions for Nuclear Incidents,” 400-R-92-001,…”doses in in first year will not exceed 2 rem”

5 rem/year NRC, “Standards for Protection Against Radiation,” recommendation and established dose limit for workers (10 CFR 20 Subpart C)


Pacific Northwest National Laboratory Study on Cleanup Standards – Nuclear Bomb Blast


Summary

Terrorism insurance has not developed as a viable market without the federal government

Modeling tools have been incorporated into terrorism risk management best practices

The future of the federal Terrorism Risk Insurance Program is highly uncertain

House H.R. 2761 Senate White House

Significant new exposure to NBCR could result The extent of insurer exposure to a radiation contamination event could

depend on the standards selected by local stakeholders after the event occurs

See www.air-worldwide.com for this information in AIR White Paper

Documents

Terrorism Insurance and Modeling