the Marsh Report Terrorism Risk Insurance 2010

The Marsh Report: Terrorism Risk Insurance 2010


Publisher Ben Tucker Marsh’s Property Practice

Subject Experts Duncan Ellis Marsh’s Property Practice

Will Eustace Marsh’s Casualty Practice

Erick Gustafson MMC Government Relations

John Hughes Marsh's Property Practice

Dusan Jovanovic Marsh’s Global Benchmarking Team

Paul Knutson Guy Carpenter

Emil Metropoulos Guy Carpenter

Tarique Nageer Marsh’s Property Practice

Sandra Owusu-Fianko Marsh's Property Practice

Chris Varin Marsh's Captive Management Practice

Managing Editor Kate Byrnes Marsh’s U.S. Risk Practices

Editor Tom Walsh Marsh’s National Sales & Marketing Team

Designer Ian Law Marsh's Interactive Assets & Strategy

The Marsh Report: Terrorism Risk Insurance 2010 www.themarshreport.com/terrorism2010



1. Introduction............................................................. 1

2. ExecutiveSummary................................................ 3

3. AnOverviewoftheTerrorismRiskInsuranceExtensionAct(TRIA)............................ 6

4. FindingsandAnalysis:PropertyTerrorismPurchasingin2009................................................ 10

5. TheStandaloneTerrorismMarketplace............. 17

6. Workers'CompensationandLiabilityCoverages................................................ 21

7. TRIA,U.S.Terrorism,andInternationalTerrorism:EffectontheInsuranceandReinsuranceMarkets.................................... 24

8. Captives:OpportunitiesandConsiderations..... 28

9. InternationalTerrorismandPoliticalViolenceInsurance............................................................... 31

10. Conclusion............................................................. 33

Table of Contents

www.themarshreport.com/terrorism2010

The Marsh Report: Terrorism Risk Insurance 2010 www.themarshreport.com/terrorism2010

The Marsh Report: Terrorism Risk Insurance 2010 | 1

Despiteanever-changingterrorismriskinsurancemarket,businessesfromeveryindustrysectorcontinuetopurchasecoverage—morethan60percentoforganizationssurveyedbyMarshboughtcoveragein2009.

Terrorisminsuranceandassociatedriskmanagementstrategiesaredynamicandcomplexissues,withmanyinterdependentfactorscontributingtomanagingtherisk.Foreignrelations,theeffectivenessofhomelanddefense,andtheambiguousnatureoftheriskmaketerrorismlossesextremelychallengingtopredictandquantify.Itisdifficultforinsurerstoeffectivelypriceandreservecapacityfortheirpotentialexposuretocatastrophicterrorismlosses.

U.S.insurersarebackedbythecommitmentoftheUnitedStatesfederalgovernmenttoprovidereinsurancerelieftohelpthemmanagetheongoingriskofterrorism.In2007,PresidentBushsignedtheTerrorismRiskInsuranceProgramReauthorizationActof2007(TRIPRA)1,extendingtheprogramthroughDecember31,2014.Theoriginallegislation—theTerrorismRiskInsuranceActof2002(TRIA)—wasadirectresponsetotheattacksofSeptember11,2001,andpartofaconcertedefforttokeeptheAmericaneconomystrong.

Liketheoriginallegislation,thetwoextensionswereintendedasshort-termsolutions.CongresspassedTRIPRAinpartbecausetheinsuranceindustryhadnotamassedenoughcapitaltoinsurecatastrophicterrorismlosseswithoutafederalbackstop.

Sincetheoriginallegislationin2002,thestandaloneterrorismmarkethasgrownandevolvedandnowoffersanumberofviableprogramsolutionsforcompaniesintheUnitedStatesandabroadtomitigatetheirterrorismrisks.

OnFebruary1,2010,theObamaAdministrationreleaseditsproposed2011budget,whichwouldreducefederalsupportforTRIPRAbeginningin2011andagainin2013.ThiswasoriginallypresentedbytheU.S.OfficeofManagementandBudgetinitsreport"Terminations,Reductions,andSavings,BudgetoftheU.S.Government,FiscalYear2010."

The2011budgetgenerallyproposesreducedfederalinterventioninTRIPRA,andspecificallyidentifies:

increasingthedeductibletobepaidbyinsurers;

increasingtheinsurerco-participation;

increasingtheeventtrigger;

removingcoverageforactsofdomesticterrorism;and

reducingtherecoupmentpercentagefrom133percentto100percent.

AlthoughthisproposalsimplyreassertsthepositiondetailedinthefirstreportofeffortsbytheObamaAdministrationtoreducegovernmentspending,itholdsfewspecificsonhowchangingTRIPRAwoulddoso.Marsh’sterrorismexpertshavehaddiscussionswithpolicymakerswhohaveindicatedthereisverylittleappetiteforthesechangestobeenactedbyCongress.

Introduction1

1.ThisreportreferstotheTerrorismRiskInsuranceActof2002,theTerrorismRiskInsuranceExtensionActof2005,andtheTerrorismRiskInsuranceProgramReauthorizationActas“TRIA,”"TRIPRA,or"theAct."Ininstanceswhereitisnecessarytodistinguishbetweenthethree,theaccompanyingtextwilldoso.


2 | The Marsh Report: Terrorism Risk Insurance 2010

Marsh’sPropertySpecializedRiskGroupwillkeepourclientsinformedoffurtherdevelopmentsandtheirpotentialimpactonterrorisminsuranceprograms.

Thispublication,Marsh’sannualterrorismriskreport,isdesignedtohelpcompaniesaddressterrorismriskissues,despitetheuncertainties.ItispartofMarsh’songoingefforttoinformclientsofnotabledevelopmentsintheterrorisminsurancemarketplace—includingcost,demand,andgapsincoverage.Thereportlooksat:

keyissuesunderTRIA;

propertyterrorisminsurancepurchasingin2009;

thestandalonepropertyterrorisminsurancemarket;

terrorismissuesinworkers'compensationandliabilityinsurance;

theeffectofTRIAandinternationalterrorismontheinsuranceandreinsurancemarkets;

insuranceforterrorismexposuresplacedwithcaptives;and

politicalviolence,internationalterrorisminsurance,andglobalterrorismpools/schemes.

Throughbenchmarkingandbystayingawareofimportantdevelopments,riskmanagersandotherkeyexecutivescanhelptheircompaniespreparestrategiestomanagetheshiftingrealitiesofterrorismrisk.Marshremainscommittedtohelpingourclientsdeveloprobust,comprehensivestrategiestomanagethisrisk.



Thisreportprovidesasnapshotofthemajorissuesandtrendssurroundingterrorisminsurancein2010.Keyissuesandfindingsinclude:

An Overview of the Terrorism Risk Insurance Act (TRIA)

TheTerrorismRiskInsuranceProgramReauthorizationAct(TRIPRA)wassignedintolawinDecember2007,extendingtheTRIAfederalbackstopprogramthroughDecember31,2014.

Thedefinitionofan"actofterrorism"hasbeenrevisedtoincludeactsofdomesticterrorism,whichwereexcludedinpreviousversionsofTRIA.

Theissueofnoncertifiedactsofterrorismremainsanimportantconsideration.AlthoughcoveragethroughTRIPRAremovesanyexclusiontotheextenttheactofterrorismiscertified,somepropertyinsurersaddexclusionarylanguagerelatedtononcertifiedterrorismcoverage.

TheStandardFirePolicy(SFP)—mandatedbystatutesin29states—may,insomecircumstances,providecoveragefromlossesiftheyarisefromafirecausedbyaterroristattack.

Property Terrorism Insurance Purchasing in 2009

Sixty-onepercentofcompaniespurchasedpropertyterrorisminsurancein2009.

Utility,realestate,healthcare,transportation,financialinstitutions,andmediacompaniespurchasedpropertyterrorisminsuranceathigherratesthanotherindustrysegmentsin2009,withtake-upratesexceeding70percentinthesesectors.

Themedianpremiumrateforterrorisminsurancewasdownfrom$37permillion(0.0037percent)in2008to$25permillion(0.0025percent)in2009.

Construction,hospitality,utility,andrealestatecompaniesexperiencedthehighestmedianpremiumratesforterrorisminsurancein2009,exceeding$50permillionofTIV.

Whenlookingatterrorisminsurancepricingasapercentageofoverallpropertypremiums,financialinstitutionsandtransportationcompaniespaidthelargestshare,allocating24percentand17percentoftheirtotalpropertyprograms,respectively.Hospitalityfirmssawsignificantdecreasesinthepercentageofpropertypremiumpaidforterrorism,downfrom13percentin2008to4percentin2009.

The Standalone Insurance Market

Capacityinthestandaloneterrorisminsurancemarkethasgrownconsiderablyovertheyears;insurersnowofferatheoreticalmaximumof$3.76billionincapacity.

ThestandalonepropertyterrorisminsurancemarketofferscoverageforbothTRIA-certifiedandnoncertifiedrisksandenablescompaniestotailorcapacitytotheircoverageneeds.

Approximately$750millionto$2billionperriskinstandalonecapacityisavailabletocompaniesthatdonothavesizeableexposuresinlocationswhereinsurershaveaggregationproblems.Capacityexcessof$2billionisavailablebutismoreexpensive.

Forlocationswheremarketshaveaggregationissuestheestimatedmarketcapacityisapproximately$1billion;additionalcapacitycanbeaccessedatsignificantlyhigherrates.

Executive Summary2



Workers' Compensation and Liability Coverages

Insurersandqualifiedself-insuredemployerscannot excludecoverageforactsofterrorismfromworkers’compensationpolicies.

Becauseworkers’compensationprovideslifetimemedicalcareforon-the-jobinjuries,somecomputermodelsprojectthatthe“worst-case”costofaterrorismincidentcouldexceed$90billion.Incontrast,someexpertsputthetotalworkers’compensationcapacityfortheentireinsurancemarketplaceat$30billion.

TheNationalCouncilonCompensationInsurance(NCCI)approvedthe“DomesticTerrorism,Earthquakes,andCatastrophicIndustrialAccidentsPremiumEndorsement(DTEC)”forworkers’compensation,whichtookeffectJanuary1,2005.Itprovidesfundingforsomecatastrophiclosses,includingactsofterrorismspecificallyexcludedbyTRIA,butnotforTRIA-certifiedactsofterrorism.

In2009,thepercentageofclientsthatpurchasedTRIAgeneralliability(GL)coverageappearstohavedippedtojustabove50percent.Theactualrate—chargedasapercentageofpremiumfortheoverallcoverage—heldsteadyatabout1percent.

TRIA, U.S. Terrorism, and International Terrorism: Effect on the Insurance and Reinsurance Markets

Commercialinsurerscontinuetoavoidaccumulatinghigh-profileurbanexposuresduetotheresidualriskforterroreventsretainedbyinsurersbelowthetriggersandretentionslevelssetbyTRIPRA,coupledwiththerelativelyhighcostofreinsuranceinkeyexposurezones.

TheAct’sdesignresultsinanumberofgapsinreinsuranceprotectionforinsurers,includingpersonallinesinsurance;thedeductible,co-payshare,andeventtriggerforTRIA-certifiedevents;andnuclear,chemical,biological,andradiological(NCBR),dependingonprimarypolicycoverage(manytraditionalpropertypoliciesexcludethenuclearandradiationrisks).

Mostreinsurershaveidentifiedalimitedportionoftheirriskcapitaltomakeavailabletocoverterrorismexposuresandtypicallyprefertomanageterrorriskbyofferingterrorismcoverageinastandalonecontractratherthanofferingcoveragewithinanormal“all-risk”catastrophetreaty,especiallyforinsurerswritinganationalportfolio.

Anestimated$700millionofper-occurrencecoverageisavailable.Forcertainprograms,notablyworkers’compensationprogramswheretheterrorismexposureislimitedtoasinglestate,itisfeasibletosecuremorethan$1billionofcapacity.

Comparedtonaturalperilssuchashurricaneorearthquake,terrorismmodelingisstillyounganduntested.Quantifyingtheeconomicandhumanlossesfromanactofterrorismcontinuestoposemajorchallengesforinsurersandreinsurers.

Captives: Opportunities and Considerations

Captiveinsurersthatissuedirectpoliciesandotherwisemeetthedefinitionofa“qualifiedinsurer”mustmakeavailablecoverageforinsuredlossesresultingfromanactofterrorismasdefinedunderTRIA.

Usingacaptivetoinsureanorganization’sexposuresagainstactsofterrorismcanbeaviable,cost-efficientalternativetotraditionalpropertyprogramsincludingterrorism.

ThereareseveralkeyareasofopportunitytoenhanceTRIAcoverageviauseofacaptive.Becausepropertypoliciestypicallyexcludethesecoveragesorbecausecostsofinsuringsuchrisksaregenerallyprohibitive,usingacaptivetoprovidethecoveragescanbeparticularlybeneficial.

International Terrorism and Political Violence Insurance

Thestandaloneterrorisminsurancemarketcanoffercoverageforassetsincountrieswheretheinsured’srisksarelocated(subjecttocertaincountrylimitations),“high-risk”countries,and/orcountrieswhereterrorisminsuranceisrequiredbythelenderormortgagee.



Insituationswherepropertyinsuranceisextendedtoincludecoverageinaccordancewiththelocalpool,anystandaloneterrorismpolicywillbeonadifferenceinconditions(DIC)ordifferenceinconditionsanddifferenceinlimits(DIC/DIL)basis.

Politicalviolencepoliciesaredesignedtorespondtoabroaderclassofperilsindevelopingcountriesthanonlyterrorism.

StandalonepoliticalviolenceprogramlimitsofbetweenUS$100millionandUS$500millionarecommonplace.Withinaterrorisminsuranceprogram,politicalviolencesublimitsrangingbetweenUS$50millionandUS$200millionarebecomingmorecommon.



An Overview of the Terrorism Risk Insurance Act (TRIA)3

Term January 1, 2008—December 31, 2014 January 1, 2006—December 31, 2007

November 26, 2002—December 31, 2005

Official Legislative Name

Terrorism Risk Insurance Program Reauthorization Act of 2007 (TRIPRA).

Terrorism Risk Insurance Extension Act of 2005 (TRIA).

Terrorism Risk Insurance Act of 2002 (TRIA).

Coverage The extension eliminates the distinction between acts of foreign or domestic terrorism.

Acts committed by individual(s) acting on behalf of any foreign person or interest to coerce the civilian population of the U.S. or to influence the policy or affect the conduct of the U.S. government by coercion.

Acts committed by individual(s) acting on behalf of any foreign person or interest to coerce the civilian population of the U.S. or to influence the policy or affect the conduct of the U.S. government by coercion.

Territory U.S. only. U.S. only. U.S. only.

Certification $5 million $5 million $5 million

Federal Backstop Trigger

$100 million $50 million in 2006, $100 million in 2007

$5 million

Insurer Retention 20%—applied against prior year direct earned premium.

17.5% in 2006, 20% in 2007—applied against prior year direct earned premium.

7% in 2003, 10% in 2004, 15% in 2005—applied against prior year direct earned premium.

Government Share-Excess of Retention

85% 90% in 2006, 85% in 2007 90%

Recoupment/Pay-Go

Formula will be calculated using several factors: the size of the total loss, the amount of the industry aggregate retention, the amount that the insurers actually retain, and the amount of the federal government reimbursement. There is no maximum on the amount that will be applied to future policyholders’ premiums. For events that occur before 2011, this amount must be collected by 9/30/2012. For events that occur after 1/1/2012, it must be collected by 9/30/2017. Congress and the Treasury Department will have some flexibility in how this is implemented.

Included with much discretion on part of Secretary of Treasury—subject to maximum 3% per year applied to policyholders’ premiums.

Included with much discretion on part of Secretary of Treasury—subject to maximum 3% per year applied to policyholders’ premiums.



TRIAwasfirstenactedonNovember26,2002,aftertheSeptember11,2001,terroristattackscreatedaseveremarketshortageforterrorisminsurance.Ithassincebeenextendedtwotimes,inDecember2005andagaininDecember2007astheTerrorismRiskInsuranceProgramReauthorizationActof2007(TRIPRA).Forthepurposesofthisreport,TRIAmaybereferredtoasTRIA,TRIPRA,ortheAct.Ininstanceswhereitisnecessarytodistinguishbetweenthethree,theaccompanyingtextwilldoso.

TRIAcontainsamake-availableprovision,whichmeansinsurers—includingcaptiveslicensedintheUnitedStatesandsurpluslinesinsurersapprovedasnonadmittedinsurersinanystate—mustmakeTRIAterrorisminsurancecoverageavailabletotheirclients.Althoughitismandatoryforinsurerstoofferterrorismcoverage,itisnotmandatoryforinsuredstopurchasethecoverage.

TherehavebeensomechangestotheActduringitstwoextensions,asillustratedonthepreviouspage.ThemostsignificantchangeinTRIPRAisthatthedefinitionofan“actofterrorism”hasbeenrevised.Therequirementthatanactbecommittedbyanindividualonbehalfofanyforeignpersonorforeigninterestinorderforittobecertifiedasan“actofterrorism”forpurposesofreimbursementhasbeenremoved.Inotherwords,TRIPRAcoversdomesticterrorism,whichwasexcludedinpreviousversionsofTRIA.

Adistinctionremainsbetweenactsthatarecertifiedandnoncertified.Thefulldefinitionofacertifiedactofterrorismis:

A. “Certification–Theterm“actofterrorism”meansanyactthatiscertifiedbytheSecretaryoftheTreasury,theSecretaryofState,andtheAttorneyGeneraloftheUnitedStates:

i. tobeanactofterrorism;

ii. tobeaviolentactoranactthatisdangeroustohumanlife,property,orinfrastructure;

iii. tohaveresultedindamagewithintheUnitedStates,oroutsidetheUnitedStatesinthecaseofanaircarrierorvessel(asdescribedintheAct);orthepremisesofaUnitedStatesmission;and

iv. tohavebeencommittedbyanindividualorindividuals,aspartofanefforttocoercethecivilianpopulationoftheUnitedStatesortoinfluencethepolicyoraffecttheconductoftheU.S.governmentbycoercion.

B. NoactshallbecertifiedbytheSecretaryasanactofterrorismif:

i. theactiscommittedaspartofthecourseofawardeclaredbytheCongress,exceptthatthisclauseshallnotapplywithrespecttoanycoverageforworkers’compensation;or

ii. propertyandcasualtylossesresultingfromtheAct,intheaggregate,donotexceedthe$5millionthreshold.”

Theissueofnoncertifiedactsofterrorismremainsanimportantconsideration.WhilecoveragethroughTRIPRAremovesanyexclusiontotheextenttheactofterrorismiscertified,somepropertyinsurersaddexclusionarylanguagerelatedtononcertifiedterrorismcoverage.

Noncertifiedterrorismcoveragecanprovideprotectionfor:

eventsthatarenotintendedtocoercethecivilianpopulationortoinfluencethepolicyoraffecttheconductoftheU.S.governmentbycoercion(forexample,animalrightsattacksand/orwhereanindividualorcorporationisthetargetandnotthepublic);

eventsthattakeplaceoutsideoflargeciviliancenterswhereaverylimitedsectionofthepublicmaybethetarget—suchasagroupofemployees—andnotthecivilianpopulationingeneral;

actsofterrorismwithlessthan$5millionininsuredlossesacrossalllinesofinsuranceandfromallinsurers;and

eventsthatarenotcertifiedbytheSecretaryoftheTreasury,SecretaryofState,andtheAttorneyGeneraloftheUnitedStates.



ThefollowingaresomeotherkeyissuesunderTRIA:

Trigger and threshold:Toclarifyhowthetriggerandthethresholdwork,theamountnecessaryforcertificationofanactis$5million,butanyoutlayoffederalfundsisprohibitedunlesstheeventreachesthetriggerof$100million.

Cost of coverage:TheActdoesnotprovidespecificguidanceonpricing;however,insurersmaychargeanadditionalpremiumforcoverageprovidedunderTRIA.TRIApreemptsstateregulationsforpriorapprovalofrates.Still,TRIAretainsastate’srighttoinvalidatearateasexcessive,inadequate,orunfairlydiscriminatory.

Terms and conditions:Insurersarerequiredtomakecoveragefor“certifiedacts”availabletotheirpolicyholdersontermsandconditionsthatdonotmateriallydifferfromthepolicy’sotherpropertyand/orcasualtycoverages.Insurersarealsorequiredtoofferthecoverageateachrenewal,eveniftheinsureddeclinedcoveragepreviously.TRIAdoesnotrequireinsurerstoofferspecifictermsandconditionsforrequiredcoverages.

Adequate disclosure:TRIArequiresinsurerstoprovidetheirpolicyholderswith“clearandconspicuous”disclosureofboththepremiumbeingchargedforTRIAcoverageandtheshareofreinsuranceprovidedbythefederalgovernment.Iftheinsuredrejectsanoffertopurchaseterrorismcoverage,theinsurermayreinstateaterrorismexclusion.

Government participation:Thefederalgovernmentwillcover85percentofcertifiedlossesonceaninsurer’sdeductibleisreached.Anindividualinsurer’sdeductibleisapercentageofitsdirectearnedpremium(DEP)fortheprioryearforthecommerciallinesofcoveragesubjecttoTRIA;thepercentageissetat20percent.

TRIAcapsthetotalliabilityoftheprogramandofinsurers—includingtheinsurers’participationanddeductibles—at$100billioninanyoneprogramyear.Ifinsuredlossesexceed$100billion,thentheallocationoflosscompensationtoinsurerswithinthe$100billioncapwillbedeterminedbyCongress.InsurerswouldnotbeliableforcertifiedlossesinexcessofthisamountunlessCongressweretopasslegislationincreasingthelimit.

Government recoupment:TRIAincludesprovisionsforbothmandatoryanddiscretionaryrecoupmentifthegovernmentmakespaymentsfollowingaTRIA-certifiedloss.Foranyprogramyearbeginningwith2008through2014,theinsurancemarketplaceaggregateretentionamountisthelesserof$27.5billionandtheaggregateamount,forallinsurers,ofinsuredlossesfromprogramtriggereventsduringtheprogramyear.

Standard Fire Policy (SFP) Statutes

TheStandardFirePolicy(SFP)ismandatedbystatutesin29statestocoverdirectlossesfromfireandlightning(see“SFPStates”).Itsetsforththeconditionsunderwhichsuchalossisdeemedtohaveoccurred.Insomesituationswhereterrorismisexcludedunderapropertypolicycoveringtheperiloffire,theissueiswhetherlossesarecoverediftheyarisefromafirecausedbyaterroristattack.

Standard Fire Policy Exclusions

SFPs generally exclude losses arising from a fire caused by:

enemy attack by armed forces, including military action taken resisting such attack;

invasion or civil war;

insurrection, rebellion, revolution, or usurped power;

the order of any civil authority;

neglect on the part of the insured to take reasonable measures to save the property; and

theft.

There are also several "conditions suspending or restricting insurance," which are similar to exclusions. These include losses that occur:

when the insured has increased the hazard;

when the building is vacant; or

as a result of riot or explosion, unless fire follows the explosion, in which case the loss caused by the fire, and not the loss caused by the explosion, is covered.

The SFP may be supplemented by endorsements extending coverage to additional perils, provided that such coverage is not inconsistent with the provisions of the SFP.



RegulatorswouldlikelyconsideranyattempttowaivetheSFP’ssubstantiveprotectionstobeaviolationofpublicpolicy,renderingthemunenforceable.Anydiminutionincoverage—specifically,anyrestrictioninfirecoverage—maybedeclarednullandvoidbythestates.

Thesestatutesprovideforanonlyactual-cash-valuerecovery;thereisnotime-elementprotection.Ineffect,ifaninsured’spolicycontainsanexclusionforterrorismoriftheinsureddecidesnottopurchaseTRIAcoverage,theSFPlawforpropertyinthese29statesmayoffersomeprotectiontoinsureds,although14ofthese—Arizona,Connecticut,Idaho,Louisiana,Michigan,Minnesota,Nebraska,NewHampshire,NewJersey,NorthDakota,Oklahoma,Pennsylvania,RhodeIsland,andVirginia—havepassedlegislationtoexcludeactsofterrorism.AnSFPstatecouldcompeltheinsurertopayforthedirectdamagefromafirecausedbyanactofterrorismonanactual-cash-valuebasis,despitethepresenceofaterrorismexclusionintheinsuringagreement.

Insurersarguethatitisunfairforthemtoremainpotentiallyliableunderstatuesforso-calledfire-followinglosseswhenpolicyholderscanrejectTRIAorotherterrorismcoverageandpaynopremiumforfire-followingcoverage.

SFP States

The Standard Fire Policy is mandated in the following states:

Alaska (personal lines only) Nebraska*

Arizona* New Hampshire*

California New Jersey*

Connecticut* New York

Georgia North Carolina

Hawaii North Dakota*

Idaho* Oklahoma*

Illinois Oregon

Iowa Pennsylvania*

Louisiana* Rhode Island*

Maine Virginia*

Massachusetts Washington

Michigan* West Virginia

Minnesota* Wisconsin

Missouri

*This state has passed legislation to exclude (or allow insurers to exclude) acts of terrorism from SFP policies.



Theterrorisminsurancemarketisrobustandcontinuestosupportinsureds’risktransferneeds.Thepercentageofcompaniesbuyingpropertyterrorisminsurance—theterrorisminsurancetake-uprate—hasgenerallyincreasedsincetheenactmentofTRIAin2002.In2003thetake-upratewas27percent;overthesubsequentyearsthenumberofcompaniespurchasingterrorismincreasedsteadilyto61percentin2009(seeChart1).

Take-up Rates by Company Size

Marshestablishedfourcategoriesoftotalinsuredvalue(TIV)asthemeasureofcompanysizetoaidinouranalysis:

CompanieswithTIVinexcessof$1billionaremajoraccountsforinsurers,payinglargepremiums.Theytypicallyworkwithseveralinsurers.AnumberofthesecompaniesusedtheirexistingcaptivesorestablishednewcaptiveinsurerstoprovideTRIAcoverage.

CompanieswithTIVbetween$500millionand$1billionarelargeorganizationsthattypicallyworkwithmultipleinsurersandhavelayeredprograms.

CompanieswithTIVbetween$100millionand$500milliontendtohavenomorethanthreeinsurersinvolvedintheirinsuranceprograms.

CompanieswithTIVlessthan$100milliongenerallyentailasmallerspreadofrisk,haveloweroverallpremiums,andworkwithasingleinsurer.

Changesintake-upratesanalyzedbycompanysizeweremarginalintheyears2007through2009.Thetake-upratesforsmallercompanies—i.e.,companieswithTIVunder$100million—continuedtoincreasegraduallyfrom47percentin2007to55percentin2009.This2009take-uprateislowercomparedtolargercompanies:62percentto64percentofwhichpurchaseterrorisminsurance.Take-upratesforcompanieswithTIVbetween$100millionand$500millionincreasednominally,whilecompanieswithTIVinexcessof$500millionfluctuatedslightlyduringthesametimeperiod.

Findings and Analysis: Property Terrorism Purchasing in 20094


2009200820072006200520042003 27%

49%

58%

59%

59%

57%

61%

Chart 1: Terrorism Take-up Rates by Year

2009

2008

2007

2006

2005

2004

2003 27%

49%

58%

59%

59%

57%

61%

>$1b$500m - $1b$100m - $500m<$100 m

47% 49%

55%

61% 61% 63% 63% 61% 62%65%

62% 64%

Chart 2: Terrorism Take-up Rates by TIV

200920082007

47% 49%

55%61% 61%63% 63% 61% 62%

65%62% 64%

200920082007

2009

2008

2007

>$1b$500m - $1b$100m - $500m<$100 m


Take-up Rates by Industry

AccordingtoMarsh’sanalysis,utilitycompaniespurchasedpropertyterrorisminsuranceatahigherratethananyotherindustrysegmentin2009:80percentofcompaniesdidso.Analyzingthedatabyindustrysegments,companiesintherealestate,healthcare,transportation,financialinstitutions,andmediasectorshavetake-upratesabove70percent,thehighestofthe15segmentssurveyed.

Conversely,take-upratesamongenergyandfoodandbeveragecompanieshavesteadilydeclinedduringthethree-yearperiod2007to2009.Onlyapproximatelyfouroutofevery10companiesinthesesectorspurchasedterrorisminsurancein2009.Manufacturingistheonlyindustrywhosetake-upratedidnotexceed50percentatallduringthelastthreeyears(seeChart3).

Industry Categories

This report examines property terrorism insurance purchasing patterns for 15 industry groups. These industries were selected based on criteria that included sample population size, perceived exposures, take-up rates, and premium rates. Other industry groups that are part of the overall analysis—but are not reported on individually—include agriculture, automotive, aviation, distribution, nonprofits, professional services, and general services.

The industry groupings in this report included, but were not limited to, the following lines of business:

Construction: contractors, homebuilders, and general contractors

Education: universities and school districts

Energy: oil, gas, and pipelines

Financial institutions: banks, insurers, and securities firms

Food and beverage: manufacturers and distributors

Hospitality: hotels, casinos, sporting arenas, and performing arts centers

Health care: hospitals and managed-care facilities

Manufacturing: all manufacturers, excluding aviation

Media: print and electronic media

Public entity: city, county, and state entities

Real estate: real estate and property management companies

Retail: retail entities of all kinds, including restaurants

Technology/telecom: hardware and software manufacturers and distributors, telephone companies, and Internet service providers

Transportation: trucking and bus companies

Utility: public and private gas, electric, and water utilities


2007

2008

2009

Energy

Food & Bev.

Construction

Retail

Public Entity

Tech./Telecom

Education

Hospitality

Media

Financial Institutions

Transportation

Health Care

Real Estate

Utility

Chart 3: Terrorism Take-up Rates by Industry

80%73%

81%

76%73%

80%

76%75%

71%

75%64%

62%

74%68%

73%

71%71%

64%

68%67%

69%

71%69%

65%

63%61%61%

61%55%

61%

58%54%

60%

47%49%

52%

51%53%

42%

66%62%

40%

200920082007

2007

2008

2009

Energy

Food & Beverage

Manufacturing

Construction

Retail

Public Entity

Technology/Telecom

Education

Hospitality

Media


Transportation

Health Care

Real Estate

Utility

80%73%

81%

76%73%

80%

76%75%

71%

75%64%

62%

74%68%

73%

71%71%

64%

68%67%

69%

71%69%

65%

63%

61%61%

61%55%

61%

58%54%

60%

47%49%

52%

51%53%

42%

66%62%

40%

0.0

0.2

0.4

0.6

0.8

1.0

47%43%

45%


Take-up Rates by Region

In2009,propertyterrorisminsurancetake-upratesrosemostsignificantlyintheNortheast,increasedslightlyinSouthandWest,andremainedflatintheMidwest.Interestingly,lessthan50percentofcompaniesintheWestpurchasedterrorisminsuranceoverthepasttwoyears(2008and2009);thelowesttake-upratesamongthefourU.S.zonesanalyzed(seeChart4).

TheNortheaststillhasthelargestpercentofcompaniespurchasingpropertyterrorisminsurance,withnearlythreeoutofeveryfourcompaniesbuyingcoverage.

Types of Coverage Companies Are Buying

ThevastmajorityofMarsh’sclients—approximately90percent—purchasedtheirterrorisminsuranceaspartoftheirpropertypoliciesratherthanasstandaloneplacements.However,standalonepoliciesareanimportantalternativeand/orsupplementtoTRIAcoverageforsomecompanies.Theprimarypurchasersofstandalonepolicieshavebeenhospitalitycompanies,largerealestatefirms,andfinancialinstitutions.Retailcompanies,mediaentities,transportation,publicentities,andutilitiesalsopurchasedstandaloneterrorismpolicies;however,inlesseramounts.

Priortothelastextension,whencompaniespurchasedterrorismcoverageaspartoftheirpropertypolicies,theygenerallypurchasedbothTRIA

coverageandnoncertifiedactscoverage.However,becausethepassingofTRIPRAin2007expandedthedefinitionofcoveredactstoincludeddomesticterroristevents,manycompanieshaveelectednottopurchasenoncertifiedterrorisminsuranceinadditiontopurchasingTRIAaspartoftheirpropertypolicies.(seeChapter3foradiscussionregardingnoncertifiedactsunderTRIPRA).

MorecompaniesaresecuringterrorisminsurancethroughtheircaptivesandarepurchasingreinsurancetocovertheirretentionorliabilityunderTRIA.Typically,thosecaptivesthatdopurchasereinsurancealsooftenbuycoverageforthenoncertifiedterrorismexposures.

The Cost of Terrorism Coverage

Wemeasuredthecostofterrorismcoveragebothasapremiumrate—premiumdividedbyTIV—andasapercentageofacompany’soverallpropertypremium.Usingpremiumrateallowscompaniestotrackwhattheypaidinabsoluteterms;percentageofoverallpremiumshowshowterrorismcoverageaffectedacompany’soverallpropertyinsurancebudget.

Thecostofpropertyterrorisminsurancehasfallengraduallyovertheyears,withamoresignificantdropin2009.Themedianpremiumrateforterrorisminsurancewasdownfrom$37permillion(0.0037percent)in2008to$25permillion(0.0025percent)in2009.

Cost by Company Size

Propertyterrorisminsuranceratestypicallydecreaseasthesizeofthecompanyincreases(seeChart5).CompanieswithTIVlessthan$100millionexperiencedmoderatemedianratedecreasesinprice,from0.0054percentofTIVor$54permillionin2008to0.0053percentor$53permillionin2009,andtheirterrorismpremiumratesremainedrelativelyhigherthanthoseoflargercompanies.CompanieswithTIVbetween$100millionand$500millionsawmedianratesdecreasefrom$36permillionin2008to$32permillionin2009.BusinesseswithTIVbetween$500millionand$1billionweretheonlysegmenttoexperienceamedianrateincrease,albeitasmallone:premiumratesin2009were$29permillion,upslightlyfrom$27permillionin2008.Forthelargestcompanies,thosewithTIVmorethan$1billion,themedianratesremainedflatat$27permillion.

www.themarshreport.com/terrorism2010WestSouthNortheastMidwest

58% 60% 60%

71%66%

73%

55% 55%58%

51%

44%47%

Chart 4: Terrorism Take-up Rates by Region

200920082007

2009

2008

2007

WestSouthNortheastMidwest

58% 60% 60%

71%66%

73%

55% 55%58%

51%

44%47%

200920082007


Whenexaminingcostasapercentageofoverallpropertypremiums(seeChart6),2009sawincreasesforcompaniesofallsizes,exceptthosewithTIVbetween$100millionand$500million.Thisindicatesthatthecostforterrorismcoveragegenerallyincreaseddisproportionatelywiththeoverallpropertymarketratechangesexperiencedduring2009.CompanieswithTIVlessthan$100millionexperiencedthelargestincrease,asterrorisminsurancerepresentsalargerproportionoftheiroverallpropertyprogramsthanitdoesforlargerorganizations.Also,terrorisminsuranceratesdonottendtohaveaswidearangeaspropertyratesandarelesssubjecttocreditsforhigherretentionsandloss-controlefforts.Thus,terrorisminsurancerepresentedalargershareoftheoverallpropertypremiumbudgetforthesmallercompanies.

Cost by Industry

Comparedtolastyear’srates,2009propertyterrorisminsurancepremiumratesbyindustryshowmedianratedecreasesfor11ofthe15industrycategories:construction,utility,financialinstitutions,transportation,energy,media,publicentity,foodandbeverage,manufacturing,healthcare,andeducation.Ratesincreasedsignificantlyforrealestatecompanies,moderatelyforhospitalityandtechnology/telecommunicationsfirms,andremainedflatforretailorganizations(seeChart7).


>$1b$500m - $1b$100m - $500m<$100m

4%

16%

22%

14%

6%5% 6% 5%

7% 8% 8%

11%

Chart 6: Terrorism Pricing as Percentage of Property Premium by TIV

200920082007

2009

2008

2007

>$1b$500m - $1b$100m - $500m<$100m

4%

16%

22%

14%

6% 5% 6% 5%7% 8% 8%

11%

200920082007

2009

2008

Education

Health Care

Manufacturing

Food & Beverage

Public Entity

Retail

Technology/Telecom

Media

Energy

Transportation


Real Estate

Utility

Hospitality

Construction

Chart 7: Terrorism Pricing - Median Rates by Industry (Rates per Million)

$65$76

$55$54

$51$59

$50$42

$47$62

$46$74

$35$50

$30$46

$29$24

$26$26

$35$30

$24$36

$23$29

$19$25

$16$23

2009

2008Education

Health Care

Manufacturing

Food & Beverage

Public Entity

Retail

Technology/Telecom

Media

Energy

Transportation


Real Estate

Utility

Hospitality

Construction

$65$76

$55$54

$51$59

$50$42

$47$62

$46$74

$35$50

$30$46

$29$24

$26$26

$25$30

$24$36

$23$29

$19$25

$16$23

20092008

>$1b$500m - $1b$100m - $500m<$100m

$63

$54 $53

$40$36

$32$29 $27 $29 $28 $27 $27

Chart 5: Terrorism Pricing - Median Rates by TIV (Rates per Million)

200920082007

2009

2008

2007

>$1b$500m - $1b$100m - $500m<$100m

$63

$54 $53

$40$36

$32$29 $27 $29 $28 $27 $27

200920082007


Construction,hospitality,utility,andrealestatecompaniesexperiencedthehighestmedianpremiumratesforterrorisminsurancein2009,exceeding$50permillionofTIV.Ratesdecreasedmostdramaticallyfortransportation,from$74permillionin2008to$46permillionofTIVin2009.Mediaandenergycompaniesalsoexperiencedsignificantreductionsinmedianrates,reductionsgreaterthan30percentover2008.

Whenlookingatterrorisminsurancepricingasapercentageofoverallpropertypremiums,financialinstitutionsandtransportationcompaniespaidthelargestshare,allocating24percentand17percentoftheirtotalpropertyprograms,respectively.Thisrepresentsthelargestincreaseasapercentageoftotalpropertycostamongallindustrygroups.Retailandrealestatecompaniesalsopaidalargerpercentageoftheirtotalpremiumsforterrorismat10percenteach.Hospitalityfirmssawsignificantdecreasesinthepercentageofpropertypremiumpaidforterrorism,downfrom13percentin2008to4percentin2009(seeChart8).

Cost by Region

TheWestregionexperiencedthelargestpricedecreasesin2009,followedbytheMidwestthentheNortheast.TheSouthsawonlymarginalratedeceasesbetween2008and2009.However,theoverallratereductionfortheperiod2007to2009wasgreaterfortheMidwestthanforanyotherregion—premiumratesdecreasedfromor$47permillionin2007to$21permillionin2009.TerrorisminsuranceisthemostexpensiveintheSouthandtheNortheast,basedonpremiumrate(seeChart9),althoughthevariationbyregionhasnarrowed.

TerrorismpricingasapercentageofpropertypremiumvariesinthefourU.S.zonesareanalyzed.Terrorismaccountsforonlyanaverageof3percentoftotalpropertypremiumsforcompaniesintheMidwestandWest,comparedto5percentand6percentinthe


2008

2009

Food & Beverage

Construction

Energy

Hospitality

Utility

Health Care

Education

Technology/Telecom

Manufacturing

Public Entity

Media

Retail

Real Estate

Transportation


2008

2009

Food & Beverage

Construction

Energy

Hospitality

Utility

Health Care

Education

Technology/Telecom

Manufacturing

Public Entity

Media

Retail

Real Estate

Transportation


Chart 8: Terrorism Pricing as Percentage of Property Premium by Industry

24%14%

17%11%

10%6%

10%6%

8%8%

7%5%

6%6%

5%6%

5%8%

5%4%

5%7%

4%13%

3%2%

3%3%

2%4%

24%14%

17%11%

10%6%

10%6%

8%8%

7%5%

6%

5%6%

5%8%

5%4%

5%7%

13%

3%

2%

3%

3%

2%

4%

4%

20092008

6%


$47

$28

$21

$41 $42

$36

$47

$40 $38

$44$40

$30

Chart 9: Terrorism Pricing - Median Rates by Region

(Rates per Million)

Rates per Million

200920082007

2009

2008

2007


$47

$28

$21

$41 $42

$36

$47

$40 $38$44

$40

$30

200920082007


SouthandNortheast,respectively.Muchofthiscanbeexplainedbytheterrorismexposuresfacedbycompaniesintheseregions.Companiesinmajormetropolitanareas—NewYork,Washington,DC,andBoston,forexample—arelikelytopayahigherpremiumfortheirterrorismcoverage,whichresultsinalargerpercentageoftheiroverallpropertyinsurancecostsdedicatedtoterrorism.

Conclusion

In2009,propertyterrorisminsuranceratesgenerallydecreasedacrosstheboard.Thepropertyinsurancemarketremainedvirtuallyflat,dueinlargeparttoalackofsignificantcatastrophiclossesin2009.Premiumratesdidincreaseforcertainrisks,however,andsomecompanieswithsignificantexposurestothoseparticularrisksexperiencedsimilarincreasesintheirterrorisminsurancerates.

Firstquarter2010premiumratesforbothpropertyandterrorisminsurancetypicallyrenewedwithslightdecreases.Itisimportanttonote,however,thatanumberofnaturalcatastrophesoccurredinthefirstfewmonthsof2010—notablyaseriesofsignificantearthquakes.Althoughmuchofthelossesfromtheseeventswerenotinsured—thusnotaffectinginsurers’surplus—itremainstobeseenwhethertheeventswillputanupwardpressureonpropertyrates.Iftherearerelativelyfewsignificantlossesfromnaturalcatastropheorterrorismeventsintherestof2010,theinsurancemarketmaymoderateandkeeppropertyratesflatornearflat.

Itwasexpectedthattheeconomicdownturnexperiencedin2008and2009wouldhaveaffectedhowcompaniesbudgetfortheiroverallinsuranceprograms,andthatterrorisminsurancewouldlikelybecutbackinanefforttogeneratecostsavings.Surprisingly,thisdidnothappenatthemagnitudesomehadpredicted.Despiteachanginganduncertainmarketplace,terrorisminsurancetake-upratescontinuedtoclimbduring2009ascompaniesofallsizesandinallindustriesacrosstheUnitedStatescontinuedtopurchasethecoverage.Mostcompaniesthatpurchasedterrorisminsuranceinthepastcontinuetodosoasmarketscontinuetounderwritetherisk,withthesupportoftheTRIAfederalbackstop.

ThereauthorizationofTRIAthrough2014hasaffordedneededcapacityinthemarketforterrorisminsurance.Propertyinsurersareabletoincludeterrorisminsuranceintheirriskportfoliosatnominalratestoinsureds.Clearly,thedemandforterrorismriskinsuranceremains.

www.themarshreport.com/terrorism2010WestSouthNortheastMidwest

4%

3% 3%

5% 5%

6%

3%

4%

5%

4% 4%

3%

Chart 10: Terrorism Pricing as Percentage ofProperty Premium by Region

200920082007

2009

2008

2007


4%3% 3%

5% 5%6%

3%4%

5%4% 4%

3%

200920082007


Methodology

This chapter relies on data from Marsh clients that purchased property terrorism insurance across the United States. Purchasing patterns are examined in the aggregate as well as on the basis of client characteristics such as size, industry, and region.

The 2009 data come from property insurance placements incepting during calendar year 2009. To account for skews within the regional and total insured values (TIV) data sets, the national annual figures were weighted. The study population does not include placements in the United States for foreign-based multinationals or for small-firm placements made through package policies.

The 2009 study was based on a sample of 1,382 firms with the following characteristics:

Minimum Median Maximum

TIV $75,000 $303 million $303 billion

Property Premium $1,059 $295,755 $56 million

Terrorism Premium $1 $9,541 $11 million

Unless otherwise noted, the calculations include TRIA policies, noncertified policies, standalone policies, and placements made through captives. For some companies, insurers quoted only a nominal terrorism premium of $1. These $1 premiums were omitted from the calculations of the median terrorism premium rates. In respect to the calculation of terrorism premium as a percentage of property premiums, standalone terrorism premiums were omitted.

Companies were assigned to regions based on the locations of the Marsh offices that served them. Generally, this was the Marsh office most closely located to a company’s headquarters. Many of our clients have multiple facilities across the country and around the world, meaning the potential risk for a terrorist attack may not be fully represented by where a company is headquartered. Having said that, the decision as to whether to purchase terrorism insurance is typically made at headquarters.

The information contained herein is based on sources we believe reliable, but we do not guarantee its accuracy. It should be understood to be general risk management and insurance information only.



4 The Standalone Terrorism Marketplace5AftertheattacksofSeptember11,2001,andpriortotheenactmentofTRIA,thestandaloneterrorisminsurancemarketwasthemainsourceofcapacityforcompanieslookingtoobtainpropertyterrorisminsurance.Mainstreampropertyinsurersweregenerallyunwillingorunabletoprovidethecoverage.

Today,thestandaloneinsurancemarketcontinuestoprovideterrorismcoverage,attimescompetingwith“allrisk”propertyinsurersthatprovideTRIAcoverageandatothertimescomplementingthecoverageprovidedbyTRIA.StandaloneinsurancemarketsalsoservecompanieswhoseneedsarenotmetbytheAct.Forexample,insituationswherethe“allrisk”programterrorismlimitscannotbefilledby“allrisk”markets,thenthestandaloneinsurancemarketmayofferalternativecapacity.Capacityinthestandaloneterrorisminsurancemarkethasgrownconsiderablyovertheyears;insurersnowofferatheoreticalmaximumof$3.76billionincapacity.

ThestandalonepropertyterrorisminsurancemarketofferscoverageforbothTRIA-certifiedandnoncertifiedrisksandenablescompaniestotailorthecapacitytotheircoverageneeds.Otherfeaturesofthisinsurancealternativeincludethefollowing:

Coverage for noncertified risks:SomecompaniesbuyTRIA-certifiedterrorismcoveragewithintheir“allrisk”propertyprogramstocoverU.S.locationsanduseastandalonepolicyfornoncertifiedrisks.

Coverage for gaps in other policies:Insituationswherethe“allrisk”programlimitscannotbefilledby“allrisk”markets—typically,fornoncertifiedrisks—thestandaloneinsurancemarketcanbeusedtofillgapsinlimits.

Coverage for international locations:Standalonecoverage,unlikeTRIAcoverage,isavailableformostlocationsworldwide.Companieswithoverseasexposuresoftenlooktothestandalonemarkettoprovidesolutionsnotsatisfiedbylocalgovernmentterrorisminsuranceschemes(seeChapter9foralistofworldwidepools).

Reinsurance of U.S.-domiciled captives for TRIA-certified terrorism:Someofthestandaloneinsurancemarketsofferpoliciestoreinsurancecaptivesforthecaptivedeductible—the15percentofTRIA-certifiedlossesthatarenotcoveredbythefederalgovernmentoncethecaptiveinsurer’sdeductibleisreached—andtheliabilityresultingfromTRIPRA’s$100milliontrigger.

Noncancelable coverage:Standalonepoliciesthatcannotbecanceledbyeitherparty—otherthanfornonpaymentofpremium—areavailable.


Standalone Terrorism Global Market Capacity as of Q2 2010

Thestandalonepropertyterrorisminsurancemarketasofthesecondquarterof2010hasanumberofinsurersasfollows:


Insurer (Company) S&P Rating A.M. BEST Rating Maximum Capacity (US$ millions)*

ACE American Insurance Company A+ A+ p XV 25

Aspen Specialty Insurance Company - A g XV 30

AXIS Specialty Limited A+ A XV 150

Chartis A+ A p XV 250 - 1,000

Glacier Reinsurance AG - A- IX 40

Hiscox Insurance Company, Inc. - A VII 100

International Insurance Company of Hannover AA- A VIII 25

Lancashire Insurance Company Limited - A- XII 200

Lloyd's of London A+ A XV 900

Montpelier Reinsurance Limited A- A- XIII 50

National Fire & Marine Insurance Company AA+ A++ g u XV 1,000+

Transatlantic Reinsurance Company A+ A g XV 50

Validus Re - A- XIV 50

Western Re/Managers Inc. A+ A XV 100

Westport Insurance Company A+ A g XV 40

* as of April 1, 2010 Theoretical maximum: $3,760

Although a significant attack has not struck U.S. soil since September 11, 2001, terrorism remains a very real and present threat worldwide. A number of events and attempts have occurred in recent years, notably the following.

2009-2010:

Moscow, Russia – Metro subway system bombings (March 29, 2010)

Buenos Aires, Argentina – Bomb exploded at Banco Nación branch (March 17, 2010)

San Salvador, El Salvador – Bombing at offices of Rio Lempa Hydroelectric Power Plant Executive Commission (March 18, 2010)

Athens, Greece – Bombing of building housing ultra nationalist group Golden Dawn (March 19, 2010)

Jakarta, Indonesia – JW Marriott and Ritz-Carlton bombings (July 17, 2009)

Lahore, Pakistan – Sri Lanka cricket team bus attack (March 30, 2009)

2004-2008:

Mumbai, India – Attacks on eight different sites including hotels and train station (November 26-29, 2008)

Islamabad, Pakistan – Marriot Hotel bombing (September 20, 2008)

Amman, Jordan –– Bombs at Grand Hyatt hotel, Radisson SAS Hotel, and Days Inn (November 9, 2005)

Bali, Indonesia – Beach Resorts (October 1, 2005)

London, United Kingdom – Underground train and bus bombings (July 7, 2005)

Jakarta, Indonesia – Australian Embassy (September 9, 2004)

Madrid, Spain – Commuter train bombings (March 11, 2004)

Moscow, Russia – Metro subway bombing (February 6, 2004)

There has also been a spate of unsuccessful attempts in recent years, including the failed Times Square bombing attempt in the spring of 2010, the attempted bombing of a Detroit-bound Delta flight on Christmas Day 2009, foiled plots to attack Heathrow and Glasgow airports, and plots to disrupt U.S. and European transportation systems. These attempts have helped to keep the threat of terrorism at the forefront of risk management decision-making.



Market Underwriting Position

Standaloneratescanattimesbemorecompetitivethanthepricingofembeddedterrorisminpropertyprograms.Inthestandalonepropertyterrorismmarket,capacity—thelimitofcoveragethatisavailableforasinglerisk—isrelativelystable,butitcanvaryconsiderably,primarilydueto:

Location of risk:Thedemandforcoverageinmajormetropolitanareashasasubstantialeffectontheavailablecapacity.

Insurer’s accumulation of exposure:Insurershaveaggregatelimitsontheriskstheycantake.Capacitycanbelimitedincertainlocations,particularlyinmajormetropolitanareassuchasNewYorkCity,wheresomeunderwriterscurrentlyhavesevereaggregationissues.

Concentration of exposure:Terroristsattacktargetsofopportunity.Althoughitiscertainlypossiblethatanattackcouldoccuranywhere—includingaremotetownorshoppingmall—demandforcoveragewilllikelybehigherinmetropolitanareassimplybecausethereisagreaterconcentrationofexposures.

Market Capacity:

– Capacityhasincreasedsignificantlyforexposuresoutsidecentralbusinessdistricts(CBD).

– Approximately$750millionto$2billionperriskinstandalonecapacityisavailabletocompaniesthatdonothavesizeableexposuresinlocationswhereinsurershaveaggregationproblems.Capacityexcessof$2billionisavailable,butismoreexpensive.

– Forlocationswheremarketshaveaggregationissues—particularlyNewYorkCity—theestimatedmarketcapacityisapproximately$1billion:additionalcapacitycanbeaccessedatsignificantlyhigherrates.

BowringMarshoperatesaWorldwideTerrorismFacilitywith13Lloyd’ssyndicatesthatprovidesupto$250millionofcapacityforworldwideterrorismpropertydamageandbusinessinterruptioncoverage.Thefacilityisdesignedtoacceptterrorismrisksformetropolitancitycenters.

Chartis/LexingtonofferscoverageforU.S.domesticlocationsaswellasforeignlocations.LexingtonhasincreasedcapacityforU.S.domesticterrorisminsurance,uptoatheoreticalpolicylimitof$1billion,whichisavailableonacase-by-casebasis.

ACEcontinuestorestrictitsstandaloneterrorismcapacitytoaccountsinwhichithasasignificantpropertyposition.TheirpositionistosupporttheACEGlobalPropertybranchesforforeignexposuresonly.

Monitoringofaggregatesisapriorityforallinsurers.Capacityintop-tiercitiesispricedaccordingly.

Marshisabletosecuremanuscriptcontingentbusinessinterruptioncoverincludingfirstandthirdpartyassetswithextensionsforportblockage,railinfrastructure,andpowersupply.

Coverage Issues

AllstandalonemarketsusetheT3/T3Apolicyforms.SomemarketswillsupportaMarshenhancedT4/T4Aform.AmanuscriptterrorismformfromMarshisavailablefromsomemarkets.Thechartonpage20comparessomeofthecharacteristicsofstandalonecoverageandTRIAcoverage.(Marshwouldhavetoundertakeacompletereviewofanyformissuedtoprovideadetailedcomparisonofcoverage.)

Product Enhancements

Thefollowingareamongthosedevelopedbystandalonepropertyterrorisminsurers:

Chartis/Lexington's BioChem ShieldSMcanofferasublimitofupto$25millionaggregateforbiological/chemicalterrorism;thisexcludesnuclearorradiologicalterrorism.Itisofferedasanendorsementtoastandaloneterrorismpolicyortoacompany’s“all-risk”program.

Chartis/Lexington's Op ShieldSMcoversbusinessinterruptionandextraexpenselossestriggeredbyacivilormilitaryauthorityordertoevacuatethatarisesfromeitheraterroristactorathreatofterrorism.Itisofferedasanendorsementtoastandaloneterrorismpolicyortoaninsured’s“all-risk”program.Lexingtoncanofferasublimitofupto$25millionaggregate.Thereisa72-hourwaitingperiodandtheindemnityperiodislimitedto30days.



Hiscox at Lloyd's Liability Terrorism Insurance coversdamagesandclaimsexpensesthattheinsuredisliabletopayduetoanyclaimorclaimsforbodilyinjuryand/orpropertydamage.Thepolicyincludesdefensecostexpenses.Thelimitavailableisbetween$50millionand$100millionaggregate.Thisisaclaimsmadeandreportedpolicy.Thereportingprovisionisassoonasreasonablypossibleandinnoeventlongerthan90daysaftertheexpiryofthepolicy.A72-houroccurrenceclauseapplies.

Lloyd's of London's Riots, Strikes, Civil Commotions, and Malicious Damagecoversinsuredpropertydamageorbusinessinterruptionlossescausedbyanactorseriesofactsofriotsand/orstrikesand/orcivilcommotionsand/ormaliciousdamage.A72-houroccurrenceclauseapplies.

Catlin Bermuda Worldwide NCBR Terrorism Coverprovidesnuclear,chemical,biological,andradiological(NCBR)coverageforindividuallocationsoraspecificstate.Forindividuallocations,thespecificZIPcodeofthepropertyandaradiusaroundthisZIPcodeisrequired.Thisproductisavailabletoindividualcommercialpurchasersorbyinsurersdesiringtoremovepeakrisks.

Thestate-specificsolutionofferscoverageforlossesincurredduetoanNCBRterroristeventinaspecificstatesolongastheeventisdeemedtohaveoriginatedinthenamedstate.

ThisNCBRsolutionisofferedforseveralinsurancelines—includingpropertydamage,businessinterruptionlosses,andworkers’compensation—andpricingisbasedontheproductcoveredaswellastheperceivedprobabilityinthespecificZIPcodeorstate.

Standalone Property Terrorism TRIA as Part of "All-Risk" Property

Covers acts of certified and noncertified acts of terrorism and can be extended to cover political violence perils.

Covers certified foreign and domestic acts of terrorism.

Can cover locations inside and outside the United States. Covers only U.S. locations.

Limits are typically aggregated or with one reinstatement; occurrence limits may be available.

Per-occurrence limits that match property policy limits.

Account- and terrorism-specific deductibles. Deductibles match property policy deductibles.

Location- and schedule-specific. Coverage for all locations, including unscheduled, depending on terms of property policy.

Non-cancelable policy available. Cancelable terms follow property policy.

Long-term policies up to three years available. Policies typically written for one year.

Select insurance markets. All markets that meet insurer definition under TRIA.

Comparison of Typical Standalone Coverage and TRIA Coverage



Workers' Compensation and Liability Coverages6

Workers' Compensation

Largelybecauseitiscontrolledbythestates,whichhavenotallowedexclusionsforterrorismlosses,workers’compensationpresentsuniquechallengestoinsurers,brokers,andriskmanagers.Insurersandqualifiedself-insuredemployerscannotexcludecoverageforactsofterrorismfromworkers’compensationpoliciesastheycanwithotherinsurancelines.Nearlyallstatesrequireemployersorinsurerstopaymedicalcostsandwagereplacementwithoutlimitsorexclusionsforworkersinjuredonthejob.Workers’compensationprovideslifetimemedicalcareforon-the-jobinjuries,leadingsomecomputermodelstoprojectthatthe“worst-case”costofaterrorismincidentcouldexceed$90billion.Incontrast,someexpertsputthetotalworkers’compensationcapacityfortheentireinsurancemarketplaceat$30billion.

Riskmanagersshouldbeawarethatinsurerscarefullycalculateandtrytolimittheirexposurestohighconcentrationsofrisk.Multilineinsurersareparticularlysensitivetosite-specificaccumulationsofrisk.Asaresult,careshouldbetakentoobtaininsurance-marketalternativesforworkers’compensationprogramsthatarelikelytobeaffectedshouldaterroreventoccur.Evenwheretheinsurerrenews,insuredsshouldbewaryoflargerretentions,accompaniedbyincreasingamountsofcollateraltosupportthoseretentions.

TRIA’slimitationtocertifiedactsofterrorismhaspromptedstateregulatorsandinsurerstopaymoreattentiontofindingpremiummechanismsfornoncertifiedactsofterrorism.Despiteimprovedmodeling,thefrequencyandseverityofterrorismriskremainsdifficulttoadequatelyassess,especiallywhencomparedtootherpotentialcatastrophiclosses(i.e.,windstormorearthquake).

Historically,ratemakersincludedasmall,undifferentiatedchargeforpotentialcatastrophiclossesintheiroverallrates.

Pursuingamoreexplicitapproach,theNationalCouncilonCompensationInsurance(NCCI)approvedthe“DomesticTerrorism,Earthquakes,andCatastrophicIndustrialAccidentsPremiumEndorsement(DTEC)”forworkers’compensation,whichtookeffectJanuary1,2005.Theendorsementsimplyreflectsthereviseddefinitionofterrorismtoincludedomesticeventsandthedisclosureofthe$100billioncap.Itprovidesfundingforsomecatastrophiclosses,includingactsofterrorismspecificallyexcludedbyTRIA,butnotforTRIA-certifiedactsofterrorism.

Theendorsementdefinesa$50millionlossaggregatethresholdforworkers’compensationfor:

allactsofterrorismoutsidethescopeofTRIA;

earthquake—definedasasingleeventinvolvingundergroundmovementalongafaultplane—orvolcanicactivity;and

catastrophicindustrialaccident,whichqualifiesifasingleeventresultsinthelosses.

Thepremiumforthisendorsementiscalculatedasratemultipliedbypayrollandisappliedafterthestandardpremium.Itisnot,however,subjecttoanyothermodificationssuchaspremiumdiscount,experiencerating,schedulerating,orretrospectiverating.



Althoughinsurers’liabilitiesincreasedunderTRIPRA—the2007extensionstipulateslargerinsurerretentions,increaseddeductibles,andanincreaseinthetrigger,forexample—theeffectonthegeneralliabilityinsurancemarkethasbeenlimited.Majorquestionsstillloom,however,includingwhetherTRIAriskscanbequantifiedandpredictedwithsufficientaccuracytogivecomforttotherisk-basedcapitalinvestorswhosponsorbothpublicandprivatelyheldinsurers.

ThepremiumchargesforTRIAforgeneralliability(GL)policieshavebeenrelativelymodest.Asaresult,insurancebuyershavepurchasedTRIAcoverageatsimilartake-upratesasthoseexperiencedinproperty.However,GLtake-uprateshavedeclinedinrecentyears.Marsh’sbenchmarkingdatashowTRIAtake-upratesforGLpeakedin2004-2005atapproximately80percent.In2009,thepercentageofclientsthatpurchasedTRIAGLcoverageappearstohavedippedtojustabove50percent.Theactualrate—chargedasapercentageofpremiumfortheoverallcoverage—heldsteadyatabout1percent,implyingthatthereductioninthetake-upratewasnotdrivenbythecostofthecoverage,butbytheperceivedrisk.Infact,thewidelyvaryingperceptionoftheriskonthepartofinsuredsisoneofthereasonsoftencitedforthelackofuniversalacceptanceofthecoverage.

Focused Attack vs. Generic Attack

The nature of a terrorist attack could have serious implications on workers’ compensation coverage.

A terrorist attack could be either a focused attack on a specific site—such as a business or government building— or it could be a generic assault on a locale, city, or neighborhood. A focused attack on a building—as in the September 11 attacks on the World Trade Center and the Pentagon—would trigger workers’ compensation coverage for employees injured or killed.

In some jurisdictions, however, generic assaults resulting in injury or death to employees while they are at work may not be deemed compensable if the risk to the employees was not greater, due to their employment, than the risk to the general public. In other words, an act of terrorism that poisoned the public water supply and caused illness or death to employees would not have created a greater risk to those employees than it did to nonemployees in a nearby restaurant or at home. As a result, some states’ workers’ compensation laws may allow the insurer to deny benefits.



The Support Anti-Terrorism by Fostering Effective Technologies (SAFETY) Act

The Support Anti-Terrorism by Fostering Effective Technologies Act (SAFETY), enacted by Congress as part of the Homeland Security Act of 2002, was put in place so that the threat of potential liability lawsuits would not deter or limit the use of products and services that could help save lives. It was also expected that the Act would facilitate innovation and development of qualifying anti-terrorism technology (QATT).

The SAFETY Act provides broad liability protections and caps and legal incentives to companies that sell, use, integrate, manage, or deploy anti-terrorism products and services. The application of the Act is very broad.

SAFETY Act designation can be sought for a specific technology (QATT) or can be applied to a process designed for the prevention of acts of terrorism, response, or a mitigation program (e.g., including a mitigation technology or strategy at a hotel, transportation network, or entertainment venue).

Once awarded, companies generally have their SAFETY Act designation for five to seven years. The designation confers many benefits on the receiving organization, defined in the Act as the “Seller”, including:

maximum caps on financial liability;

exclusive jurisdiction in federal court;

punitive damage claims barred;

pre-judgment interest barred; and

non-economic damages barred.

An interesting aspect of the SAFETY Act is that it is not limited to the use of QATT, so that it is possible for a building to become SAFETY Act-certified or designated. Once certified it would enjoy the protections of the Act like other certified entities.

A key benefit of the Act is that liability for all claims against the “Seller”—when a QATT has been deployed in response to a qualifying act of terrorism (as defined by the Secretary of Homeland Security)—shall not be in an amount greater than the limits of liability of the insurance coverage required by the Secretary.

All contractors, subcontractors, vendors, and customers of the “Seller” are required to agree to reciprocally waive claims against each other, another potent line of defense. Additionally, in any attendant litigation, the “Seller” gains the presumption that the government-contractor defense applies if the “Seller” has the product certified as an “approved product for Homeland Security.” In other words, if the government would be immune from suit under principles of sovereign immunity, then the QATT is likewise immune.

Companies can apply for certification for all of their properties or a select few. If a company elects to certify only select buildings in their portfolio, only those certified buildings would enjoy protection under the Act. Noncertified buildings, if hit in an attack, would not be covered by the Act.

In conclusion, in the event a company or building owner decides to gain certification of its location or product/service by the Department of Homeland Security (DHS), then the SAFETY Act's cap on liability applies. While there is some expense in the application process, if a company believes it has a process/technology that qualifies for certification under the SAFETY Act, it may wish to consider applying for this designation. Marsh’s Casualty Practice is available to discuss this issue further.



CommercialinsurersarestronglysupportiveofTRIA,asitprovidesthemanultimatesafetynetfortheirterrorismexposures.However,theresidualriskforterroreventsretainedbyinsurersbelowthetriggersandretentionlevelssetbyTRIPRA,coupledwiththerelativelyhighcostofreinsuranceinkeyexposurezones,meansthatinsurersremaincautiousaboutterrorismexposure.Asaresult,theycontinuetoavoidaccumulatinghigh-profileurbanexposures.

Managing the Gaps in TRIA Coverage

TRIAprovideshigh-levelreinsuranceprotectiontoprimaryinsurersforcommercialinsurancelines.TheAct’sdesignresultsinanumberofgapsinreinsuranceprotectionforinsurers.Thesegapsinclude:

personallinesinsurance;

thedeductible,co-payshare,andeventtriggerforTRIPRA-certifiedevents;and

nuclear,chemical,biological,andradiological(NCBR),dependingonprimarypolicycoverage.Manytraditionalpropertypoliciesexcludethenuclearandradiationrisks.

TRIAisacommerciallinesprogram;therefore,personallinespoliciesofinsurersarefullyexposedtobothTRIA-certifiedandnoncertifiedactsofterrorism.Ingeneral,insurershaveaddressedtheserisksbyhavingfullterrorism—certifiedandnoncertified—includedintheirpersonallinesproperty/catastrophereinsuranceprograms,oftenexcludingNCBRlosses.Thisprotectionisfrequentlyprovidedwithnoexplicitcostbreakout.

Frominsurers’perspectives,alarge,non-reinsuredgapinTRIPRAterrorismexposurefortheperiod2007-2014existsforcertifiedactsinthreeareas:

1. Belowthe20percentdeductiblesetbyTRIPRA.

2. Withinthe15percentvirtuallyunlimitedco-participationcorridorabovethedeductible.

3. Ininstanceswhenaninsurer’sdirectexposureisdisproportionallyhighrelativetotheminimumindustryeventtriggerof$100million.Insuchcasesaninsurerwouldbe100percentexposedtoanylossesunderthetrigger.

TheObamaAdministration’sproposed2011budgetwouldreducefederalsupportforTRIA.WhileMarsh’sterrorismexpertsbelievethereislittleappetiteamongpolicymakerstosupportsuchareduction,itisimportanttonotesuchachangelikelywouldaffecttheterrorisminsuranceandreinsurancemarkets.Specifically,anyreductioninfederalTRIAsupportwouldlikelyincreaseinsurancemarketuncertaintyaroundterrorismrisksandaffectreinsurers’appetitestoprovidecoverageforthem.Itwouldalsocauseanincreaseininsurers’deductibleandco-sharepercentages,whichinturnlikelywouldincreasethedemandforterrorismreinsurance,possiblybeyondcurrentmarketcapacity.

Mostcedentsprefertohavecommercialcertifiedterrorismcoveredwithintheirstandardpropertyandcasualtyreinsuranceprograms.Includingsuchcoverageinexistingprograms,however,canbeexpensive,dependingonthelocationandvaluesoftheoriginalinsuredterrorismpolicies.Anotheroptionforcedentsistopurchasestandaloneterrorismreinsurancecoverage.Pricingforsuchcoveragehasdecreasedinrecentyears,butoverallactivitylevelsforthesestandaloneproductshavealsodeclined.

TRIA, U.S. Terrorism, and International Terrorism: Effect on the Insurance and Reinsurance Markets7



Mostreinsurershaveidentifiedalimitedportionoftheirriskcapitaltomakeavailabletocoverterrorismexposures,giventhechallengesinunderwriting,modeling,andpricingforterrorismrelativetoothercatastrophicperils.Asmentionedabove,reinsurerstypicallyprefertomanageterrorriskbyofferingterrorismcoverageinastandalonecontractwheretheycanmonitorandcontrolexposure,ratherthanofferingcoveragewithinanormal“all-risk”catastrophetreaty,especiallyforinsurerswritinganationalportfolio.SomeregionalinsurerswithexposureslimitedtoruralorsuburbanareasareseekingtosecureclosetofullterrorismcoveragewithintheirreinsuranceprogramssincetheyaremorelikelytobeexposedtoagapinTRIAcoverage,asnotedabove.RatingagenciesarealsopayingincreasingattentiontothepossibilitythataregionalinsurercouldhavealargelossrelativetoitspolicyholdersurpluswithoutanyprotectionfromTRIA.

Insurersthathavenotpurchasedstandaloneterrorismreinsurancecitethefollowingfactors:

1. Cedents’targetbudgetforcatastropherisktransferisfullyconsumedbytheircurrentnaturalperilstreaty(ies).

2. Cedentsarecomfortablewiththelevelofrisktransferforterrorismincludedwithintheircurrent“all-perils”reinsurancecontracts.

3. Thereisaninabilitytopassalongthefullcostinprimaryinsurancepolicies.

4. Therearelimitedcapacity/limitsavailableataffordablerates,dependingonthelocationoftheoriginalinsuredterrorismpolicies.

5. Theyfeelthatexposureconcentrationsarecontrolledand/orarelimited,particularlyforclientswithlittleexposureintargetedurbancenters.

6. TheyarecomfortablewiththeprotectionsprovidedunderTRIPRA.

7. ThereislittlecoverageavailableforNCBR.

Agrowingconcernintheinsurancemarketplaceinvolvesthemoredetailedquestionsaskedbyratingagencies—suchasA.M.Best—regardingcapitaladequacy.A.M.Bestnowconsidersacedent’sdataquality;thefrequencyandseverityofspecificallydefinedterrorismscenarios,includingtheirpotentialimpactonthecedent’ssurplus/capitalafterTRIPRA;andotherinuringreinsurance.Ahostofdataqualitysurcharges,city-specificprobabilities,frequencymultipliers,andevenassignedworkers’compensationbenefitlevelsareappliedtoaninsurer’scombinedlineterrorlossestogeneratea“terrorismcharge”thatcanpotentiallybestresstestedagainsttheirpublishedA.M.Best’sCapitalAdequacyRatio(BCAR)and,inturn,impacttheirrating.WithrecentfavorableearthquakeCATmodelchanges,thelikelihoodthatthe“terrorismcharge”couldbehigherthanthenaturalcatastrophealternative—especiallyforworkers’compensation—hasincreased.AstheA.M.BestmethodologynotablydiffersfromstandardprobabilisticanddeterministicterrorismCATmodelingoutput,itisimportantthatinsuredsevaluateit,alongwiththeirownenterpriseexposureevaluations,whenconsideringunderwritingguidelinesandreinsuranceprotection.

Inworkers’compensation,mostinsurers—otherthansmallregionals—incorporatesomelevelofterrorismcoverageintotheircorporatecatastropheprograms.Themostcommonstructureisforinsurerstoaddcoverageforcertifiedactsofterror,excludingNCBR,totheirexistingworkers’compensationcatastropheprograms.Pricingandcapacityforterrorismcoveragehavecontinuedtoimproveoverthepastyear,andmorereinsurersarenowwillingtoprovideoptionsforNCBRperils.Terrorismcoverageisofferedonbothaper-occurrenceandaggregateexcessbasis(exclusivelyonanaggregatebasisifNCBRiscovered).Whenclientsaddterrorismcoverage,excludingNCBR,toanexistingcatastropheprogram,reinsurershavepricedtheadditionalcoverageasasurchargeabovethenaturalperilspricing.Thispricinghasbecomemorecompetitive,withreinsurersnowcharging5percentto15percentofadditionalpremium.

Cedantscontinuetoofferterrorisminsurancewheretheyarerequiredbylawtodoso,orwhereitisstandardmarketpractice;manyprovidelocalcoverageonanadmittedbasis.



Cedantscontinuetolimittheiroffertocoverterrorisminmostinternationalterritorieswherethereisnolocalgovernment-sponsoredpool.Treatiesalsocontinuetoexcludeanycoverageforinternationalterrorism.

Capacity

Inthecurrentmarketplace,upto$700millionofper-occurrencecoverageisestimatedtobeavailable,althoughthatfiguremayvarybasedonthelocationandseverityoftheoriginalinsuredpolicies.Forcertainprograms,notablyworkers’compensationprogramswheretheterrorismexposureislimitedtoasinglestate,itisfeasibletosecuremorethan$1billionofcapacity.Suchcapacitymayexpandorcontractbasedonprice,typeofrisk,andoverallreinsurancemarketconditions.Withreinsurercapitallevelsathistoricallyhighlevels,themarketplaceisapproachingthepeakofhypotheticalcapacity,however,wehaveyettoseedemandtotestthatavailability.

Modeling Terrorism

Modelingmethodologieshavebeencontinuallyrefinedandupdatedrelativetotheperilofterrorism.However,quantifyingtheeconomicandhumanlossesfromanactofterrorismcontinuestoposemajorchallengesforinsurersandreinsurers.Avarietyofapproachesexistforinsurerstomodelterrorismrisk.Mostmodelsinvolvethreetechniques:

1. Producingprobabilisticlossestimates.

2. Conductingexposure-concentrationanalysis.

3. Generatingdeterministiclossestimates.

Probabilistic modeling,alsoknownascatastrophe(CAT)modeling,estimateslossesbasedonalargenumberofevents.Akeyfactoristheestimatedfrequencyamodelerappliestoallthepossibleeventsthatcouldoccur.Theindustryandratingagenciescontinuetoquestionthecredibilityofprobabilisticterrorismmodelingasitrequirespredictionsofhumanbehavior.Asaresult,unlikehurricaneandearthquakeCATmodeling,littleconsiderationisplacedonprobabilisticterrorismmodeling.

Exposure-concentration analysis,alsoknownasaccumulationassessment,identifiesandquantifiesconcentrationsofexposuresaroundpotentialterroristtargetsasdefinedbythemodeler.Target-basedaccumulationassessmentlocatespotentialtargets—typicallywithhigheconomic,human,and/orsymbolicvalue—andaggregatesaninsurer’sexposuresinandaroundvariousdistancesfromthesetargets.

Animportantvariationofthisanalysislooksataninsurer’slargestexposureconcentrations,independentofwhatanyparticularsourcedefinesasatarget.Therefore,thescanningofclustersofmulti-lineexposureexceedinganeconomicthresholdwithinaportfolio—irrespectiveoftheseperceivedanddefinedtargets—isessential.AccordingtoA.M.Best’s“terrorcharge”methodology,itistheselargestofinsuredlocations(differentiatedbycity)thatcanbepotentiallystresstestedagainstpublishedBCAR,regardlessoftheirproximitytolandmarks.

Deterministic modelingrepresentsacompromisebetweenthelackofaccuracyinaccumulationanalysisandthevastuncertaintysurroundingprobabilisticmodels.Byimposinganactualevent’sdamage“footprint”ataspecifiedtarget,aspecific—yethypothetical—scenariocanbeanalyzedwithsomecertainty.Majormodelingfirmsofferanarrayofdeterministic-analysistoolsforconventionalandNCBRattacksatdefinedtargetandnon-targetlocations.Thisapproachcanbeeffectivewherecoarsescreeningstudiesshowthatexposuresforanareaoreventcouldbehigh,andadetailedassessmentmayreduceuncertaintiesandhelpdecisionmaking.

Relativetonaturalperilssuchashurricaneorearthquake,terrorismmodelingisstillyounganduntested.Insurers,reinsurers,andmodelingcompaniesareconstantlylearning,assessingandrefiningtheirmodelsandtheassumptionsthatunderlaythosemodels,therebyincreasingtheirabilitytomanageterrorismriskinaneducatedandmorequantitativefashion.Currently,deterministic,scenario-basedtestingisthemostcommontoolusedbyinsurerstoassesstheirvulnerabilitytoterrorism.Giventhehumanandsocietalnatureoftherisk,itcannotbeexpectedthattheprobabilityofterroreventscanbedeterminedwiththecertaintyneededtomakecriticalriskmanagementdecisions.



Whileterrorismmodelingchallengesremain,GuyCarpenterLLC,aMarshsistercompany,helpsinsurersexplorevariousterrorismlossscenariosandperspectivesusingajudgment-basedmulti-modelapproachthatgoesbeyondpurelyprobabilisticand/ordeterministicmodeling.Andsinceterrorismmodelaccuracyishighlydependentonthequalityoftheunderlyingdata,whichcontinuestoevolveandimprove,GuyCarpenteremploysdataqualitybenchmarkingandrefinementbestpracticesisdesignedtoensurethattheexposureandoutputcontemplatedisaccurateforproperenterpriseriskmanagement.


4


Captives: Opportunities and Considerations8TRIAservesasreinsuranceforcommercialpropertyandcasualtypoliciescoveringactsofterrorismthatoccurintheUnitedStates(includingallterritoriesandpossessionsorasdefinedbyTRIPRA).InsurersthatmeettherequirementsoftheActareobligatedtoofferterrorismcoverageandmustcomplywithspecifiedreportingprovisions.

Utilizingacaptivetoinsureanorganization’sexposuresagainstactsofterrorismcanbeaviable,cost-efficientalternativetotraditionalpropertyprograms.Thereareanumberofconsiderationsorganizationsmusttakeintoaccountwhendeterminingifitshoulduseitscaptivetoprovideterrorisminsurance.

GuidanceissuedbytheDepartmentofTreasurystatesthatTRIPRAappliestocaptiveinsurers(includingriskretentiongroups)thatmeetthecriteriaofaqualifiedinsurer.ThecriteriaarecontainedinSection102oftheAct,“DefinitionofInsurer.”Essentially,anyentitythatfallswithinthestatelicensedoradmittedcategoryandreceivesandreportsdirectearnedpremiumisconsideredbytheDepartmentofTreasurytobeaninsurerunderTRIA.Captivesandriskretentiongroupsareincludedtotheextentthattheyareprovidingdirectcoverageonly.CaptivesmustbedomiciledintheUnitedStatestobeeligibleforinclusionunderTRIA.Allreferencesto“captives”inthisdocumentapplytoU.S.-domiciledcaptivesonly.

Advantages of Using a Captive to Access TRIA

Premium savings.Allpremiumspaidtothecaptiveareretainedbytheorganization.

Profit.Intheeventtherearenolosses,thecaptiveincomeaccruespositivelytotheconsolidatednetoperatingincomeoftheparent.

Enhance Coverage.Opportunitiestoenhancecoveragearealsoavailable.Marshdevelopeda

TerrorismCaptiveManuscriptpolicyformthatcanbeusedtoaddressadditionalcoveragesthatarespecifictoterrorismrisks.

ThereareseveralkeyareasofopportunitytoenhanceTRIAcoverageviauseofacaptive.Becausepropertypoliciestypicallyexcludethesecoveragesorbecausecostsofinsuringsuchrisksaregenerallyprohibitive,usingacaptivetoprovidethefollowingcoveragescanbeparticularlybeneficial.

– NCBRattack.ThiscoverageisprovidedbyTRIA,butanofferingbyinsurersisnotmandatory;therefore,itisnotwidelyavailableintheopenmarket.

– Cyber-risk.Thisistypicallyexcludedfrompropertypolicies,meaningthatcoverageasaresultofaterrorattackisusuallynotprovided.

– Transmissionanddistribution(T&D)lines.CoverageforphysicaldamagetoT&Dlines—orresultingtimeelementlossesasaresultofdamagetoT&Dlines—istypicallyexcludedorrestrictedinpropertypolicies.

– Contingenttimeelement.Generally,policieshavesublimitsorcoverageislimitedunderpropertypolicies.

– Confiscation/DenialofAccess.AcoverageextensionthatisavailabletoenhancetheconventionalandNCBRterrorismcoverageforlossofvalueandconsequentiallossasaresultofconfiscation,includingasaresultofpublicordertodestroyordemolishabuilding.Thisisnottraditionallyaddressedbypropertypolicies.

– Port/AirportClosure.Mosttraditionalpropertypoliciesdonotoffercoveragefortimeelementlossincurredastheresultoftheclosureofanairportorport.SuchcoverageisprovidedunderMarsh’sterrorismmanuscriptform.



Obligations of Captive Insurers

Captiveinsurersthatissuedirectpoliciesandotherwisemeetthedefinitionofa“qualifiedinsurer”mustmakeavailablecoverageforinsuredlossesresultingfromanactofterrorismasdefinedunderTRIA.

Totheextentthatterrorismcoverageisofferedaspartofanexistingpolicy,coveragethatisextendedforterrorismmustnotdiffermateriallyfromtheterms,amounts,andothercoveragelimitationsapplicabletolossesfromeventsotherthanterrorism.Thisdoesnot,however,prohibitaninsuredfromseekingTRIA-specificcoverageinaseparatetransaction.

CaptiveinsurersmustcomplywithTRIA’sdisclosurerequirements.TheNationalAssociationofInsuranceCommissioners(NAIC)haspreparedreportingformsthathavebeenapprovedbytheDepartmentofTreasury.Theformsareavailableathttp://www.naic.org/topics/topic_tria.htm.

Steps for Captives Considering Accessing TRIA

UnderTRIA,eachparticipatinginsurerwillberesponsibleforpayingoutacertainamountinclaims—thedeductible—beforefederalassistancebecomesavailable.Thisdeductibleisequalto20percentofthedirectearnedpremiumsfromqualifyinglinesofbusinessfromthepreviouscalendaryear(notallearnedpremiumsareafactorinthecalculation).Forlossesaboveacaptive’sdeductible,thefederalgovernmentwillcover85percent,whilethecaptiveinsurercontributes15percent.ForclientsconsideringusingtheircaptivestoaccessTRIA,Marshmakesthefollowingrecommendations:

Determinethecaptiveexposurebycalculatingthe20percenthorizontaldeductible,andthevertical15percentquota-sharebasedonthepolicylimit.

Determinethepremiumtochargeforterrorismcoverage.(Forthisexercise,Marshhascompiledpropertybenchmarkinginformationbyindustrygroup,insurer,andregiontohelpcaptivescalculateacommerciallyreasonablepremiumamount.Treasuryguidelinesstatethepremiumsmustnotbediscriminatory,excessive,orinadequate.Iftheyarefoundtobeso,thiscouldjeopardizethecaptive’sabilitytocollectintheeventofaloss.)

BeawareoftheterrorismrisksthatarenotcoveredbytheAct(e.g.,lossesoccurringoutsidetheUnitedStates.)

Considerpurchasingreinsuranceforthehorizontaldeductible,15percentverticalshare,and$100millionnettriggerliability.Considerpurchasingcoverageforadeliberation/delayintheTRIAcertificationand/orpaymentprocesslastinggreaterthan180days.(Marshhasateamdedicatedtostandaloneterrorisminsuranceplacementsandhasexecutedmanycontractsthatactasreinsuranceofourclients’captives.)

Keepinmindthatthecaptive,likeallinsurers,mayberesponsibleforassessing,collecting,anddistributingthepost-losssurchargethatwillbeassessedagainstallpolicyholdersintheeventalossoccurs.

Securetheapprovaloftheresponsibledomicileinsuranceregulator.

Considerations

CaptivesareincludedinthedefinitionofinsurersunderTRIAaccordingtoDepartmentofTreasuryguidance,butcaptiveownershavealsobeenspecificallycautionedagainst“gaming”theprogram.Thesecautionsareinrecognitionoftheinherentconflictofinterestandunusuallevelofcontrolapolicyholderhasoveraninsurerinacaptiveinsurancetransaction.Thecautionsemphasizethatcaptiveownersshouldnottakeactionsthatwouldimproperlyreduceanorganization’soverallshareofaloss—forexample,captiveinsurersshouldnotdeliberatelyunderpricethepremiuminordertoreducethecaptive’sTRIAdeductible.

Capitalizationmustbedeterminedandprovided.Twomajorfactorsareconsideredwhendeterminingcapitalization.Theprimaryconsiderationisthatcapitalizationmustbesufficienttosatisfytheresponsibledomicileinsuranceregulator.Captiveinsurancecompanyregulatorsapplydifferingstandards,butareprimarilyconcernedwithstatutoryminimumsandensuringthecaptiveinsurerhasthecapacitytomeetitsreasonablyforeseeableobligationstopolicyholders.Captiveinsuranceregulatorsconsidersuchtraditionalfactorsasreinsuranceprotectioninthisanalysis,butalso


factornontraditional“assets”suchaslettersofcreditandparentcompanyfinancialstrength.Second,capitalizationshouldbeevaluatedbasedonappropriatenessconsideringtheoverallbusinessplanandobjectivesofthecaptive.Marshroutinelyassistscaptiveownerswithbuildingandpresentinganoverallbusinessplan,includingcapitallevelsandstructure,tobepresentedtotheresponsibledomicileregulatorforapproval.

Premiumschargedbythecaptiveshouldbebasedoncurrentmarketprices.Ifpremiumsarenotthoughtfullyderivedandsupported,financialpenalties,includingnotrecoveringintheeventofaloss,mayapply.

Captives,likeallsubjectinsurers,mayberequiredtosubmitinformationonterrorismpremiumratesforreviewbytheNAICandtheSecretaryoftheTreasury.

TheannualliabilityofthefederalgovernmentandallsubjectinsurersiscappedbyTRIPRAat$100billion.Shouldactualaggregateinsuredlossesexceed$100billion,thiscapcouldresultinapolicyholderreceivinglessthanthestatedpolicylimits.

TRIApermitsinsurerstoobtainreinsurancecoverageforalloranyportionofanylossnotcoveredbytheAct.TheActcontainsatriggerof$100million,whichmeansnopaymentswillbemadeforactsofterrorismresultinginaggregateinsuredlosses—toallinvolvedinsurers—oflessthan$100million.Theeffectofthetriggeristointroduceuncertaintyintheeventofsmallerlosses.Aworst-casescenariocouldseeaninsurerexposedtoupto100percentofalossofupto$99,999,999.

TimingmustbeconsideredwhencreatingacaptiveoramendingitspurposetowritenewlinesofcoverageinordertoavailitselfofcoverageprovidedbyTRIA.Ittypicallytakesbetween30and60daystoestablishanewcaptive.Withanexistingcaptive,thetimeframewilldependonitscurrentscopeanddesiredamendments,butitislikelytotakeatleastsevendaystosecuretherequiredapprovalsandinceptthecoverage.

Thestart-upandongoingadministrativecostsofaU.S.-domiciledcaptivemustbeconsideredandwillvarydependingonseveralfactorssuchasscopeandfeesformanagement,audits,legaladvice,andactuarialworkrequired.

UnderTRIA,insurers—includingcaptives—arerequiredtoprocessclaimsinaccordancewithcustomarybusinesspractices.OtherproceduresmayalsobeprescribedbytheSecretaryoftheTreasury.

IfacaptiveinsurerisaffiliatedwithotherorganizationsthatqualifyasinsurersunderTRIA,thedirectearnedpremiumsoftheaffiliatedinsurerswillbeconsideredalongwiththecaptive’swhendetermininginsurerdeductibles.

Marsh’sCaptiveSolutionsGroupworkscloselywithMarsh’sPropertySpecializedRiskGroupontheplacementofterrorismcoveragesolutionsforMarshclients.Ourexpertshavedesignatedresourcesresponsibleforreal-timemonitoringofTRIAdevelopments,providingspecialtytechnicalresourcesduringterrorismsolutionevaluations,implementationofclientprograms,andcolleagueandclienteducation.ContactMarshtodiscusstheviabilityofusingyourorganization’scaptivetomitigateyourterrorismexposures.

30 | The Marsh Report: Terrorism Risk Insurance 2010 www.themarshreport.com/terrorism2010


International Terrorism and Political Violence Insurance9

Multinationalclientswithgloballocationshaveanumberofoptionsforinsuringagainstactsofterrorism.

Thestandaloneterrorismmarketcanofferinsuranceforassetsin:

countrieswheretheinsured’srisksarelocated(subjecttocertaincountrylimitations),

“high-risk”countries,and/or

countrieswhereterrorisminsuranceisrequiredbythelenderormortgagee.

Incountrieswherecompulsoryoroptionalterrorismpoolsexist,propertyinsurancecanbeextendedtoincludecoverageinaccordancewiththelocalpool.Insuchsituations,anystandaloneterrorismpolicywillbeonadifferenceinconditions(DIC)ordifferenceinconditionsanddifferenceinlimits(DIC/DIL)basis.Theprincipalterrorismpoolsandfacilities,ascompiledbyGuyCarpenter,aresummarizedinthefollowingtable.

Country Compulsory Pool (Y/N)

Names of Terrorism Pool/Funding Mechanism

Australia N Australian Reinsurance Pool Corporation (ARPC)

Austria N Österreichischer Versicherungspool zur Deckung von Terrorisiken (The Austrian Terrorpool)

Bahrain N The Arab War Risks Insurance Syndicate (AWRIS)

Belgium N Terrorism Reinsurance & Insurance Pool (TRIP)

Finland N Finnish Terrorism Pool

France Y Gestion de l’Assurance et de la Réassurance des Risques d’Attentats et Terrorisme (GAREAT)

Germany N EXTREMUS Versicherungs-AG

Hong Kong - China N The Motor Insurance Bureau (MIB)

India N The General Insurance Corporation of India

Israel Y Terrorism (Intifada Risks) - The Victims of Hostile Actions (Pensions) Law and The Property Tax and Compensation Fund Law

Namibia N Namibia Special Risks Insurance Association (NASRIA)

Netherlands N Nederlandse Herverzekeringsmaatschappij voor Terrorismeschaden (NHT)

South Africa N South African Special Risks Insurance Association (SASRIA)

Spain Y Consorcio de Compensación de Seguros (CCS)

Sri Lanka N SRCC/Terrorism Fund - Goverment

Taiwan N Taiwan Terrorism Insurance Pool

United Kingdom N Pool Reinsurance Company Limited (Pool Re)

United States N Terrorism Risk Insurance Reauthorization Act of 2007 (TRIPRA)



Thestandaloneterrorismandpoliticalriskmarketscanalsoofferbroaderpoliticalviolenceinsurancetoclientswithlocationsindevelopingcountries.Clientsmayalsowishtoconsiderpurchasingpoliticalviolenceinsurance,eitheronastandalonebasisoraspartofacurrentterrorismprogramwithaseparatesublimitforpoliticalviolenceperils.

Terrorismcoverageisoftenincorrectlyperceivedtocoverallviolenthumanactsresultinginpropertyandbusinessinterruptionloss.Thelossmustmeettheterrorismdefinitionunderthestandalonepolicyinorderforcoveragetoapply.Certaintypesofeventsaretypicallyexcludedfromstandaloneterrorismcontracts,including:

strikes,riots,andcivilcommotion;

warandcivilwar;and

insurrection,revolution,rebellion,andcoupd’état.

Exposuresandrisksfacedbycompaniesindevelopingcountriesvarygeographicallyandarenotlimitedtoonly“terrorism”asdefinedundermoststandaloneterrorismpolicies.Forinsurancepurposes,eventsthataregenerallydescribedas“terrorism”mayactuallybeconsidered“war,”“civilwar,”oranotherpoliticalviolenceperil.Forthisreason,politicalviolenceinsuranceshouldbeconsideredbycompanieswithexposuresindevelopingcountries.

Politicalviolencepoliciesaredesignedtorespondtoabroaderclassofperilsindevelopingcountriesthanonlyterrorismandcommonlyprovidethefollowingcoverage:

sabotage;

maliciousdamage;

riots,strikes,orcivilcommotion;

revolution;

rebellion;

insurrection;and/or

warandcivilwar.

Combinedpoliticalviolenceandterrorismprogramsarestructuredtocoordinatewithacompany’sexistingpropertypolicies,includinganycoverageunderapropertyprogramforsuchperilsasstrikes,riots,andcivilcommotionorin-countrypoolterrorismschemes.

Availablelimitsforpoliticalviolencecoveragearegenerallycountrydependantandaretypicallyinfluencedbytheavailablewarcapacityinthemarketplace.StandalonepoliticalviolenceprogramlimitsofbetweenUS$100millionandUS$500millionarecommonplace.Withinaterrorisminsuranceprogram,politicalviolencesublimitsrangingbetweenUS$50millionandUS$200millionarebecomingmorecommon.



Conclusion10Thisreportreviewstheterrorisminsurancemarketplacein2009andearly2010.Asthetake-uprateanalysisinChapter4demonstrates,companiesinallregionsoftheU.S.,inallindustrysectors,andofallsizesunderstandtheneedtopurchaseterrorismcoverage.Theexposuretopotentialfutureterroristattacksisfeltmoststronglyincentralbusinessdistrictsandinareasthatpresent“soft”targets,butremainsanissueforcompaniesregardlessoflocation.Thisexposure,coupledwithalackofanaccuratevehicleforpredictingeventsandtheireffects,demonstratestheongoingneedforanationalterrorisminsurancesolution,withinvolvementfromboththefederalgovernmentandprivateindustry.

Detractorsofthefederalgovernment’scontinuedinvolvementinterrorisminsurancearequicktopointoutthattheinsurancemarketplacehasincreasedsurplusestoalevelthatshouldbeabletodealwithfutureterrorismlosses.Thisargument,however,takeslittleaccountofthepressuresfacedthroughoutthecommercialpropertyandcasualtyinsuranceindustryasaresultofheightenedcatastrophelosses—suchasanumberofsignificantearthquakesinthefirsthalfof2010andapredictedabove-averageAtlantichurricaneseasonfor2010.Suchconditions,basedonanumberofestimates,arelikelytocontinuefortheforeseeablefuture.Infact,afterarelativelybenign2009,thefirsthalfof2010hasseenanaboveaveragenumberofsignificantcatastrophicevents.

Thecontinuedstabilityoftheinsuranceindustrywillhaveadirectimpactontheavailabilityofinsuranceforfire,workers’compensation,andliabilitycoverage.WithoutabackstoplikeTRIPRA,whichisscheduledtoexpireDecember,31,2014,marketdislocationmayoccurduetotheobligatorynature

ofterrorismcoverageforcertainlinesofinsurance.WithoutafederalguaranteelikeTRIA,itislikelythatinsurersthatprovideworkers’compensationtoU.S.clients—andinlocationswheretheperilofterrorismcannotbeexcluded—wouldnotbeabletoalsosupportpropertycoverageincludingterrorismatthesamelevel.Regardlessofgovernmentparticipation,itwilllikelytaketheinsuranceindustryanumberofyearstodevelopthesurplusnecessarytodealwithcatastrophicterrorismlossesofthemagnitudeofSeptember11,2001.Therefore,somecombinationofpublic-andprivate-sectorinvolvementisstillrequiredlong-termtoappropriatelyaddressterrorismexposureintheUnitedStates.

Thereisarealpotentialforaneconomicdownturnshouldterrorisminsurancenotbereadilyavailable.Therefore,theinsuranceindustryshouldfullyexploreallpossibleoptions,regardlessoftheleveloffederalparticipation.Themajorityoflong-termterrorisminsurancesolutions—includingoverseasterrorisminsuranceprograms—relyonthepresenceofgovernmentprotectionintheeventthatpoolmechanismsbecomeerodedthroughterrorismlosses.

Terrorismremainsarealandpresentrisk,notablyinmajormetropolitanareas.Companiescontinuetoconsiderwaystomitigateagainstitandprotecttheiremployeesandfacilitiesagainstattack.Marsh’sPropertySpecializedRiskGroup(formerlytheTerrorismRiskSpecialty),inconcertwithourpoliticalviolence,workers’compensation,generalliability,modeling,andMMCsistercompanyexpertsareavailabletodiscussthemyriadoptionsavailabletoinsureagainstandotherwiseprepareforthisrisk.


The information contained herein is based on sources we believe reliable, but we do not guarantee its accuracy. Marsh makes no representations or warranties, expressed or implied, concerning the application of policy wordings or the financial condition or solvency of insurers or reinsurers. The information contained in this publication provides only a general overview of subjects covered, is not intended to be taken as advice regarding any individual situation, and should not be relied upon as such. Statements concerning tax and/or legal matters should be understood to be general observations based solely on our experience as risk consultants and insurance brokers and should not be relied upon as tax and/or legal advice, which we are not authorized to provide. Insureds should consult their own qualified insurance, tax and/or legal advisors regarding specific coverage and other issues.

Marsh is part of the family of MMC companies, including Kroll, Guy Carpenter, Mercer, and the Oliver Wyman Group (including Lippincott and NERA Economic Consulting).

This document or any portion of the information it contains may not be copied or reproduced in any form without the permission of Marsh Inc., except that clients of any of the MMC companies need not obtain such permission when using this report for their internal purposes, as long as this page is included with all such copies or reproductions. Copyright © 2010 Marsh Inc. All rights reserved.

Compliance No. #MA10-10170

Item #100642

For further information, please visit www.themarshreport.com/terrorism2010

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www.marsh.com

The Marsh Report: Terrorism Risk Insurance 2010 ©2010 Marsh Inc. All rights reserved.

Compliance #: MA10-10170 Item #: 100642

Documents

the Marsh Report Terrorism Risk Insurance 2010