Transcript The purpose of this title is to establish a temporary Federal program

Terrorism Risk Insurance
Act of 2002
Christopher Yaure
Risk Manager, Terrorism and Emerging Risks
GE ERC
Presentation to the Annual Meeting of the CAS
November 10, 2003
OVERVIEW
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Terrorism Insurance Program
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Mandatory participation
Mandatory availability
Federal compensation
Cap on liability
Preemption and nullification
Disclosure requirements
Reporting
Recoupment and surcharges
Federal cause of action
Treatment of terrorist assets
Federal Reserve Board provisions
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Findings
The ability of businesses and individuals
to obtain property and casualty
insurance at reasonable and predictable
prices, in order to spread the risk of
both routine and catastrophic loss, is
critical to economic growth, urban
development, and the construction and
maintenance of public and private
housing as well as to the promotion of
United States exports and foreign trade
in an increasingly interconnected world
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Findings (2)
Property and casualty insurance firms are
important financial institutions, the
products of which allow mutualization
of risk and the efficient use of financial
resources and enhance the ability of the
economy to maintain stability, while
responding to a variety of economic,
political, environmental, and other risks
with a minimum of disruption
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Findings (3)
The ability of the insurance industry
to cover the unprecedented
financial risks presented by
potential acts of terrorism in the
United States can be a major factor
in the recovery from terrorist
attacks, while maintaining the
stability of the economy
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Findings (4)
Widespread financial market uncertainties
have arisen following the terrorist
attacks of September 11, 2001,
including the absence of information
from which financial institutions can
make statistically valid estimates of the
probability and cost of future terrorist
events, and therefore the size, funding,
and allocation of the risk of loss caused
by such acts of terrorism
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Findings (5)
A decision by property and casualty insurers to
deal with such uncertainties, either by
terminating property and casualty coverage for
losses arising from terrorist events, or by
radically escalating premium coverage to
compensate for risks of loss that are not
readily predictable, could seriously hamper
ongoing and planned construction, property
acquisition, and other business projects,
generate a dramatic increase in rents, and
otherwise suppress economic activity
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Findings (6)
The United States Government should
provide temporary financial
compensation to insured parties,
contributing to the stabilization of the
United States economy in a time of
national crisis, while the financial
services industry develops the systems,
mechanisms, products, and programs
necessary to create a viable financial
services market for private terrorism
risk insurance
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Purpose (1)
The purpose of this title is to
establish a temporary Federal
program that provides for a
transparent system of shared
public and private compensation
for insured losses resulting from
acts of terrorism, in order to—
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Purpose (2)
Protect consumers by addressing
market disruptions and ensure the
continued widespread availability
and affordability of property and
casualty insurance for terrorism
risk
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Purpose (3)
Allow for a transitional period for the
private markets to stabilize,
resume pricing of such insurance,
and build capacity to absorb any
future losses, while preserving
State insurance regulation and
consumer protections
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Act of Terrorism
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An act of terrorism
Violent act or act dangerous to human life,
property, or infrastructure
Damage in the US
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Applies outside of the US for certain air carriers, vessels,
and missions
On behalf of any foreign person or interest
Effort to coerce the civilian population or influence
the policy or affect the conduct of the government
by coercion
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Limitations
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Does not apply to act committed as part of
declared war
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Exception for workers compensation
Aggregate losses $5,000,000 or less
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Process
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Certified by Secretary of Treasury
Determination final
Not subject to judicial review
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Property and Casualty Insurers
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Receives direct earned commercial property and
casualty insurance premium
AND
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Within specified categories
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Licensed or admitted in any state
NAIC Quarterly Listing of Alien Insurers
Approved to offer certain insurance by Federal agencies
State residual market insurance entity or workers’
compensation fund
Captives and other self-insurance arrangements, if determined
by Treasury
Affiliated insurers treated as one insurer
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Property and Casualty
Insurance
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Commercial lines only
Specifically includes
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Excess insurance
Workers’ compensation
Surety
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Lines Excluded
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Crop or livestock insurance
Private mortgage insurance
Financial guaranty insurance issued by
monoline financial guaranty insurance
corporation
Medical malpractice
Health or life, including group life
National Flood Insurance
Reinsurance
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Mandatory Availability
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An insurer “shall make available” coverage
for losses from acts of terrorism
All property and casualty insurance policies
“[C]overage for insured losses that does
not differ materially from the terms,
amounts, and other coverage limitations
applicable to losses arising from events
other than acts of terrorism.”
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Federal Compensation
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90% of insured losses in excess of a
deductible
Deductible
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Direct earned premium in prior calendar year
Multiplied by 7%/10%/15%
Special rules for insurers without a full year of
operations in relevant calendar year
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Temporary Support
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Effective November 26, 2002
Federal compensation applies to losses
through December 31, 2005
Mandatory availability applies through
December 31, 2004
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May be extended through December 31, 2005
Determination by September 1, 2004
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Cap on Liability
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Maximum aggregate industry losses in one
year is $100,000,000,000
Losses pro rated among insurers
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Preemption and Nullification
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Policies in force on November 26, 2002
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Exclusion for insured losses void
State approval of exclusions for insured losses void
Written notice to insured of additional premium
Reinstatement of exclusion after 30 days
Rates and forms not subject to prior approval
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Through December 31, 2003
State can invalidate rate as excessive, inadequate, or
unfairly discriminatory
Subsequent review of forms
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Disclosure Requirements
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Policies in force on November 26, 2002
New policies
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At time of offer, purchase, and renewal
Premium charged for insured losses
Federal share of compensation
Separate line item on policy
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Reporting
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State
Federal
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Additional Items
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Recoupment and surcharges
Federal cause of action
Treatment of terrorist assets
Federal Reserve Board provisions
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ADDITIONAL PRICING ISSUES
FOR TRIA
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Pricing
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Adequate
Not excessive
Not unfairly discriminatory
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Expected Losses – Policy Level
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Historical losses
Models
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Pure premium
Frequency of events
Severity of losses
Relative likelihood of targets
Game theory
Additive or multiplicative
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Aggregate Losses
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Company historical
Industry historical
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Market share
Models
PML vs. MPL
Allocation to policies
Take up rate
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Federal Compensation
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MPL = $10B + 0.9 * Direct Earned Premium *
Deductible Rate (but not more than $100B)
Market share * $100B
Fund the retention
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How many years
Credit for federal program
Debit for federal program
Different impact on same policy for different
companies
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Accumulation and
Diversification
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Geographical
Weapons of mass destruction
Swarm attacks
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Other Methods and Issues
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Cost of reinsurance
Cost of capital
Cat analysis
Excess vs. primary
Impact on non-terrorism insurance pricing
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MARKET RESPONSE
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Insurers
Insureds
Reinsurers
Sunset
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ADDITIONAL ISSUES
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Underwriting
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Moral hazard – very low
Morale hazard – moderate
Adverse selection – mixed
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If pricing flexibility is limited, significant issue
With respect to cancellation - high
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NRBC
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Nuclear
Radioactive
Biological
Chemical
TRIA requirements
Pricing
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Non-TRIA Coverage
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Include automatically
Exclude automatically
Additional premium
Include with TRIA
Pricing
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Reinsurance
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TRIA
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How much to cede
Avoid wasting federal compensation
Post-2005
Non-TRIA
Non-US
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Claims and Coding
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Catastrophe processes
Centralization
Coding
TRIA requirements
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Additional Issues
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Correlations with other items
Fire following
Reserving
Tax issues
Filing issues
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