The Marsh Report: Terrorism Risk Insurance 2010

The Marsh Report: Terrorism Risk Insurance 2010

Publisher Subject Experts

Ben Tucker Duncan Ellis Will Eustace Erick Gustafson John Hughes Dusan Jovanovic Paul Knutson Emil Metropoulos Tarique Nageer Sandra Owusu-Fianko Chris Varin

Marsh’s Property Practice Marsh’s Property Practice Marsh’s Casualty Practice MMC Government Relations Marsh's Property Practice Marsh’s Global Benchmarking Team Guy Carpenter Guy Carpenter Marsh’s Property Practice Marsh's Property Practice Marsh's Captive Management Practice Marsh’s U.S. Risk Practices Marsh’s National Sales & Marketing Team Marsh's Interactive Assets & Strategy

Managing Editor Editor Designer

Kate Byrnes Tom Walsh Ian Law

The Marsh Report: Terrorism Risk Insurance 2010

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Table of Contents

The Marsh Report: Terrorism Risk Insurance 2010
1. Introduction ............................................................ 1 . 2. Executive Summary ............................................... 3 . 3. n Overview of the Terrorism Risk A Insurance Extension Act (TRIA) ............................ 6 4. indings and Analysis: Property Terrorism F Purchasing in 2009 ............................................... 10 . 5. The Standalone Terrorism Marketplace ............ 17 . 6. orkers' Compensation and W Liability Coverages ................................................ 21 7. RIA, U.S. Terrorism, and International Terrorism: T Effect on the Insurance and Reinsurance Markets .................................... 24 8. aptives: Opportunities and Considerations .... 28 C . 9. nternational Terrorism and Political Violence I Insurance ............................................................... 31 10. Conclusion ............................................................. 33

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The Marsh Report: Terrorism Risk Insurance 2010

The Marsh Report: Terrorism Risk Insurance 2010

www.themarshreport.com/terrorism2010

1

Introduction

Despite an ever-changing terrorism risk insurance market, businesses from every industry sector continue to purchase coverage—more than 60 percent of organizations surveyed by Marsh bought coverage in 2009. Terrorism insurance and associated risk management strategies are dynamic and complex issues, with many interdependent factors contributing to managing the risk. Foreign relations, the effectiveness of homeland defense, and the ambiguous nature of the risk make terrorism losses extremely challenging to predict and quantify. It is difficult for insurers to effectively price and reserve capacity for their potential exposure to catastrophic terrorism losses. U.S. insurers are backed by the commitment of the United States federal government to provide reinsurance relief to help them manage the ongoing risk of terrorism. In 2007, President Bush signed the Terrorism Risk Insurance Program Reauthorization Act of 2007 (TRIPRA)1, extending the program through December 31, 2014. The original legislation—the Terrorism Risk Insurance Act of 2002 (TRIA)—was a direct response to the attacks of September 11, 2001, and part of a concerted effort to keep the American economy strong. Like the original legislation, the two extensions were intended as short-term solutions. Congress passed TRIPRA in part because the insurance industry had not amassed enough capital to insure catastrophic terrorism losses without a federal backstop.

Since the original legislation in 2002, the standalone terrorism market has grown and evolved and now offers a number of viable program solutions for companies in the United States and abroad to mitigate their terrorism risks. On February 1, 2010, the Obama Administration released its proposed 2011 budget, which would reduce federal support for TRIPRA beginning in 2011 and again in 2013. This was originally presented by the U.S. Office of Management and Budget in its report "Terminations, Reductions, and Savings, Budget of the U.S. Government, Fiscal Year 2010." The 2011 budget generally proposes reduced federal intervention in TRIPRA, and specifically identifies:  increasing the deductible to be paid by insurers;  increasing the insurer co-participation;  increasing the event trigger;  removing coverage for acts of domestic terrorism; and  reducing the recoupment percentage from 133 percent to 100 percent. Although this proposal simply reasserts the position detailed in the first report of efforts by the Obama Administration to reduce government spending, it holds few specifics on how changing TRIPRA would do so. Marsh’s terrorism experts have had discussions with policymakers who have indicated there is very little appetite for these changes to be enacted by Congress.

1. his report refers to the Terrorism Risk Insurance Act of 2002, the Terrorism Risk Insurance Extension Act of 2005, and the T Terrorism Risk Insurance Program Reauthorization Act as “TRIA,” "TRIPRA, or "the Act." In instances where it is necessary to distinguish between the three, the accompanying text will do so.

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Marsh’s Property Specialized Risk Group will keep our clients informed of further developments and their potential impact on terrorism insurance programs. This publication, Marsh’s annual terrorism risk report, is designed to help companies address terrorism risk issues, despite the uncertainties. It is part of Marsh’s ongoing effort to inform clients of notable developments in the terrorism insurance marketplace—including cost, demand, and gaps in coverage. The report looks at:  key issues under TRIA;  property terrorism insurance purchasing in 2009;  the standalone property terrorism insurance market;  terrorism issues in workers' compensation and liability insurance;  the effect of TRIA and international terrorism on the insurance and reinsurance markets;  insurance for terrorism exposures placed with captives; and  political violence, international terrorism insurance, and global terrorism pools/schemes. Through benchmarking and by staying aware of important developments, risk managers and other key executives can help their companies prepare strategies to manage the shifting realities of terrorism risk. Marsh remains committed to helping our clients develop robust, comprehensive strategies to manage this risk.

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2

Executive Summary

This report provides a snapshot of the major issues and trends surrounding terrorism insurance in 2010. Key issues and findings include: An Overview of the Terrorism Risk Insurance Act (TRIA)  The Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) was signed into law in December 2007, extending the TRIA federal backstop program through December 31, 2014.  The definition of an "act of terrorism" has been revised to include acts of domestic terrorism, which were excluded in previous versions of TRIA.  The issue of noncertified acts of terrorism remains an important consideration. Although coverage through TRIPRA removes any exclusion to the extent the act of terrorism is certified, some property insurers add exclusionary language related to noncertified terrorism coverage.  The Standard Fire Policy (SFP)—mandated by statutes in 29 states—may, in some circumstances, provide coverage from losses if they arise from a fire caused by a terrorist attack. Property Terrorism Insurance Purchasing in 2009  Sixty-one percent of companies purchased property terrorism insurance in 2009.  Utility, real estate, health care, transportation, financial institutions, and media companies purchased property terrorism insurance at higher rates than other industry segments in 2009, with take-up rates exceeding 70 percent in these sectors.  The median premium rate for terrorism insurance was down from $37 per million (0.0037 percent) in 2008 to $25 per million (0.0025 percent) in 2009.

 Construction, hospitality, utility, and real estate companies experienced the highest median premium rates for terrorism insurance in 2009, exceeding $50 per million of TIV.  When looking at terrorism insurance pricing as a percentage of overall property premiums, financial institutions and transportation companies paid the largest share, allocating 24 percent and 17 percent of their total property programs, respectively. Hospitality firms saw significant decreases in the percentage of property premium paid for terrorism, down from 13 percent in 2008 to 4 percent in 2009.

The Standalone Insurance Market
 Capacity in the standalone terrorism insurance market has grown considerably over the years; insurers now offer a theoretical maximum of $3.76 billion in capacity.  The standalone property terrorism insurance market offers coverage for both TRIA-certified and noncertified risks and enables companies to tailor capacity to their coverage needs.  Approximately $750 million to $2 billion per risk in standalone capacity is available to companies that do not have sizeable exposures in locations where insurers have aggregation problems. Capacity excess of $2 billion is available but is more expensive.  For locations where markets have aggregation issues the estimated market capacity is approximately $1 billion; additional capacity can be accessed at significantly higher rates.

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Workers' Compensation and Liability Coverages
 Insurers and qualified self-insured employers cannot exclude coverage for acts of terrorism from workers’ compensation policies.  Because workers’ compensation provides lifetime medical care for on-the-job injuries, some computer models project that the “worst-case” cost of a terrorism incident could exceed $90 billion. In contrast, some experts put the total workers’ compensation capacity for the entire insurance marketplace at $30 billion.  The National Council on Compensation Insurance (NCCI) approved the “Domestic Terrorism, Earthquakes, and Catastrophic Industrial Accidents Premium Endorsement (DTEC)” for workers’ compensation, which took effect January 1, 2005. It provides funding for some catastrophic losses, including acts of terrorism specifically excluded by TRIA, but not for TRIA-certified acts of terrorism.  In 2009, the percentage of clients that purchased TRIA general liability (GL) coverage appears to have dipped to just above 50 percent. The actual rate— charged as a percentage of premium for the overall coverage—held steady at about 1 percent.

 Most reinsurers have identified a limited portion of their risk capital to make available to cover terrorism exposures and typically prefer to manage terror risk by offering terrorism coverage in a standalone contract rather than offering coverage within a normal “all-risk” catastrophe treaty, especially for insurers writing a national portfolio.  An estimated $700 million of per-occurrence coverage is available. For certain programs, notably workers’ compensation programs where the terrorism exposure is limited to a single state, it is feasible to secure more than $1 billion of capacity.  Compared to natural perils such as hurricane or earthquake, terrorism modeling is still young and untested. Quantifying the economic and human losses from an act of terrorism continues to pose major challenges for insurers and reinsurers.

Captives: Opportunities and Considerations
 Captive insurers that issue direct policies and otherwise meet the definition of a “qualified insurer” must make available coverage for insured losses resulting from an act of terrorism as defined under TRIA.  Using a captive to insure an organization’s exposures against acts of terrorism can be a viable, cost-efficient alternative to traditional property programs including terrorism.  There are several key areas of opportunity to enhance TRIA coverage via use of a captive. Because property policies typically exclude these coverages or because costs of insuring such risks are generally prohibitive, using a captive to provide the coverages can be particularly beneficial.

TRIA, U.S. Terrorism, and International Terrorism: Effect on the Insurance and Reinsurance Markets
 Commercial insurers continue to avoid accumulating high-profile urban exposures due to the residual risk for terror events retained by insurers below the triggers and retentions levels set by TRIPRA, coupled with the relatively high cost of reinsurance in key exposure zones.  The Act’s design results in a number of gaps in reinsurance protection for insurers, including personal lines insurance; the deductible, co-pay share, and event trigger for TRIA-certified events; and nuclear, chemical, biological, and radiological (NCBR), depending on primary policy coverage (many traditional property policies exclude the nuclear and radiation risks).

International Terrorism and Political Violence Insurance
 The standalone terrorism insurance market can offer coverage for assets in countries where the insured’s risks are located (subject to certain country limitations), “high-risk” countries, and/or countries where terrorism insurance is required by the lender or mortgagee.

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 In situations where property insurance is extended to include coverage in accordance with the local pool, any standalone terrorism policy will be on a difference in conditions (DIC) or difference in conditions and difference in limits (DIC/DIL) basis.  Political violence policies are designed to respond to a broader class of perils in developing countries than only terrorism.  Standalone political violence program limits of between US$100 million and US$500 million are commonplace. Within a terrorism insurance program, political violence sublimits ranging between US$50 million and US$200 million are becoming more common.

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3
Term Official Legislative Name Coverage

An Overview of the Terrorism Risk Insurance Act (TRIA)

January 1, 2008—December 31, 2014 Terrorism Risk Insurance Program Reauthorization Act of 2007 (TRIPRA). The extension eliminates the distinction between acts of foreign or domestic terrorism.

January 1, 2006— December 31, 2007 Terrorism Risk Insurance Extension Act of 2005 (TRIA). 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. U.S. only. $5 million $50 million in 2006, $100 million in 2007 17.5% in 2006, 20% in 2007—applied against prior year direct earned premium. 90% in 2006, 85% in 2007

November 26, 2002— December 31, 2005 Terrorism Risk Insurance Act of 2002 (TRIA). 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. U.S. only. $5 million $5 million 7% in 2003, 10% in 2004, 15% in 2005—applied against prior year direct earned premium. 90%

Territory Certification Federal Backstop Trigger Insurer Retention

U.S. only. $5 million $100 million 20%—applied against prior year direct earned premium.

Government Share-Excess of Retention Recoupment/ Pay-Go

85%

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.

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TRIA was first enacted on November 26, 2002, after the September 11, 2001, terrorist attacks created a severe market shortage for terrorism insurance. It has since been extended two times, in December 2005 and again in December 2007 as the Terrorism Risk Insurance Program Reauthorization Act of 2007 (TRIPRA). For the purposes of this report, TRIA may be referred to as TRIA, TRIPRA, or the Act. In instances where it is necessary to distinguish between the three, the accompanying text will do so. TRIA contains a make-available provision, which means insurers—including captives licensed in the United States and surplus lines insurers approved as nonadmitted insurers in any state—must make TRIA terrorism insurance coverage available to their clients. Although it is mandatory for insurers to offer terrorism coverage, it is not mandatory for insureds to purchase the coverage. There have been some changes to the Act during its two extensions, as illustrated on the previous page. The most significant change in TRIPRA is that the definition of an “act of terrorism” has been revised. The requirement that an act be committed by an individual on behalf of any foreign person or foreign interest in order for it to be certified as an “act of terrorism” for purposes of reimbursement has been removed. In other words, TRIPRA covers domestic terrorism, which was excluded in previous versions of TRIA. A distinction remains between acts that are certified and noncertified. The full definition of a certified act of terrorism is: A. “Certification – The term “act of terrorism” means any act that is certified by the Secretary of the Treasury, the Secretary of State, and the Attorney General of the United States: i. ii. to be an act of terrorism; to be a violent act or an act that is dangerous to human life, property, or infrastructure; to have resulted in damage within the United States, or outside the United States in the case of an air carrier or vessel (as described in the Act); or the premises of a United States mission; and

iv.

to have been committed by an individual or individuals, as part of an effort to coerce the civilian population of the United States or to influence the policy or affect the conduct of the U.S. government by coercion.

B. No act shall be certified by the Secretary as an act of terrorism if: i. the act is committed as part of the course of a war declared by the Congress, except that this clause shall not apply with respect to any coverage for workers’ compensation; or property and casualty losses resulting from the Act, in the aggregate, do not exceed the $5 million threshold.”

ii.

The issue of noncertified acts of terrorism remains an important consideration. While coverage through TRIPRA removes any exclusion to the extent the act of terrorism is certified, some property insurers add exclusionary language related to noncertified terrorism coverage. Noncertified terrorism coverage can provide protection for:  events that are not intended to coerce the civilian population or to influence the policy or affect the conduct of the U.S. government by coercion (for example, animal rights attacks and/or where an individual or corporation is the target and not the public);  events that take place outside of large civilian centers where a very limited section of the public may be the target—such as a group of employees— and not the civilian population in general;  acts of terrorism with less than $5 million in insured losses across all lines of insurance and from all insurers; and  events that are not certified by the Secretary of the Treasury, Secretary of State, and the Attorney General of the United States.

iii.

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The following are some other key issues under TRIA: Trigger and threshold: To clarify how the trigger and the threshold work, the amount necessary for certification of an act is $5 million, but any outlay of federal funds is prohibited unless the event reaches the trigger of $100 million. Cost of coverage: The Act does not provide specific guidance on pricing; however, insurers may charge an additional premium for coverage provided under TRIA. TRIA preempts state regulations for prior approval of rates. Still, TRIA retains a state’s right to invalidate a rate as excessive, inadequate, or unfairly discriminatory. Terms and conditions: Insurers are required to make coverage for “certified acts” available to their policyholders on terms and conditions that do not materially differ from the policy’s other property and/ or casualty coverages. Insurers are also required to offer the coverage at each renewal, even if the insured declined coverage previously. TRIA does not require insurers to offer specific terms and conditions for required coverages. Adequate disclosure: TRIA requires insurers to provide their policyholders with “clear and conspicuous” disclosure of both the premium being charged for TRIA coverage and the share of reinsurance provided by the federal government. If the insured rejects an offer to purchase terrorism coverage, the insurer may reinstate a terrorism exclusion. Government participation: The federal government will cover 85 percent of certified losses once an insurer’s deductible is reached. An individual insurer’s deductible is a percentage of its direct earned premium (DEP) for the prior year for the commercial lines of coverage subject to TRIA; the percentage is set at 20 percent. TRIA caps the total liability of the program and of insurers—including the insurers’ participation and deductibles—at $100 billion in any one program year. If insured losses exceed $100 billion, then the allocation of loss compensation to insurers within the $100 billion cap will be determined by Congress. Insurers would not be liable for certified losses in excess of this amount unless Congress were to pass legislation increasing the limit.

Government recoupment: TRIA includes provisions for both mandatory and discretionary recoupment if the government makes payments following a TRIA- certified loss. For any program year beginning with 2008 through 2014, the insurance marketplace aggregate retention amount is the lesser of $27.5 billion and the aggregate amount, for all insurers, of insured losses from program trigger events during the program year.

Standard Fire Policy (SFP) Statutes
The Standard Fire Policy (SFP) is mandated by statutes in 29 states to cover direct losses from fire and lightning (see “SFP States”). It sets forth the conditions under which such a loss is deemed to have occurred. In some situations where terrorism is excluded under a property policy covering the peril of fire, the issue is whether losses are covered if they arise from a fire caused by a terrorist attack.

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.

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Regulators would likely consider any attempt to waive the SFP’s substantive protections to be a violation of public policy, rendering them unenforceable. Any diminution in coverage—specifically, any restriction in fire coverage—may be declared null and void by the states. These statutes provide for an only actual-cash-value recovery; there is no time-element protection. In effect, if an insured’s policy contains an exclusion for terrorism or if the insured decides not to purchase TRIA coverage, the SFP law for property in these 29 states may offer some protection to insureds, although 14 of these—Arizona, Connecticut, Idaho, Louisiana, Michigan, Minnesota, Nebraska, New Hampshire, New Jersey, North Dakota, Oklahoma, Pennsylvania, Rhode Island, and Virginia—have passed legislation to exclude acts of terrorism. An SFP state could compel the insurer to pay for the direct damage from a fire caused by an act of terrorism on an actual-cash-value basis, despite the presence of a terrorism exclusion in the insuring agreement. Insurers argue that it is unfair for them to remain potentially liable under statues for so-called fire-following losses when policyholders can reject TRIA or other terrorism coverage and pay no premium for fire-following coverage.

SFP States
The Standard Fire Policy is mandated in the following states: Alaska (personal lines only) Arizona* California Connecticut* Georgia Hawaii Idaho* Illinois Iowa Louisiana* Maine Massachusetts Michigan* Minnesota* Missouri *This state has passed legislation to exclude (or allow insurers to exclude) acts of terrorism from SFP policies. Nebraska* New Hampshire* New Jersey* New York North Carolina North Dakota* Oklahoma* Oregon Pennsylvania* Rhode Island* Virginia* Washington West Virginia Wisconsin

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4

Findings and Analysis: Property Terrorism Purchasing in 2009

The terrorism insurance market is robust and continues to support insureds’ risk transfer needs. The percentage of companies buying property terrorism insurance—the terrorism insurance take-up rate—has generally increased since the enactment of TRIA in 2002. In 2003 the take-up rate was 27 percent; over the subsequent years the number of companies purchasing terrorism increased steadily to 61 percent in 2009 (see Chart 1).

 Companies with TIV between $100 million and $500 million tend to have no more than three insurers involved in their insurance programs.  Companies with TIV less than $100 million generally entail a smaller spread of risk, have lower overall premiums, and work with a single insurer.

Chart 2: Terrorism Take-up Rates by TIV
2007
61% 61% 63%

2008
63%

2009
61% 62% 65% 62% 64%

Chart 1: Terrorism Take-up Rates by Year
2003 2004 2005 2006 2007 2008 2009
27% 49% 58% 59% 59% 57% 61%
47% 49% 55%

<$100 m

$100m - $500m $500m - $1b

>$1b

Take-up Rates by Company Size
Marsh established four categories of total insured value (TIV) as the measure of company size to aid in our analysis:  Companies with TIV in excess of $1 billion are major accounts for insurers, paying large premiums. They typically work with several insurers. A number of these companies used their existing captives or established new captive insurers to provide TRIA coverage.  Companies with TIV between $500 million and $1 billion are large organizations that typically work with multiple insurers and have layered programs. Changes in take-up rates analyzed by company size were marginal in the years 2007 through 2009. The take-up rates for smaller companies—i.e., companies with TIV under $100 million—continued to increase gradually from 47 percent in 2007 to 55 percent in 2009. This 2009 take-up rate is lower compared to larger companies: 62 percent to 64 percent of which purchase terrorism insurance. Take-up rates for companies with TIV between $100 million and $500 million increased nominally, while companies with TIV in excess of $500 million fluctuated slightly during the same time period.

%

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Take-up Rates by Industry
According to Marsh’s analysis, utility companies purchased property terrorism insurance at a higher rate than any other industry segment in 2009: 80 percent of companies did so. Analyzing the data by industry segments, companies in the real estate, health care, transportation, financial institutions, and media sectors have take-up rates above 70 percent, the highest of the 15 segments surveyed.

Conversely, take-up rates among energy and food and beverage companies have steadily declined during the three-year period 2007 to 2009. Only approximately four out of every 10 companies in these sectors purchased terrorism insurance in 2009. Manufacturing is the only industry whose take-up rate did not exceed 50 percent at all during the last three years (see Chart 3).

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

Chart 3: Terrorism Take-up Rates by Industry
2007 Utility
73%

2008

2009
81% 80%

Real Estate Health Care Transportation Financial Institutions Media Hospitality Education Technology/Telecom Public Entity Retail Construction Manufacturing Food & Beverage Energy

80% 73% 76% 71% 75% 76% 62% 64%

75%

 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, 1.0 and Internet service providers  Transportation: trucking and bus companies
0.8 0.6

73% 68% 74% 64% 71% 71%

69% 67% 68% 71% 69% 65% 63% 61% 61% 61% 55% 61% 58% 54% 60% 47% 49% 52% 45% 43% 47% 51% 53% 66% 62%

 Utility: public and private gas, electric, and water utilities 0.4
0.2 0.0

42%

40%

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Take-up Rates by Region
In 2009, property terrorism insurance take-up rates rose most significantly in the Northeast, increased slightly in South and West, and remained flat in the Midwest. Interestingly, less than 50 percent of companies in the West purchased terrorism insurance over the past two years (2008 and 2009); the lowest take-up rates among the four U.S. zones analyzed (see Chart 4). The Northeast still has the largest percent of companies purchasing property terrorism insurance, with nearly three out of every four companies buying coverage.

coverage and noncertified acts coverage. However, because the passing of TRIPRA in 2007 expanded the definition of covered acts to included domestic terrorist events, many companies have elected not to purchase noncertified terrorism insurance in addition to purchasing TRIA as part of their property policies. (see Chapter 3 for a discussion regarding noncertified acts under TRIPRA). More companies are securing terrorism insurance through their captives and are purchasing reinsurance to cover their retention or liability under TRIA. Typically, those captives that do purchase reinsurance also often buy coverage for the noncertified terrorism exposures.

Chart 4: Terrorism Take-up Rates by Region
2007
71% 66% 58% 60% 60% 55% 55% 58% 51% 44% 47% 73%

The Cost of Terrorism Coverage
We measured the cost of terrorism coverage both as a premium rate—premium divided by TIV—and as a percentage of a company’s overall property premium. Using premium rate allows companies to track what they paid in absolute terms; percentage of overall premium shows how terrorism coverage affected a company’s overall property insurance budget. The cost of property terrorism insurance has fallen gradually over the years, with a more significant drop in 2009. The median premium rate for terrorism insurance was down from $37 per million (0.0037 percent) in 2008 to $25 per million (0.0025 percent) in 2009.

2008

2009

Midwest

Northeast

South

West

Cost by Company Size Types of Coverage Companies Are Buying
The vast majority of Marsh’s clients—approximately 90 percent—purchased their terrorism insurance as part of their property policies rather than as standalone placements. However, standalone policies are an important alternative and/or supplement to TRIA coverage for some companies. The primary purchasers of standalone policies have been hospitality companies, large real estate firms, and financial institutions. Retail companies, media entities, transportation, public entities, and utilities also purchased standalone terrorism policies; however, in lesser amounts. Prior to the last extension, when companies purchased terrorism coverage as part of their property policies, they generally purchased both TRIA Property terrorism insurance rates typically decrease as the size of the company increases (see Chart 5). Companies with TIV less than $100 million experienced moderate median rate decreases in price, from 0.0054 percent of TIV or $54 per million in 2008 to 0.0053 percent or $53 per million in 2009, and their terrorism premium rates remained relatively higher than those of larger companies. Companies with TIV between $100 million and $500 million saw median rates decrease from $36 per million in 2008 to $32 per million in 2009. Businesses with TIV between $500 million and $1 billion were the only segment to experience a median rate increase, albeit a small one: premium rates in 2009 were $29 per million, up slightly from $27 per million in 2008. For the largest companies, those with TIV more than $1 billion, the median rates remained flat at $27 per million.

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Chart 5: Terrorism Pricing Median Rates by TIV (Rates per Million)
2007
$63 $54 $53 $40

Cost by Industry
Compared to last year’s rates, 2009 property terrorism insurance premium rates by industry show median rate decreases for 11 of the 15 industry categories: construction, utility, financial institutions, transportation, energy, media, public entity, food and beverage, manufacturing, health care, and education. Rates increased significantly for real estate companies, moderately for hospitality and technology/ telecommunications firms, and remained flat for retail organizations (see Chart 7).

2008

2009

$36

$32

$29 $27 $29

$28 $27 $27

<$100m

$100m - $500m $500m - $1b

>$1b

Chart 7: Terrorism Pricing Median Rates by Industry (Rates per Million)
2008 2009
$76

$65

$59

$62

When examining cost as a percentage of overall property premiums (see Chart 6), 2009 saw increases for companies of all sizes, except those with TIV between $100 million and $500 million. This indicates that the cost for terrorism coverage generally increased disproportionately with the overall property market rate changes experienced during 2009. Companies with TIV less than $100 $76 million experienced the largest increase, as terrorism insurance represents a larger proportion of their overall property programs than it does for larger organizations. Also, terrorism insurance rates do not tend to have as wide a range as property rates and are less subject to credits for higher retentions and loss-control efforts. Thus, terrorism insurance represented a larger share of the overall property premium budget for the smaller companies.

Construction
$65

Hospitality Utility

$54 $55 $51 $59

Real Estate Financial Institutions

$42

$50 $47 $62 $74

Transportation
$46

Energy
$35

$50

$74

Media
$30

$46

Chart 6: Terrorism Pricing as Percentage of Property Premium by TIV
2007
22% 16%

Technology/Telecom Retail Public Entity

$24

$29

2008

2009

$26 $26 $25 $30 $36

14% 11% 7% 8% 8%

Food & Beverage
$24

4%

6% 5%

6% 5%

Manufacturing
$23

$29

<$100m

$100m - $500m $500m - $1b

>$1b

Health Care
$19

$25

Education
$16

$23

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Construction, hospitality, utility, and real estate companies experienced the highest median premium rates for terrorism insurance in 2009, exceeding $50 per million of TIV. Rates decreased most dramatically for transportation, from $74 per million in 2008 to $46 per million of TIV in 2009. Media and energy companies also experienced significant reductions in median rates, reductions greater than 30 percent over 2008.

Chart 8: Terrorism Pricing as Percentage of Property Premium by Industry
2008 Financial Institutions Transportation Real Estate Retail Media Public Entity 2009
14%

When looking at terrorism insurance pricing as a percentage of overall property premiums, financial institutions and transportation companies paid the largest share, allocating 24 percent and 17 percent of their total property programs, respectively. This represents the largest increase as a percentage of total property cost among all industry groups. Retail and real estate companies also paid a larger percentage of their total premiums for terrorism at 10 percent each. Hospitality firms saw significant decreases in the percentage of property premium paid for terrorism, down from 13 percent in 2008 to 4 percent in 2009 (see Chart 8).

Cost by Region
24%

11%

17%

6%

10%

6%

10% 8% 8%

5%

The West region experienced the largest price decreases in 2009, followed by the Midwest then the Northeast. The South saw only marginal rate deceases between 2008 and 2009. However, the overall rate reduction for the period 2007 to 2009 was greater for the Midwest than for any other region—premium rates decreased from or $47 per million in 2007 to $21 per million in 2009. Terrorism insurance is the most expensive in the South and the Northeast, based on premium rate (see Chart 9), although the variation by region has narrowed.

2008 2009
2008

7%

Manufacturing

6% 6%

Technology/Telecom
6% 5%

Chart 9: Terrorism Pricing Median Rates by Region (Rates per Million)
2007 2008
$47 $41 $42 $36 $28 $21 $40 $38

2009
$44

Education
5%

8%

$47

Health Care Utility

$40 $30

4% 5% 7%

5%

Hospitality
4%

2009
13%

Energy

Midwest

Northeast

South

West

2% 3% 3% 3%

Construction Food & Beverage
2% 4%

Terrorism pricing as a percentage of property premium varies in the four U.S. zones are analyzed. Terrorism accounts for only an average of 3 percent of total property premiums for companies in the Midwest and West, compared to 5 percent and 6 percent in the

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South and Northeast, respectively. Much of this can be explained by the terrorism exposures faced by companies in these regions. Companies in major metropolitan areas—New York, Washington, DC, and Boston, for example—are likely to pay a higher premium for their terrorism coverage, which results in a larger percentage of their overall property insurance costs dedicated to terrorism.

Chart 10: Terrorism Pricing as Percentage of Property Premium by Region
2007
6% 5% 5% 4% 4% 3% 3% 3% 5% 4% 4% 3%

2008

2009

It was expected that the economic downturn experienced in 2008 and 2009 would have affected how companies budget for their overall insurance programs, and that terrorism insurance would likely be cut back in an effort to generate cost savings. Surprisingly, this did not happen at the magnitude some had predicted. Despite a changing and uncertain marketplace, terrorism insurance take-up rates continued to climb during 2009 as companies of all sizes and in all industries across the United States continued to purchase the coverage. Most companies that purchased terrorism insurance in the past continue to do so as markets continue to underwrite the risk, with the support of the TRIA federal backstop. The reauthorization of TRIA through 2014 has afforded needed capacity in the market for terrorism insurance. Property insurers are able to include terrorism insurance in their risk portfolios at nominal rates to insureds. Clearly, the demand for terrorism risk insurance remains.

Midwest

Northeast

South

West

Conclusion In 2009, property terrorism insurance rates generally decreased across the board. The property insurance market remained virtually flat, due in large part to a lack of significant catastrophic losses in 2009. Premium rates did increase for certain risks, however, and some companies with significant exposures to those particular risks experienced similar increases in their terrorism insurance rates. First quarter 2010 premium rates for both property and terrorism insurance typically renewed with slight decreases. It is important to note, however, that a number of natural catastrophes occurred in the first few months of 2010—notably a series of significant earthquakes. Although much of the losses from these events were not insured—thus not affecting insurers’ surplus—it remains to be seen whether the events will put an upward pressure on property rates. If there are relatively few significant losses from natural catastrophe or terrorism events in the rest of 2010, the insurance market may moderate and keep property rates flat or near flat.

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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 TIV Property Premium Terrorism Premium $75,000 $1,059 $1 Median $303 million $295,755 $9,541 Maximum $303 billion $56 million $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.

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5 4

The Standalone Terrorism Marketplace

After the attacks of September 11, 2001, and prior to the enactment of TRIA, the standalone terrorism insurance market was the main source of capacity for companies looking to obtain property terrorism insurance. Mainstream property insurers were generally unwilling or unable to provide the coverage. Today, the standalone insurance market continues to provide terrorism coverage, at times competing with “all risk” property insurers that provide TRIA coverage and at other times complementing the coverage provided by TRIA. Standalone insurance markets also serve companies whose needs are not met by the Act. For example, in situations where the “all risk” program terrorism limits cannot be filled by “all risk” markets, then the standalone insurance market may offer alternative capacity. Capacity in the standalone terrorism insurance market has grown considerably over the years; insurers now offer a theoretical maximum of $3.76 billion in capacity. The standalone property terrorism insurance market offers coverage for both TRIA-certified and noncertified risks and enables companies to tailor the capacity to their coverage needs. Other features of this insurance alternative include the following:  Coverage for noncertified risks: Some companies buy TRIA-certified terrorism coverage within their “all risk” property programs to cover U.S. locations and use a standalone policy for noncertified risks.  Coverage for gaps in other policies: In situations where the “all risk” program limits cannot be filled by “all risk” markets—typically, for noncertified risks—the standalone insurance market can be used to fill gaps in limits.

 Coverage for international locations: Standalone coverage, unlike TRIA coverage, is available for most locations worldwide. Companies with overseas exposures often look to the standalone market to provide solutions not satisfied by local government terrorism insurance schemes (see Chapter 9 for a list of worldwide pools).  Reinsurance of U.S.-domiciled captives for TRIA-certified terrorism: Some of the standalone insurance markets offer policies to reinsurance captives for the captive deductible—the 15 percent of TRIA-certified losses that are not covered by the federal government once the captive insurer’s deductible is reached—and the liability resulting from TRIPRA’s $100 million trigger.  Noncancelable coverage: Standalone policies that cannot be canceled by either party—other than for nonpayment of premium—are available.

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Standalone Terrorism Global Market Capacity as of Q2 2010
The standalone property terrorism insurance market as of the second quarter of 2010 has a number of insurers as follows:
Insurer (Company) ACE American Insurance Company Aspen Specialty Insurance Company AXIS Specialty Limited Chartis Glacier Reinsurance AG Hiscox Insurance Company, Inc. International Insurance Company of Hannover Lancashire Insurance Company Limited Lloyd's of London Montpelier Reinsurance Limited National Fire & Marine Insurance Company Transatlantic Reinsurance Company Validus Re Western Re/Managers Inc. Westport Insurance Company * as of April 1, 2010 S&P Rating A+ A+ A+ AAA+ AAA+ A+ A+ A+ A.M. BEST Rating A+ p XV A g XV A XV A p XV A- IX A VII A VIII A- XII A XV A- XIII A++ g u XV A g XV A- XIV A XV A g XV Maximum Capacity (US$ millions)* 25 30 150 250 - 1,000 40 100 25 200 900 50 1,000+ 50 50 100 40 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.

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Market Underwriting Position
Standalone rates can at times be more competitive than the pricing of embedded terrorism in property programs. In the standalone property terrorism market, capacity—the limit of coverage that is available for a single risk—is relatively stable, but it can vary considerably, primarily due to:  Location of risk: The demand for coverage in major metropolitan areas has a substantial effect on the available capacity.  Insurer’s accumulation of exposure: Insurers have aggregate limits on the risks they can take. Capacity can be limited in certain locations, particularly in major metropolitan areas such as New York City, where some underwriters currently have severe aggregation issues.  Concentration of exposure: Terrorists attack targets of opportunity. Although it is certainly possible that an attack could occur anywhere— including a remote town or shopping mall— demand for coverage will likely be higher in metropolitan areas simply because there is a greater concentration of exposures.  Market Capacity: – apacity has increased significantly for C exposures outside central business districts (CBD). – Approximately $750 million to $2 billion per risk in standalone capacity is available to companies that do not have sizeable exposures in locations where insurers have aggregation problems. Capacity excess of $2 billion is available, but is more expensive. – For locations where markets have aggregation issues—particularly New York City—the estimated market capacity is approximately $1 billion: additional capacity can be accessed at significantly higher rates.  Bowring Marsh operates a Worldwide Terrorism Facility with 13 Lloyd’s syndicates that provides up to $250 million of capacity for worldwide terrorism property damage and business interruption coverage. The facility is designed to accept terrorism risks for metropolitan city centers.

 Chartis/Lexington offers coverage for U.S. domestic locations as well as foreign locations. Lexington has increased capacity for U.S. domestic terrorism insurance, up to a theoretical policy limit of $1 billion, which is available on a case-by-case basis.  ACE continues to restrict its standalone terrorism capacity to accounts in which it has a significant property position. Their position is to support the ACE Global Property branches for foreign exposures only.  Monitoring of aggregates is a priority for all insurers. Capacity in top-tier cities is priced accordingly.  Marsh is able to secure manuscript contingent business interruption cover including first and third party assets with extensions for port blockage, rail infrastructure, and power supply.

Coverage Issues
All standalone markets use the T3/T3A policy forms. Some markets will support a Marsh enhanced T4/ T4A form. A manuscript terrorism form from Marsh is available from some markets. The chart on page 20 compares some of the characteristics of standalone coverage and TRIA coverage. (Marsh would have to undertake a complete review of any form issued to provide a detailed comparison of coverage.)

Product Enhancements
The following are among those developed by standalone property terrorism insurers:  Chartis/Lexington's BioChem ShieldSM can offer a sublimit of up to $25 million aggregate for biological/chemical terrorism; this excludes nuclear or radiological terrorism. It is offered as an endorsement to a standalone terrorism policy or to a company’s “all-risk” program.  Chartis/Lexington's Op ShieldSM covers business interruption and extra expense losses triggered by a civil or military authority order to evacuate that arises from either a terrorist act or a threat of terrorism. It is offered as an endorsement to a standalone terrorism policy or to an insured’s “all-risk” program. Lexington can offer a sublimit of up to $25 million aggregate. There is a 72-hour waiting period and the indemnity period is limited to 30 days.

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 Hiscox at Lloyd's Liability Terrorism Insurance covers damages and claims expenses that the insured is liable to pay due to any claim or claims for bodily injury and/or property damage. The policy includes defense cost expenses. The limit available is between $50 million and $100 million aggregate. This is a claims made and reported policy. The reporting provision is as soon as reasonably possible and in no event longer than 90 days after the expiry of the policy. A 72-hour occurrence clause applies.  Lloyd's of London's Riots, Strikes, Civil Commotions, and Malicious Damage covers insured property damage or business interruption losses caused by an act or series of acts of riots and/or strikes and/or civil commotions and/or malicious damage. A 72-hour occurrence clause applies.  Catlin Bermuda Worldwide NCBR Terrorism Cover provides nuclear, chemical, biological, and radiological (NCBR) coverage for individual locations or a specific state. For individual locations, the specific ZIP code of the property and a radius around this ZIP code is required. This product is available to individual commercial purchasers or by insurers desiring to remove peak risks.

The state-specific solution offers coverage for losses incurred due to an NCBR terrorist event in a specific state so long as the event is deemed to have originated in the named state. This NCBR solution is offered for several insurance lines—including property damage, business interruption losses, and workers’ compensation—and pricing is based on the product covered as well as the perceived probability in the specific ZIP code or state.

Comparison of Typical Standalone Coverage and TRIA Coverage
Standalone Property Terrorism Covers acts of certified and noncertified acts of terrorism and can be extended to cover political violence perils. Can cover locations inside and outside the United States. Limits are typically aggregated or with one reinstatement; occurrence limits may be available. Account- and terrorism-specific deductibles. Location- and schedule-specific. Non-cancelable policy available. Long-term policies up to three years available. Select insurance markets. TRIA as Part of "All-Risk" Property Covers certified foreign and domestic acts of terrorism. Covers only U.S. locations. Per-occurrence limits that match property policy limits. Deductibles match property policy deductibles. Coverage for all locations, including unscheduled, depending on terms of property policy. Cancelable terms follow property policy. Policies typically written for one year. All markets that meet insurer definition under TRIA.

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6

Workers' Compensation and Liability Coverages

Workers' Compensation
Largely because it is controlled by the states, which have not allowed exclusions for terrorism losses, workers’ compensation presents unique challenges to insurers, brokers, and risk managers. Insurers and qualified self-insured employers cannot exclude coverage for acts of terrorism from workers’ compensation policies as they can with other insurance lines. Nearly all states require employers or insurers to pay medical costs and wage replacement without limits or exclusions for workers injured on the job. Workers’ compensation provides lifetime medical care for on-the-job injuries, leading some computer models to project that the “worst-case” cost of a terrorism incident could exceed $90 billion. In contrast, some experts put the total workers’ compensation capacity for the entire insurance marketplace at $30 billion. Risk managers should be aware that insurers carefully calculate and try to limit their exposures to high concentrations of risk. Multiline insurers are particularly sensitive to site-specific accumulations of risk. As a result, care should be taken to obtain insurance-market alternatives for workers’ compensation programs that are likely to be affected should a terror event occur. Even where the insurer renews, insureds should be wary of larger retentions, accompanied by increasing amounts of collateral to support those retentions. TRIA’s limitation to certified acts of terrorism has prompted state regulators and insurers to pay more attention to finding premium mechanisms for noncertified acts of terrorism. Despite improved modeling, the frequency and severity of terrorism risk remains difficult to adequately assess, especially when compared to other potential catastrophic losses (i.e., windstorm or earthquake).

Historically, rate makers included a small, undifferentiated charge for potential catastrophic losses in their overall rates. Pursuing a more explicit approach, the National Council on Compensation Insurance (NCCI) approved the “Domestic Terrorism, Earthquakes, and Catastrophic Industrial Accidents Premium Endorsement (DTEC)” for workers’ compensation, which took effect January 1, 2005. The endorsement simply reflects the revised definition of terrorism to include domestic events and the disclosure of the $100 billion cap. It provides funding for some catastrophic losses, including acts of terrorism specifically excluded by TRIA, but not for TRIA-certified acts of terrorism. The endorsement defines a $50 million loss aggregate threshold for workers’ compensation for:  all acts of terrorism outside the scope of TRIA;  earthquake—defined as a single event involving underground movement along a fault plane—or volcanic activity; and  catastrophic industrial accident, which qualifies if a single event results in the losses. The premium for this endorsement is calculated as rate multiplied by payroll and is applied after the standard premium. It is not, however, subject to any other modifications such as premium discount, experience rating, schedule rating, or retrospective rating.

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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.

Although insurers’ liabilities increased under TRIPRA—the 2007 extension stipulates larger insurer retentions, increased deductibles, and an increase in the trigger, for example—the effect on the general liability insurance market has been limited. Major questions still loom, however, including whether TRIA risks can be quantified and predicted with sufficient accuracy to give comfort to the risk-based capital investors who sponsor both public and privately held insurers. The premium charges for TRIA for general liability (GL) policies have been relatively modest. As a result, insurance buyers have purchased TRIA coverage at similar take-up rates as those experienced in property. However, GL take-up rates have declined in recent years. Marsh’s benchmarking data show TRIA take-up rates for GL peaked in 2004-2005 at approximately 80 percent. In 2009, the percentage of clients that purchased TRIA GL coverage appears to have dipped to just above 50 percent. The actual rate—charged as a percentage of premium for the overall coverage— held steady at about 1 percent, implying that the reduction in the take-up rate was not driven by the cost of the coverage, but by the perceived risk. In fact, the widely varying perception of the risk on the part of insureds is one of the reasons often cited for the lack of universal acceptance of the coverage.

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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.

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7

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

Commercial insurers are strongly supportive of TRIA, as it provides them an ultimate safety net for their terrorism exposures. However, the residual risk for terror events retained by insurers below the triggers and retention levels set by TRIPRA, coupled with the relatively high cost of reinsurance in key exposure zones, means that insurers remain cautious about terrorism exposure. As a result, they continue to avoid accumulating high-profile urban exposures.

From insurers’ perspectives, a large, non-reinsured gap in TRIPRA terrorism exposure for the period 2007-2014 exists for certified acts in three areas: 1. 2. 3. Below the 20 percent deductible set by TRIPRA. Within the 15 percent virtually unlimited co-participation corridor above the deductible. In instances when an insurer’s direct exposure is disproportionally high relative to the minimum industry event trigger of $100 million. In such cases an insurer would be 100 percent exposed to any losses under the trigger.

Managing the Gaps in TRIA Coverage
TRIA provides high-level reinsurance protection to primary insurers for commercial insurance lines. The Act’s design results in a number of gaps in reinsurance protection for insurers. These gaps include:  personal lines insurance;  the deductible, co-pay share, and event trigger for TRIPRA-certified events; and  nuclear, chemical, biological, and radiological (NCBR), depending on primary policy coverage. Many traditional property policies exclude the nuclear and radiation risks. TRIA is a commercial lines program; therefore, personal lines policies of insurers are fully exposed to both TRIA-certified and noncertified acts of terrorism. In general, insurers have addressed these risks by having full terrorism—certified and noncertified—included in their personal lines property/catastrophe reinsurance programs, often excluding NCBR losses. This protection is frequently provided with no explicit cost breakout.

The Obama Administration’s proposed 2011 budget would reduce federal support for TRIA. While Marsh’s terrorism experts believe there is little appetite among policymakers to support such a reduction, it is important to note such a change likely would affect the terrorism insurance and reinsurance markets. Specifically, any reduction in federal TRIA support would likely increase insurance market uncertainty around terrorism risks and affect reinsurers’ appetites to provide coverage for them. It would also cause an increase in insurers’ deductible and co-share percentages, which in turn likely would increase the demand for terrorism reinsurance, possibly beyond current market capacity. Most cedents prefer to have commercial certified terrorism covered within their standard property and casualty reinsurance programs. Including such coverage in existing programs, however, can be expensive, depending on the location and values of the original insured terrorism policies. Another option for cedents is to purchase standalone terrorism reinsurance coverage. Pricing for such coverage has decreased in recent years, but overall activity levels for these standalone products have also declined.

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Most reinsurers have identified a limited portion of their risk capital to make available to cover terrorism exposures, given the challenges in underwriting, modeling, and pricing for terrorism relative to other catastrophic perils. As mentioned above, reinsurers typically prefer to manage terror risk by offering terrorism coverage in a standalone contract where they can monitor and control exposure, rather than offering coverage within a normal “all-risk” catastrophe treaty, especially for insurers writing a national portfolio. Some regional insurers with exposures limited to rural or suburban areas are seeking to secure close to full terrorism coverage within their reinsurance programs since they are more likely to be exposed to a gap in TRIA coverage, as noted above. Rating agencies are also paying increasing attention to the possibility that a regional insurer could have a large loss relative to its policyholder surplus without any protection from TRIA. Insurers that have not purchased standalone terrorism reinsurance cite the following factors: 1. Cedents’ target budget for catastrophe risk transfer is fully consumed by their current natural perils treaty(ies). Cedents are comfortable with the level of risk transfer for terrorism included within their current “all-perils” reinsurance contracts. There is an inability to pass along the full cost in primary insurance policies. There are limited capacity/limits available at affordable rates, depending on the location of the original insured terrorism policies. They feel that exposure concentrations are controlled and/or are limited, particularly for clients with little exposure in targeted urban centers. They are comfortable with the protections provided under TRIPRA. There is little coverage available for NCBR.

A growing concern in the insurance marketplace involves the more detailed questions asked by rating agencies—such as A.M. Best—regarding capital adequacy. A.M. Best now considers a cedent’s data quality; the frequency and severity of specifically defined terrorism scenarios, including their potential impact on the cedent’s surplus/capital after TRIPRA; and other inuring reinsurance. A host of data quality surcharges, city-specific probabilities, frequency multipliers, and even assigned workers’ compensation benefit levels are applied to an insurer’s combined line terror losses to generate a “terrorism charge” that can potentially be stress tested against their published A.M. Best’s Capital Adequacy Ratio (BCAR) and, in turn, impact their rating. With recent favorable earthquake CAT model changes, the likelihood that the “terrorism charge” could be higher than the natural catastrophe alternative—especially for workers’ compensation— has increased. As the A.M. Best methodology notably differs from standard probabilistic and deterministic terrorism CAT modeling output, it is important that insureds evaluate it, along with their own enterprise exposure evaluations, when considering underwriting guidelines and reinsurance protection. In workers’ compensation, most insurers—other than small regionals—incorporate some level of terrorism coverage into their corporate catastrophe programs. The most common structure is for insurers to add coverage for certified acts of terror, excluding NCBR, to their existing workers’ compensation catastrophe programs. Pricing and capacity for terrorism coverage have continued to improve over the past year, and more reinsurers are now willing to provide options for NCBR perils. Terrorism coverage is offered on both a per-occurrence and aggregate excess basis (exclusively on an aggregate basis if NCBR is covered). When clients add terrorism coverage, excluding NCBR, to an existing catastrophe program, reinsurers have priced the additional coverage as a surcharge above the natural perils pricing. This pricing has become more competitive, with reinsurers now charging 5 percent to 15 percent of additional premium. Cedants continue to offer terrorism insurance where they are required by law to do so, or where it is standard market practice; many provide local coverage on an admitted basis.

2.

3. 4.

5.

6. 7.

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Cedants continue to limit their offer to cover terrorism in most international territories where there is no local government-sponsored pool. Treaties also continue to exclude any coverage for international terrorism.

Capacity
In the current marketplace, up to $700 million of per-occurrence coverage is estimated to be available, although that figure may vary based on the location and severity of the original insured policies. For certain programs, notably workers’ compensation programs where the terrorism exposure is limited to a single state, it is feasible to secure more than $1 billion of capacity. Such capacity may expand or contract based on price, type of risk, and overall reinsurance market conditions. With reinsurer capital levels at historically high levels, the marketplace is approaching the peak of hypothetical capacity, however, we have yet to see demand to test that availability.

 Exposure-concentration analysis, also known as accumulation assessment, identifies and quantifies concentrations of exposures around potential terrorist targets as defined by the modeler. Target-based accumulation assessment locates potential targets—typically with high economic, human, and/or symbolic value—and aggregates an insurer’s exposures in and around various distances from these targets. An important variation of this analysis looks at an insurer’s largest exposure concentrations, independent of what any particular source defines as a target. Therefore, the scanning of clusters of multi-line exposure exceeding an economic threshold within a portfolio—irrespective of these perceived and defined targets—is essential. According to A.M. Best’s “terror charge” methodology, it is these largest of insured locations (differentiated by city) that can be potentially stress tested against published BCAR, regardless of their proximity to landmarks.  Deterministic modeling represents a compromise between the lack of accuracy in accumulation analysis and the vast uncertainty surrounding probabilistic models. By imposing an actual event’s damage “footprint” at a specified target, a specific— yet hypothetical—scenario can be analyzed with some certainty. Major modeling firms offer an array of deterministic-analysis tools for conventional and NCBR attacks at defined target and non-target locations. This approach can be effective where coarse screening studies show that exposures for an area or event could be high, and a detailed assessment may reduce uncertainties and help decision making. Relative to natural perils such as hurricane or earthquake, terrorism modeling is still young and untested. Insurers, reinsurers, and modeling companies are constantly learning, assessing and refining their models and the assumptions that underlay those models, thereby increasing their ability to manage terrorism risk in an educated and more quantitative fashion. Currently, deterministic, scenario-based testing is the most common tool used by insurers to assess their vulnerability to terrorism. Given the human and societal nature of the risk, it cannot be expected that the probability of terror events can be determined with the certainty needed to make critical risk management decisions.

Modeling Terrorism
Modeling methodologies have been continually refined and updated relative to the peril of terrorism. However, quantifying the economic and human losses from an act of terrorism continues to pose major challenges for insurers and reinsurers. A variety of approaches exist for insurers to model terrorism risk. Most models involve three techniques: 1. 2. 3. Producing probabilistic loss estimates. Conducting exposure-concentration analysis. Generating deterministic loss estimates.

 Probabilistic modeling, also known as catastrophe (CAT) modeling, estimates losses based on a large number of events. A key factor is the estimated frequency a modeler applies to all the possible events that could occur. The industry and rating agencies continue to question the credibility of probabilistic terrorism modeling as it requires predictions of human behavior. As a result, unlike hurricane and earthquake CAT modeling, little consideration is placed on probabilistic terrorism modeling.

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While terrorism modeling challenges remain, Guy Carpenter LLC, a Marsh sister company, helps insurers explore various terrorism loss scenarios and perspectives using a judgment-based multi-model approach that goes beyond purely probabilistic and/or deterministic modeling. And since terrorism model accuracy is highly dependent on the quality of the underlying data, which continues to evolve and improve, Guy Carpenter employs data quality benchmarking and refinement best practices is designed to ensure that the exposure and output contemplated is accurate for proper enterprise risk management.

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8 4

Captives: Opportunities and Considerations

TRIA serves as reinsurance for commercial property and casualty policies covering acts of terrorism that occur in the United States (including all territories and possessions or as defined by TRIPRA). Insurers that meet the requirements of the Act are obligated to offer terrorism coverage and must comply with specified reporting provisions. Utilizing a captive to insure an organization’s exposures against acts of terrorism can be a viable, cost-efficient alternative to traditional property programs. There are a number of considerations organizations must take into account when determining if it should use its captive to provide terrorism insurance. Guidance issued by the Department of Treasury states that TRIPRA applies to captive insurers (including risk retention groups) that meet the criteria of a qualified insurer. The criteria are contained in Section 102 of the Act, “Definition of Insurer.” Essentially, any entity that falls within the state licensed or admitted category and receives and reports direct earned premium is considered by the Department of Treasury to be an insurer under TRIA. Captives and risk retention groups are included to the extent that they are providing direct coverage only. Captives must be domiciled in the United States to be eligible for inclusion under TRIA. All references to “captives” in this document apply to U.S.-domiciled captives only.

Terrorism Captive Manuscript policy form that can be used to address additional coverages that are specific to terrorism risks. There are several key areas of opportunity to enhance TRIA coverage via use of a captive. Because property policies typically exclude these coverages or because costs of insuring such risks are generally prohibitive, using a captive to provide the following coverages can be particularly beneficial. – NCBR attack. This coverage is provided by TRIA, but an offering by insurers is not mandatory; therefore, it is not widely available in the open market. – Cyber-risk. This is typically excluded from property policies, meaning that coverage as a result of a terror attack is usually not provided. – Transmission and distribution (T&D) lines. Coverage for physical damage to T&D lines—or resulting time element losses as a result of damage to T&D lines—is typically excluded or restricted in property policies. – Contingent time element. Generally, policies have sublimits or coverage is limited under property policies. – Confiscation/Denial of Access. A coverage extension that is available to enhance the conventional and NCBR terrorism coverage for loss of value and consequential loss as a result of confiscation, including as a result of public order to destroy or demolish a building. This is not traditionally addressed by property policies. – Port/Airport Closure. Most traditional property policies do not offer coverage for time element loss incurred as the result of the closure of an airport or port. Such coverage is provided under Marsh’s terrorism manuscript form.

Advantages of Using a Captive to Access TRIA
 Premium savings. All premiums paid to the captive are retained by the organization.  Profit. In the event there are no losses, the captive income accrues positively to the consolidated net operating income of the parent.  Enhance Coverage. Opportunities to enhance coverage are also available. Marsh developed a

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Obligations of Captive Insurers
 Captive insurers that issue direct policies and otherwise meet the definition of a “qualified insurer” must make available coverage for insured losses resulting from an act of terrorism as defined under TRIA.  To the extent that terrorism coverage is offered as part of an existing policy, coverage that is extended for terrorism must not differ materially from the terms, amounts, and other coverage limitations applicable to losses from events other than terrorism. This does not, however, prohibit an insured from seeking TRIA-specific coverage in a separate transaction.  Captive insurers must comply with TRIA’s disclosure requirements. The National Association of Insurance Commissioners (NAIC) has prepared reporting forms that have been approved by the Department of Treasury. The forms are available at http://www.naic.org/topics/topic_tria.htm.

 Be aware of the terrorism risks that are not covered by the Act (e.g., losses occurring outside the United States.)  Consider purchasing reinsurance for the horizontal deductible, 15 percent vertical share, and $100 million net trigger liability. Consider purchasing coverage for a deliberation/delay in the TRIA certification and/or payment process lasting greater than 180 days. (Marsh has a team dedicated to standalone terrorism insurance placements and has executed many contracts that act as reinsurance of our clients’ captives.)  Keep in mind that the captive, like all insurers, may be responsible for assessing, collecting, and distributing the post-loss surcharge that will be assessed against all policyholders in the event a loss occurs.  Secure the approval of the responsible domicile insurance regulator.

Steps for Captives Considering Accessing TRIA
Under TRIA, each participating insurer will be responsible for paying out a certain amount in claims—the deductible—before federal assistance becomes available. This deductible is equal to 20 percent of the direct earned premiums from qualifying lines of business from the previous calendar year (not all earned premiums are a factor in the calculation). For losses above a captive’s deductible, the federal government will cover 85 percent, while the captive insurer contributes 15 percent. For clients considering using their captives to access TRIA, Marsh makes the following recommendations:  Determine the captive exposure by calculating the 20 percent horizontal deductible, and the vertical 15 percent quota-share based on the policy limit.  Determine the premium to charge for terrorism coverage. (For this exercise, Marsh has compiled property benchmarking information by industry group, insurer, and region to help captives calculate a commercially reasonable premium amount. Treasury guidelines state the premiums must not be discriminatory, excessive, or inadequate. If they are found to be so, this could jeopardize the captive’s ability to collect in the event of a loss.)

Considerations
Captives are included in the definition of insurers under TRIA according to Department of Treasury guidance, but captive owners have also been specifically cautioned against “gaming” the program. These cautions are in recognition of the inherent conflict of interest and unusual level of control a policyholder has over an insurer in a captive insurance transaction. The cautions emphasize that captive owners should not take actions that would improperly reduce an organization’s overall share of a loss—for example, captive insurers should not deliberately under price the premium in order to reduce the captive’s TRIA deductible. Capitalization must be determined and provided. Two major factors are considered when determining capitalization. The primary consideration is that capitalization must be sufficient to satisfy the responsible domicile insurance regulator. Captive insurance company regulators apply differing standards, but are primarily concerned with statutory minimums and ensuring the captive insurer has the capacity to meet its reasonably foreseeable obligations to policyholders. Captive insurance regulators consider such traditional factors as reinsurance protection in this analysis, but also

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factor nontraditional “assets” such as letters of credit and parent company financial strength. Second, capitalization should be evaluated based on appropriateness considering the overall business plan and objectives of the captive. Marsh routinely assists captive owners with building and presenting an overall business plan, including capital levels and structure, to be presented to the responsible domicile regulator for approval. Premiums charged by the captive should be based on current market prices. If premiums are not thoughtfully derived and supported, financial penalties, including not recovering in the event of a loss, may apply. Captives, like all subject insurers, may be required to submit information on terrorism premium rates for review by the NAIC and the Secretary of the Treasury. The annual liability of the federal government and all subject insurers is capped by TRIPRA at $100 billion. Should actual aggregate insured losses exceed $100 billion, this cap could result in a policyholder receiving less than the stated policy limits. TRIA permits insurers to obtain reinsurance coverage for all or any portion of any loss not covered by the Act. The Act contains a trigger of $100 million, which means no payments will be made for acts of terrorism resulting in aggregate insured losses—to all involved insurers—of less than $100 million. The effect of the trigger is to introduce uncertainty in the event of smaller losses. A worst-case scenario could see an insurer exposed to up to 100 percent of a loss of up to $99,999,999. Timing must be considered when creating a captive or amending its purpose to write new lines of coverage in order to avail itself of coverage provided by TRIA. It typically takes between 30 and 60 days to establish a new captive. With an existing captive, the time frame will depend on its current scope and desired amendments, but it is likely to take at least seven days to secure the required approvals and incept the coverage.

The start-up and ongoing administrative costs of a U.S.-domiciled captive must be considered and will vary depending on several factors such as scope and fees for management, audits, legal advice, and actuarial work required. Under TRIA, insurers—including captives—are required to process claims in accordance with customary business practices. Other procedures may also be prescribed by the Secretary of the Treasury. If a captive insurer is affiliated with other organizations that qualify as insurers under TRIA, the direct earned premiums of the affiliated insurers will be considered along with the captive’s when determining insurer deductibles. Marsh’s Captive Solutions Group works closely with Marsh’s Property Specialized Risk Group on the placement of terrorism coverage solutions for Marsh clients. Our experts have designated resources responsible for real-time monitoring of TRIA developments, providing specialty technical resources during terrorism solution evaluations, implementation of client programs, and colleague and client education. Contact Marsh to discuss the viability of using your organization’s captive to mitigate your terrorism exposures.

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International Terrorism and Political Violence Insurance

Multinational clients with global locations have a number of options for insuring against acts of terrorism. The standalone terrorism market can offer insurance for assets in:  countries where the insured’s risks are located (subject to certain country limitations),  “high-risk” countries, and/or  countries where terrorism insurance is required by the lender or mortgagee.

In countries where compulsory or optional terrorism pools exist, property insurance can be extended to include coverage in accordance with the local pool. In such situations, any standalone terrorism policy will be on a difference in conditions (DIC) or difference in conditions and difference in limits (DIC/DIL) basis. The principal terrorism pools and facilities, as compiled by Guy Carpenter, are summarized in the following table.

Country Australia Austria Bahrain Belgium Finland France Germany Hong Kong - China India Israel Namibia Netherlands South Africa Spain Sri Lanka Taiwan United Kingdom United States

Compulsory Pool (Y/N) N N N N N Y N N N Y N N N Y N N N N

Names of Terrorism Pool/Funding Mechanism Australian Reinsurance Pool Corporation (ARPC) Österreichischer Versicherungspool zur Deckung von Terrorisiken (The Austrian Terrorpool) The Arab War Risks Insurance Syndicate (AWRIS) Terrorism Reinsurance & Insurance Pool (TRIP) Finnish Terrorism Pool Gestion de l’Assurance et de la Réassurance des Risques d’Attentats et Terrorisme (GAREAT) EXTREMUS Versicherungs-AG The Motor Insurance Bureau (MIB) The General Insurance Corporation of India Terrorism (Intifada Risks) - The Victims of Hostile Actions (Pensions) Law and The Property Tax and Compensation Fund Law Namibia Special Risks Insurance Association (NASRIA) Nederlandse Herverzekeringsmaatschappij voor Terrorismeschaden (NHT) South African Special Risks Insurance Association (SASRIA) Consorcio de Compensación de Seguros (CCS) SRCC/Terrorism Fund - Goverment Taiwan Terrorism Insurance Pool Pool Reinsurance Company Limited (Pool Re) Terrorism Risk Insurance Reauthorization Act of 2007 (TRIPRA)

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The standalone terrorism and political risk markets can also offer broader political violence insurance to clients with locations in developing countries. Clients may also wish to consider purchasing political violence insurance, either on a standalone basis or as part of a current terrorism program with a separate sublimit for political violence perils. Terrorism coverage is often incorrectly perceived to cover all violent human acts resulting in property and business interruption loss. The loss must meet the terrorism definition under the standalone policy in order for coverage to apply. Certain types of events are typically excluded from standalone terrorism contracts, including:  strikes, riots, and civil commotion;  war and civil war; and  insurrection, revolution, rebellion, and coup d’état. Exposures and risks faced by companies in developing countries vary geographically and are not limited to only “terrorism” as defined under most standalone terrorism policies. For insurance purposes, events that are generally described as “terrorism” may actually be considered “war,” “civil war,” or another political violence peril. For this reason, political violence insurance should be considered by companies with exposures in developing countries. Political violence policies are designed to respond to a broader class of perils in developing countries than only terrorism and commonly provide the following coverage:  sabotage;  malicious damage;  riots, strikes, or civil commotion;  revolution;  rebellion;  insurrection; and/or  war and civil war.

Combined political violence and terrorism programs are structured to coordinate with a company’s existing property policies, including any coverage under a property program for such perils as strikes, riots, and civil commotion or in-country pool terrorism schemes. Available limits for political violence coverage are generally country dependant and are typically influenced by the available war capacity in the marketplace. Standalone political violence program limits of between US$100 million and US$500 million are commonplace. Within a terrorism insurance program, political violence sublimits ranging between US$50 million and US$200 million are becoming more common.

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Conclusion

This report reviews the terrorism insurance marketplace in 2009 and early 2010. As the take-up rate analysis in Chapter 4 demonstrates, companies in all regions of the U.S., in all industry sectors, and of all sizes understand the need to purchase terrorism coverage. The exposure to potential future terrorist attacks is felt most strongly in central business districts and in areas that present “soft” targets, but remains an issue for companies regardless of location. This exposure, coupled with a lack of an accurate vehicle for predicting events and their effects, demonstrates the ongoing need for a national terrorism insurance solution, with involvement from both the federal government and private industry. Detractors of the federal government’s continued involvement in terrorism insurance are quick to point out that the insurance marketplace has increased surpluses to a level that should be able to deal with future terrorism losses. This argument, however, takes little account of the pressures faced throughout the commercial property and casualty insurance industry as a result of heightened catastrophe losses—such as a number of significant earthquakes in the first half of 2010 and a predicted above-average Atlantic hurricane season for 2010. Such conditions, based on a number of estimates, are likely to continue for the foreseeable future. In fact, after a relatively benign 2009, the first half of 2010 has seen an above average number of significant catastrophic events. The continued stability of the insurance industry will have a direct impact on the availability of insurance for fire, workers’ compensation, and liability coverage. Without a backstop like TRIPRA, which is scheduled to expire December, 31, 2014, market dislocation may occur due to the obligatory nature

of terrorism coverage for certain lines of insurance. Without a federal guarantee like TRIA, it is likely that insurers that provide workers’ compensation to U.S. clients—and in locations where the peril of terrorism cannot be excluded—would not be able to also support property coverage including terrorism at the same level. Regardless of government participation, it will likely take the insurance industry a number of years to develop the surplus necessary to deal with catastrophic terrorism losses of the magnitude of September 11, 2001. Therefore, some combination of public- and private-sector involvement is still required long-term to appropriately address terrorism exposure in the United States. There is a real potential for an economic downturn should terrorism insurance not be readily available. Therefore, the insurance industry should fully explore all possible options, regardless of the level of federal participation. The majority of long-term terrorism insurance solutions—including overseas terrorism insurance programs—rely on the presence of government protection in the event that pool mechanisms become eroded through terrorism losses. Terrorism remains a real and present risk, notably in major metropolitan areas. Companies continue to consider ways to mitigate against it and protect their employees and facilities against attack. Marsh’s Property Specialized Risk Group (formerly the Terrorism Risk Specialty), in concert with our political violence, workers’ compensation, general liability, modeling, and MMC sister company experts are available to discuss the myriad options available to insure against and otherwise prepare for this risk.

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

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 contact your local Marsh office or visit our web site at: www.themarshreport.com/terrorism2010 www.marsh.com

The Marsh Report: Terrorism Risk Insurance 2010 ©2010 Marsh Inc. All rights reserved. Compliance #: MA10-10170 Item #: 100642

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