Ten Years After 9/11

The Future of TRIA and Terrorism Insurance Challenges – Strategies – Solutions

Session: RMG216

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THANK EVERYONE FOR THEIR PARTICIPATION AND WISH THEM A NICE DAYTHANK EVERYONE FOR THEIR PARTICIPATION AND WISH THEM A NICE DAY

Discussion Points

• Client’s Perspective: – How TRIA Supports My Terrorism and All Risk Programs– Ten Years of Challenges

• Up on the Hill – And the Rest of the World– Where is Treasury/DHS Headed…today’s talk– Options based on other approaches

• The Future is Now– Positioning Yourself and Your Program

• Your Questions and Comments

The Speakers

• Shari Natovitz, VP Risk Mgt. – Silverstein/World Trade

Center Properties

• Brian Finch, Partner– Dickstein Shapiro LLP

• Wendy Peters, SVP– Willis Terrorism Practice

Group

• All of You

RISK MANAGER’S PERSPECTIVE:DEALING WITH A WORLD WITHOUT TRIA

Shari Natovitz Silverstein/World Trade Center Properties

6

H

D

Our Current NYC Portfolio

Developer – World Trade Center

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Limited Risk Management Tools

• Buildings Cannot be Hidden or Disguised

Can’t Move the BuildingsCan Reduce Impact

Insurance, Contractual Relief Physical Safety Features to Protect Assets and People Security

Training Control of Access, Loading Docks, Packages

Evacuation Training – Staff and Tenant

AND WE STILL NEED AND WE STILL NEED INSURANCEINSURANCE

Our Terrorism Insurance Needs

• NYC TIV: >$4 Billion• We Purchase an All Risk

Master Program– Limit: 1.4B– Requires purchasing

meaningful Terrorism coverage

• Minimum of at least $1B + Projects

– If available, would cost in excess of $3,700,000

• NYC Projects: >$2Billion• Builders Risk separate for

each Tower - total $2.2B– Requires purchasing

equivalent Terrorism coverage

– Limit - $2.1B– Projected Cost $7,700,000

Terrorism Insurance Challenges

• Limits All Risk markets willing to provide coverage• Demand for full limits• Strain on terrorism market capacity• Too expensive

• The Solution: Maximizing our use of TRIPRA

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A Little Bit About TRIA/TRIPRATRIA is a US Federal Program which provides a backstop to insurance companies for a Certified Act of Terrorism

•Create an Insurance Company to utilize the Federal backstop to reduce the insurance purchase

•Certified Act• A violent act or act dangerous to human life,

property or infrastructure• Losses Must exceed $5M

•Triggered when aggregate losses exceed $100,000,000

•Coverage: 85% of limit•Deductible: 20% of direct earned premium

What about remaining risk? – Reinsurance

$5M “Act of Terrorism” qualification

$100M “TRIA Trigger”

20% of premium TRIA deductible

85

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15

% o

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How a Captive Terrorism Program Works

• Difficult to obtain limit• Cost is significantly higher• Premium out the door

Access to increased insurance capacity Cost savings Accumulation of investment income

Marketplace

Deductible

100%

Required to purchase full value

85%

Federal Reinsurance

Deductible

15%

CaptiveRisk

Captive

100% Insured

Differences

Players and Their Roles

Captive$$$Capitalization

Owner$$$Dividend

Insured Properties

Insured Properties

Insured Properties

Insured Properties

Allocated Insurance Premiums

Insurance

Service Providers

Fee

Insurance Broker, Captive Management,Actuarial, Auditing, Legal

TaxAuthorities

Taxes

TRIPRA

ReinsurersReinsurance

Reinsurance

Premium

Example:TRIA Captive Positive Impact

Limit and Premium Comparison

  2010 Terrorism Program 2011 Captive  

Location Limit (Individual) Premium Limit (Blanket) Premium* Savings

1 $332,115,076 $383,686

$1,015,714,978

$300,017 ($83,669)

2 $125,000,000 $161,659 $160,799 ($860)

3 $281,570,000 $500,000 $89,024 ($410,976)

4 $115,540,000 $168,000 $167,425 ($575)

5 $140,000,000 $300,000 $300,000 $0

Total $994,225,076 $1,513,345 $1,015,714,978 $1,017,265 ($496,080)

* Total annualized premium for the captive

My Issues:

• Even with TRIA – insufficient capacity– NYC– Financial District and Midtown– NYS Fire Following

• Mitigation and Security Have Little Impact on Availability and Cost

• All Risk Carriers Seeking Full Terrorism Limits• Lender Demands• Prudent Risk Management

What to Do

• Watch and Wait…with Concern:– “The sky is falling! The

sky is falling!”

• Identify the Facts– Loan Covenants– Exposure– Placement Structure– Costs

• Develop a Plan– Find an Expert

• Contact Congress– Use Your Associations

• Inform the C-Suite

If TRIPRA Is Not Renewed(Or Captive Provision not Continued)

• My spend could increase by $9M • Terrorism limits may not be available• Adverse impact on All Risk program• Expansion/Acquisitions impacted• Breach of Lender Agreements• Smaller carriers with embedded coverage may

non renew

WHAT’S HAPPENING…ON THE HILLAND IN THE WORLD

Brian Finch, Partner DICKSTEIN SHAPIRO

TRIPRA – The Washington View on Renewal

Brian Finch, PartnerDickstein Shapiro LLP

TRIPRA Renewal – Who Matters on the Hill?

• Leadership --- it always matters who is in charge (Speaker, Senate Majority Leader)

• Relevant Committees:– Senate Banking– House Financial Services– Budget?

• Lots of time between 2014 and now to impact personalities …

Personalities Matter

• If the Senate flips to Republican control, what would that mean?– If Sen. Shelby is Chairman, that matters.

• House Financial Services– There will be a new Chairman in 2013– Will there be a Southern or New York flavor to the

Committee?

• Could discussions be under way already?

What Could the Path to Renewal Look Like?

• Will it be smooth sailing or rough seas?• Potential sticking points include:

– Retention levels– Rethinking whether this is needed to support solvency– “Make available” still an issue?

• A reexamination to see if it is wanted, much less needed?

• Has it been a positive in the market?

Possible Outcomes

• Simple reauthorization or extension?• Minor adjustments?• Blank slate/starting from scratch?• Other issues that could weigh heavily on the

debate:– Cyber– Overall Federal debt worries

What to Do …

• Is there plenty of time?• If not, when do you start discussions?• There will be winners and losers• Remember the big picture

– Is another 9/11 more of “if” than a “when”?

• Are there other “when” events that will dominate the debate?

THE FUTURE IS NOW: POSITIONING YOUR COMPANY & YOUR PROGRAM

Wendy Peters, SVP Willis Terrorism Practice Group

The Current Terrorism Insurance Marketplace

•Prices for terrorism insurance have remained relatively stable since 2003 ( supply & demand model)•Percentage of companies purchasing terrorism insurance in the 60%, up to 80% in Real Estate sector – most in major metropolitan areas. •NY metro insureds face greatest challenges in obtaining sufficient coverage : much more expensive than other geographical areas•Total market capacity stands at approximately $2.5 billion, though substantially less in major metro areas.

The Arguments for TRIPRA

• Insurer reluctance to assume more risk - difficulty to model frequency - Terrorism is human driven.

• Concentration of risk in major metropolitan areas. • From insurers’ perspectives – already a large, non-reinsured gap

in TRIPRA 20 percent deductible, 15 percent virtually unlimited co-participation corridor above the deductible, $100 million trigger

• For conventional attacks that cause less than $40 billion, TRIPRA potentially wouldn’t respond due to industry retentions and recoupment provisions.

• Magnitude of non-conventional terrorist attack – virtually uninsurable

Potential Arguments against TRIPRA

• Government bailout days are over. Ability of insurers to pay loss/retained loss position of major carriers ( $550 billion surplus in 2011 – time to step up to the plate!)

• Current deductible levels for major insurers – largest carriers see little recovery under TRIPRA, but see big opportunity if it expires.

• Should funding be pre or post loss – did the government lose an opportunity to build reserves?

• Sufficient insurance market place exists – ( though more expensive)• Subsidy to relatively few, high profile risks in major metropolitan

areas.• Even when available, take up rate at 60% - much lower for NBCR

Potential Alternatives

• Lowering insurers deductibles in areas affected by a future large terrorist events .

• Spreading losses across entire industry • Allowing insurers to establish tax deductible reserves for terrorism attacks• Pre event funding: Fully-funded, government backstopped terrorism pool, e.g.

Pool Re, – access to cheaper reinsurance.

•

The Future

What do we do now?

•Modeling - get a grip on PMLS. What are my true risk exposures? What do I really need to insure and to what value? •Quantification of loss expectancies— Analyses can capture both probabilistic and scenario based loss assessments.•Determine suitability of insurance purchased.•Identify locations contributing the most to the expected losses, so company can focus attention on those higher risk facilities. •May have limited impact on insurance rates in metro areas.

The Future

What do we do now?

•Write to your Congressman. Vocalize support now. •Loan agreements - start the dialogue now with lenders.•Lock in long term, stand-alone insurance, as available. •Secure convertible, non certified reinsurance support for captives.

COMMENTS …QUESTIONSThank you for attending