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www.air-worldwide.com
Terrorism Insurance and Modeling
Jack Seaquist
September 21, 2007
© 2007 AIR Worldwide Corporation CONFIDENTIAL
Discussion Agenda
Development of terrorism insurance Terrorism modeling Status of the federal backstop extension Key issue for the future – NBCR exposure
© 2007 AIR Worldwide Corporation CONFIDENTIAL
Terrorism Insurance
Prior to 9/11/2001 – no recognition of terrorism as a peril – it’s covered After 9/11 – terrorism exclusion added to policy terms
Approved in most states
November 2002 – Terrorism Risk Insurance Act of 2002 (TRIA) Mandatory availability in covered commercial lines Covers certified acts by international terrorists Company deductible and co-share Limited reinsurance market Some stand-alone coverage
December 2005 – Terrorism Risk Insurance Extension Act of 2005 (TRIEA)
Extension through end of 2007
September 2007 – active legislative activities to extend Terrorism Risk Insurance Program
© 2007 AIR Worldwide Corporation CONFIDENTIAL
Analytic Developments to Support Terrorism Risk Management
September 2002 – introduction of probabilistic terrorism models Spring 2003 – use of probabilistic loss results in ISO advisory loss
cost filings February 2004 – A.M. Best adds Terrorism Section to Supplemental
Rating Questionnaire (SRQ) Insurance companies begin measuring and managing terrorism risk
Exposure concentrations Worst-case modeled loss scenarios - deterministic
© 2007 AIR Worldwide Corporation CONFIDENTIAL
AIR Terrorism Model Components
ProbabilisticLoss
Estimate
ProbabilisticLoss
Estimate
Event LossEvent Loss
WeaponsWeapons
TerrorismEvents
TerrorismEvents
PolicyConditions
PolicyConditions
ENGINEERING
HAZARD
FINANCIAL
FrequencyEstimate
FrequencyEstimate
WeaponDamage andInjury Models
WeaponDamage andInjury Models
ExposureInformation
ExposureInformation
Targets/Landmarks
Targets/Landmarks
© 2007 AIR Worldwide Corporation CONFIDENTIAL
AIR Models Possible Future Conventional Weapon Attacks Where They Could Occur
Commercial facilities Prominent buildings Corporate headquarters Transportation
Airports Rail; Bus Bridges; Ports
Chemical plants Energy facilities Retail centers and malls Hotels and casinos Amusement parks and sports venues
Government facilities Federal office buildings
and courthouses Embassies State capitols
Educational, medical, and religiousinstitutions, etc.
Comprehensive Set of Possible Targets
© 2007 AIR Worldwide Corporation CONFIDENTIAL
NBCR Chemical*
Sarin (GB) VX Nerve
Biological* Anthrax Small pox
Radiological Cesium 137 Cobalt 60
Nuclear*
AIR Models a Range of Weapon Types and Sizes
CONVENTIONAL Vehicle bombs
Portable Car Van Delivery Truck Large Truck
Airplane crash General aviation Large commercial
airliner
* Includes small, medium, and large
© 2007 AIR Worldwide Corporation CONFIDENTIAL
Building Physical Damage Outcome Also Contributes to the Distribution of Injury Severity Levels
© 2007 AIR Worldwide Corporation CONFIDENTIAL
Injury Severity Model Accounts for the Full Range of Possible Damage States and Resulting Injuries
1 2 3 4
CompleteDamage Collapse
CompleteDamage
No Collapse
ExtensiveDamage
ModerateDamage
MinorDamage
Building EventDamage Distribution Fatality
Life Threatening
Moderate
Minor
None
Fatality
Life Threatening
Moderate
Minor
None
Fatality
Life Threatening
Moderate
Minor
None
Fatality
Life Threatening
Moderate
Minor
None
Fatality
Life Threatening
Moderate
Minor
None
© 2007 AIR Worldwide Corporation CONFIDENTIAL
AIR Terrorism Model Components
ProbabilisticLoss
Estimate
ProbabilisticLoss
Estimate
Event LossEvent Loss
WeaponsWeapons
TerrorismEvents
TerrorismEvents
PolicyConditions
PolicyConditions
ENGINEERING
HAZARD
FINANCIAL
FrequencyEstimate
FrequencyEstimate
WeaponDamage andInjury Models
WeaponDamage andInjury Models
ExposureInformation
ExposureInformation
Targets/Landmarks
Targets/Landmarks
© 2007 AIR Worldwide Corporation CONFIDENTIAL
AIR Terrorism Model Components
ProbabilisticLoss
Estimate
ProbabilisticLoss
Estimate
Event LossEvent Loss
WeaponsWeapons
TerrorismEvents
TerrorismEvents
PolicyConditions
PolicyConditions
ENGINEERING
HAZARD
FINANCIAL
FrequencyEstimate
FrequencyEstimate
WeaponDamage andInjury Models
WeaponDamage andInjury Models
ExposureInformation
ExposureInformation
Targets/Landmarks
Targets/Landmarks
Event scenario:
6-ton truck bomb – Midtown Manhattan
Event loss:
• $3.5 billion property loss
• $4.5 billion workers’ compensation loss
Deterministic Loss Analysis
© 2007 AIR Worldwide Corporation CONFIDENTIAL
National Intelligence Estimate – July 2007
“We assess that al-Qa’ida’s Homeland plotting is likely to continue to focus on prominent political, economic, and infrastructure targets with the goal of producing mass casualties, visually dramatic destruction, significant economic aftershocks, and/or fear among the US population. The group is proficient with conventional small arms and improvised explosive devices, and is innovative in creating new capabilities and overcoming security obstacles.
• We assess that al-Qa’ida will continue to try to acquire and employ chemical, biological, radiological, or nuclear material in attacks and would not hesitate to use them if it develops what it deems is sufficient capability.”
© 2007 AIR Worldwide Corporation CONFIDENTIAL
Limited Statistics Are Available, But UK’s MI5 Released Terrorist Plot Statistics
We are tracking almost 30 terrorist plots involving 1,600 suspects and 200 cells
Five major plots foiled since the July 2005 London transit bomb attacks
Dame Eliza Manningham-Buller, Director General, MI5, November 10, 2006
© 2007 AIR Worldwide Corporation CONFIDENTIAL
Operational Threat Assessment Considerations of the Terrorism Expert Group
Objectives Mass casualties? Economic impact? Symbolic? Punish a group, industry,
company, government? Capabilities and Resources
Weapon availability NBCR efforts Coordinated attacks Manufacture vs. buy Financial Technical expertise Operational skills
Deployment Locales with presence Financial vs. operational Local target surveillance
opportunity Local support
Historical attacks Targets Weapons Locales
Reaction to Security Federal State Local Private
© 2007 AIR Worldwide Corporation CONFIDENTIAL
AIR Terrorism Model Components
ProbabilisticLoss
Estimate
ProbabilisticLoss
Estimate
Event LossEvent Loss
WeaponsWeapons
TerrorismEvents
TerrorismEvents
PolicyConditions
PolicyConditions
ENGINEERING
HAZARD
FINANCIAL
FrequencyEstimate
FrequencyEstimate
WeaponDamage andInjury Models
WeaponDamage andInjury Models
ExposureInformation
ExposureInformation
Targets/Landmarks
Targets/Landmarks
© 2007 AIR Worldwide Corporation CONFIDENTIAL
AIR Terrorism Model Components
ProbabilisticLoss
Estimate
ProbabilisticLoss
Estimate
Event LossEvent Loss
WeaponsWeapons
TerrorismEvents
TerrorismEvents
PolicyConditions
PolicyConditions
ENGINEERING
HAZARD
FINANCIAL
FrequencyEstimate
FrequencyEstimate
WeaponDamage andInjury Models
WeaponDamage andInjury Models
ExposureInformation
ExposureInformation
Targets/Landmarks
Targets/Landmarks
500,000-year simulation catalog:
Excedance Probability Distribution
Probabilistic Loss Analysis
© 2007 AIR Worldwide Corporation CONFIDENTIAL
Terrorism Risk Management Best Practices
Focus on quality of exposure data Improve location details Understand local targets
Exposure concentration analysis Identify points of accumulation through ring
analyses Determine proximity to target locations
Deterministic loss estimation Incorporate physical damage models Examine concentration points and target locations
Fully probabilistic loss analysis Manage surplus and reinsurance Estimate loss potential under varying conditions
© 2007 AIR Worldwide Corporation CONFIDENTIAL
Rating Agencies Are Forcing Terrorism Risk ManagementA.M. Best Summary
Exposure data quality Exposure concentration, including cost of lives
Single location exposure 500-foot ring exposure
Deterministic loss scenarios Delivery truck bomb
Zonal aggregations (reinsurers) Percent of policyholder surplus exposed
With and without reinsurance and TRIA Within and outside 11 high risk cities
See AIR white paper for detailed instructions
© 2007 AIR Worldwide Corporation CONFIDENTIAL
Rating Agencies Are Forcing Terrorism Risk ManagementStandard & Poor’s Summary
Modeled loss exposure within a 500 foot circle 2 - 5 ton truck bomb 6 - 10 ton truck bomb 25 ton truck bomb
Modeled loss exposure within a 1-mile circle 2 - 5 ton truck bomb 6 - 10 ton truck bomb 25 ton truck bomb
Modeled loss exposure (range various) Anthrax or biological -- 0.1 - 1 kg Anthrax or biological – greater than 1 - 10 kg Airplane crash Small nuclear – 1 kiloton Large Nuclear – 5 - 20 kiloton
Top 10 single address exposures Full limit net exposure
© 2007 AIR Worldwide Corporation CONFIDENTIAL
Through 2007, TRIEA Protects Insurers from Large Losses
2007 Terms Commercial P&C lines Deductible 20% of applicable premium 15% insurer co-pay $100 million event trigger “Make available” provision $100 billion aggregate limit Post-funded
Terrorism cannot be excluded from workers’ compensation
Existing exclusions in a policy can apply to terrorism coverage
NBCR Com
pany
Ret
entio
n
2005 2006 2007 2008
Impact on a hypothetical company with a loss equal to its premium base
100%
© 2007 AIR Worldwide Corporation CONFIDENTIAL
The American Academy of Actuaries Determined That Potential Large Losses Are Uninsurable
Scenario New York WashingtonSan
FranciscoDes
Moines
Truck bomb $12 $6 $9 $3
Chemical $447 $106 $92 $27
Biological $778 $197 $171 $42
Insured Losses*, in $ billions
Terrorism Risk Insurance Subgroup
* Deterministic loss results provided by AIR
© 2007 AIR Worldwide Corporation CONFIDENTIAL
GAO Reported CBRN Coverage Problems to Congress in September 2006
TRIA will cover losses from certified terrorism events irrespective of the weapon type
Risks continue to be unattractive to insure Property insurers believe they have excluded NBCR coverage by interpreting
existing exclusions to apply Workers’ compensation provides coverage because it is required by states Rating agencies have not looked at NBCR exposure Models have been found useful for managing insurers’ exposure to terrorism
risks
“Given the challenges faced by insurers in providing coverage for, and pricing NBCR risks, any purely market-driven expansion of coverage is highly unlikely in the foreseeable future.”
© 2007 AIR Worldwide Corporation CONFIDENTIAL
President’s Working Group on Financial Markets Sees TRIA Going Away
Insurers have allocated additional capacity Prices have declined Take-up rates have increased Better risk measurement and management is available Terrorism risk modeling has improved Greater reinsurance capacity is available Insurer financial health has recovered State regulation does not appear to have a significant impact on capacity But there may be little potential for future CNBR market development
“Further improvements in insurers’ ability to model and manage terrorism risk, and the other factors noted above, will likely contribute to the long-term development of the terrorism risk insurance market.”
© 2007 AIR Worldwide Corporation CONFIDENTIAL
Status of Pending Legislation
House of Representatives - H.R. 2761 Approved with amendments by Financial Services Committee on August 1 Costs assessed by Congressional Budget Office on September 6
Resulted in Pay-As-You-Go Roadblock Rules Committee established ground rules for the debate on September 17 Passed by full House on September 19 (312-110)
Senate Intent to create legislation with long term extension Minority party seeks short term extension
White House – Statement of Administration Policy – September 17 President’s senior advisors would recommend a veto of H.R. 2761 The program should be temporary and short-term There should be no expansion of the program Private sector retentions should be increased
© 2007 AIR Worldwide Corporation CONFIDENTIAL
Key Provisions of H.R. 2761
15-year extension Adds group life and farm-owners multiple peril lines Covers domestic terrorism Reduces event trigger back to $50 million from $100 million in 2007 Post-event reset of deductible after years with significant industry loss Adds “make available” provision for NBCR
With reduced company deductible, starting at 3.5% Implementation to begin in 2009
© 2007 AIR Worldwide Corporation CONFIDENTIAL
H.R. 2761 Addresses the Gap in NBCR Coverage
“…as nuclear, biological, chemical or radiological acts of terrorism (known as NBCRterrorism) present a threat of loss of life, injury, disease and property damage potentiallyunparalleled in scope and complexity by any prior event, natural or man-made, the FederalGovernment’s responsibility in providing for and preserving national economic security callsfor a strong Federal role in ensuring financial compensation and economic recovery in theevent of such an attack.”
The current H.R. 2761 adds to the mandatory availability provision:
“…shall make available, in insurance policies for covered lines for which the coverage
described in subparagraph (A) is provided, exceptions to the pollution and nuclearhazard exclusions of such policies that render such exclusionsinapplicable only as to insured losses arising from acts of NBCR terrorism.”
© 2007 AIR Worldwide Corporation CONFIDENTIAL
Current NBCR Exclusions
Chemical and biological exclusions are found in pollution exclusions Exceptions to the exclusion may apply in certain attack modes Pollution exclusions are not universal
Nuclear and radiological attacks subject to nuclear hazard exclusion Excludes property damage from radioactive contamination Does not exclude fire and blast damage from a bomb
Workers’ compensation has no exclusions
© 2007 AIR Worldwide Corporation CONFIDENTIAL
Nuclear Damage Effects
Blast and shock Thermal radiation Initial nuclear radiation Residual nuclear radiation contamination (fallout)
0.5 to 3 mile damage radius
© 2007 AIR Worldwide Corporation CONFIDENTIAL
Residual Radioactive Contamination from Surface Nuclear Bursts
Earth, dust, and debris from the earth’s surface are taken up into the fireball and contaminated
Contaminated particles range in diameter from less than 1 micron to several millimeters
The larger ones begin to fall back to earth even before the radioactive cloud has attained its maximum height
The very smallest ones may remain suspended in the atmosphere for long periods – they may circle the earth many times before reaching the ground
The early fallout hazard represents the larger particles reaching the ground within 24 hours – this can contaminate large areas and represent an immediate biological hazard
© 2007 AIR Worldwide Corporation CONFIDENTIAL
Decontamination and Restoration
Cleanup of contaminated areas, like Chernobyl Three Mile Island
Contaminated material will need removed from the scene Radioactive particles may chemically bind to concrete and asphalt Radioactive particles may become lodged in crevices of building
exteriors and surroundings Affected areas could be unavailable for many years Cleanup may be feasible, but demolition and rebuilding may be the
most cost-effective approach Contamination level decreases with the distance from the event
© 2007 AIR Worldwide Corporation CONFIDENTIAL
DHS Planning Scenario – 10-kT Nuclear Attack
Infrastructure damage – total within 0.5 to 1.0 miles Contamination – approximately 3,000 square miles Economic impact – Hundreds of billions Recovery timeline – years
© 2007 AIR Worldwide Corporation CONFIDENTIAL
DHS Planning Scenario – Radiological Dispersal Devices (Cesium)
Infrastructure damage – near the explosion Contamination – 36 city blocks (0.25 mile radius) Economic impact – up to billions of dollars Recovery timeline – months to years
© 2007 AIR Worldwide Corporation CONFIDENTIAL
Nuclear Regulatory Commission Fact Sheet
Biological Effects of Radiation Average annual radiation exposure is 360 mrem. Above background levels of radiation exposure, the NRC requires
that its licensees limit maximum radiation exposure to individual members of the public to 100 mrem per year
And limit occupational radiation exposure to adults working with radioactive material to 5 rem per year
NRC regulations and radiation exposure limits are consistent with recommendations of national and international scientific organizations and with practices in other developed nations
Reference point: full set of dental X-rays = 40 mrem
© 2007 AIR Worldwide Corporation CONFIDENTIAL
DHS Proposed Protective Action Guides for Radiological Dispersion and Improvised Nuclear Devices
Posted in Federal Register for comment – 3 January 2006 Revised version scheduled for August 2007 in the Federal Register The need for federal guidance was established during TOPOFF 2 Previous EPA guidance (1992) was for nuclear plant spills
“Because of the extremely broad range of potential impacts that may occur from RDDs and INDs (e.g., ranging from light contamination of one building to widespread destruction of a major metropolitan area), a pre-established numeric guideline is not recommended as best serving the needs of decision makers in the late phase. Rather, a process should be used to determine the societal objectives for expected land uses and the options and approaches available, in order to select the most acceptable criteria.”
© 2007 AIR Worldwide Corporation CONFIDENTIAL
Health Physics Society – Specialists in Radiation Safety
Background Information on “Guidance for Protective Actions Following a Radiological Terrorist Event”, 31 January 2007
Protective Actions for the Late (Recovery) Phase The EPA’s PAG Manual does not have any protective actions for
this phase Recommends that continued cleanup during the late phase should
be subject to the principles of ALARA (as low as reasonably achievable), economic and social factors being taken into account, with a minimum level of continued cleanup of 100 mrem per year
At this dose, risks of radiation-induced health effects are either non-existent or too small to be observed.
© 2007 AIR Worldwide Corporation CONFIDENTIAL
Potential Range of Cleanup Guidance for a Radiological Contamination Event
15 mrem/year EPA, “Establishment of Cleanup Levels for CERCLA Sites With Radioactive Contamination” (e.g., Hanford Site)
25 mrem/year NRC, Final Rule on Radiological Criteria for License Termination (10 CFR Part 20 Subpart E)
100 mrem/year Health Physics Society Position Statement, “Guidance for Protective Actions Following a Radiological Terrorist Event”
500 mrem/year EPA, “Manual of Protective Action Guides and Protective Actions for Nuclear Incidents,” 400-R-92-001,…”doses in any single year after the first will not exceed 0.5 rem”
2 rem/year EPA, “Manual of Protective Action Guides and Protective Actions for Nuclear Incidents,” 400-R-92-001,…”doses in in first year will not exceed 2 rem”
5 rem/year NRC, “Standards for Protection Against Radiation,” recommendation and established dose limit for workers (10 CFR 20 Subpart C)
© 2007 AIR Worldwide Corporation CONFIDENTIAL
Pacific Northwest National Laboratory Study on Cleanup Standards – Nuclear Bomb Blast
© 2007 AIR Worldwide Corporation CONFIDENTIAL
Summary
Terrorism insurance has not developed as a viable market without the federal government
Modeling tools have been incorporated into terrorism risk management best practices
The future of the federal Terrorism Risk Insurance Program is highly uncertain
House H.R. 2761 Senate White House
Significant new exposure to NBCR could result The extent of insurer exposure to a radiation contamination event could
depend on the standards selected by local stakeholders after the event occurs
See www.air-worldwide.com for this information in AIR White Paper