TRIA: Political Update & Long Term Solutions

1. TRIA: Political Update & Long Term Solutions Glenn Pomeroy Associate General Counsel GE Insurance Solutions May 16, 2005

2. Political Update • Two-year extension failed in 108th Congress • Key obstacles in 2004 • House Majority Leader Tom DeLay • Senate Banking Chairman Richard Shelby • Mandated Treasury Department study on marketplace • Lack of Treasury Department and White House support • Outlook for 109th Congress... • Push for two-year extension • Accelerate consideration of a long-term solution • Treasury Department marketplace study - due June 2005 • White House support critical • Partisan distractions

3. Point: House Majority Leader DeLay (R. Tex.) * * * As a true believer in the power of the free market, I am disappointed that the insurance industry has not come up with solutions to the problem of insuring against terrorism as it said it would. I know some people believe terrorism is unlike any other risk insurance companies face, and they’re right. But I also understand that terrorism is a fact of life today. The insurance industry is made up of creative and motivated thinkers who have always been able to accommodate new risks, new challenges, and new technologies. It took the wisdom of a remarkable thinker and one of our founding fathers, Ben Franklin, to use the free market to develop a solution to the threat that fire posed to the citizens of Philadelphia. * * * It is important for the industry to work with Congress to develop a long-term solution that does not involve the federal government serving as a reinsurer or permanent backstop. Nor can the government become a funding mechanism for the insurance industry. That is not the business of government, and that is not the philosophy of the Republican Party. Letter to PCIAA dated March 15, 2005

4. Counterpoint: Senate Minority Leader Reid (D. Nev.) * * * * * *

5. Other views "...the Terrorism Risk Insurance Act needs to be extended and now, not later. Why the urgency? Because companies that are now negotiating insurance policy renewals for next year and beyond are finding that their terrorism coverage will be severely limited or dropped altogether if TRIA is not extended." -- U.S. Chamber of Commerce President and CEO Thomas J. Donahue, March 17, 2005"There are regrettable instances in which markets do not work, cannot work. I have yet to be convinced [that the terrorism insurance market can be made to work]." -- Federal Reserve Chairman Alan Greenspan, February 17, 2005 “Congress should promptly act to extend TRIA for two years.” --Acting Superintendent of Insurance New York Howard Mills, April 14, 2005

6. Coalition to Insurance Against Terrorism www.insureagainstterrorism.org

7. National Basketball AssociationNational Collegiate Athletic Association National Council of Chain RestaurantsNational Football LeagueNational Hockey League National Multi Housing CouncilNational Petrochemical & Refiners AssociationNational Restaurant AssociationNational Retail FederationNational Roofing Contractors AssociationNational Rural Electric Cooperative AssociationThe New England CouncilOffice of the Commissioner of BaseballPublic Utilities Risk Management AssociationPartnership for New York City The Real Estate Board of New YorkThe Real Estate RoundtableSociety of American FloristsStarwood Hotels and ResortsTaxicab, Limousine & Paratransit AssociationTrizec Properties, Inc.Travel Business RoundtableUJA-Federation of New YorkUnion Pacific CorporationU.S. Chamber of CommerceWestfield (as of 9/24/04) Commercial Mortgage Securities AssociationCornerstone Real Estate Advisers, Inc.CSX Corporation Edison Electric InstituteElectric Power Supply Association The Financial Services RoundtableThe Food Marketing InstituteGeneral Aviation Manufacturers AssociationHelicopter Association InternationalHilton Hotels CorporationHost MarriottHyatt HotelsIndependent Electrical ContractorsInstitute of Real Estate ManagementIntercontinental HotelsInternational Council of Shopping CentersInternational Franchise AssociationInternational Safety Equipment AssociationThe Long Island Import Export AssociationMarriott InternationalMortgage Bankers Association of AmericaNational Apartment AssociationNational Association of Home BuildersNational Association of Industrial and Office PropertiesNational Association of ManufacturersNational Association of REALTORS® National Association of Real Estate Investment TrustsNational Association of Waterfront EmployersNational Association of Wholesaler-Distributors American Bankers AssociationAmerican Bankers Insurance AssociationAmerican Council of Engineering CompaniesAmerican Gas AssociationAmerican Hotel and Lodging AssociationAmerican Land Title AssociationAmerican Public Gas AssociationAmerican Public Power AssociationAmerican Resort Development Association American Society of Association ExecutivesAmerica's Community BankersAssociated Builders and ContractorsAssociated General Contractors of AmericaAssociation of American RailroadsAssociation of Art Museum DirectorsThe Bond Market AssociationBabson Capital ManagementBuilding Owners and Managers AssociationBoston PropertiesCCIM InstituteCentury 21 Department StoresChemical Producers and Distributors Association

8. 5 Reasons Why America Needs A Terrorism Insurance Backstop 1. The Unique Nature of the Risk 2. The State of the Insurance Market 3. The Proper Role of Government 4. A Matter of Fairness 5. Lack of Cover Already Hurting our Homeland's Economic Security "Planning the day before for the day after an attack should be viewed as equally important to protect ourselves against such an attack." Robert Lowe, CEO Lowe Enterprises, Chairman of Real Estate Roundtable and CIAT Spokesperson, Senate Hearing April 15, 2005

9. Legislative Options Clean 2-year extension 2-year extension w/transition to public/private partnership Redefine govt. backstop – (e.g., $25B per year for mega-catastrophes) Develop long-term solution

10. Post-TRIA Alternatives • Rely on Private Markets • Capacity of Private Reinsurance Market • Capital Markets - Capacity/interest? • Pre-Funded Tax-Free Catastrophe Reserves • Voluntary Pools • Problems: • Insufficient capacity for large losses • High prices/few buyers • NBCR not covered • Expectation of post-event government funds – reduce incentive for voluntary purchase • Regulatory restrictions – Exclusions allowed? SFP? Workers Compensation? Adequate Pricing?

11. Post-TRIA Alternatives • Government/Private Market Shared Risk • TRIA Extension without modification • TRIA Expansion • TRIA Roll-back • Mandatory Government Sponsored Insurance • Problems: • Subsidized rate, but many remain uninsured • NBCR uninsured • Domestic terrorism, Life, and Personal lines risks retained • Exposure is capped, but retention levels a solvency threat for some insurers

12. Post-TRIA Alternatives • Government Direct Compensation • Partial Recovery • Full or Near-Full Recovery • Problems • High taxes and substantial bureaucracy • Determining fair compensation amounts

13. Post-TRIA Alternatives • Concepts Under Consideration by Primary Industry Modified TRIA – 2 program components • NBCR (WMD) – U.S. government first dollar coverage • Conventional Coverage – modified TRIA • Increase post-event surcharges, lower deductible, and/or allocated/split deductible Modified TRIA – private pool & federal catastrophe cover • Federal catastrophe layer excess of $40 billion • Industry retention of $40 billion – private pool/program • Insurer co-participation at 5% of losses • 95% first dollar quota share reinsured by Pool • Pool funded by premiums, private reinsurance, post-event bond issue, post-event surcharges to re-pay bonds • Federal tax exemptions and contingent guarantees to support bond offering

14. Non US Government Programs Consorcio de Compensacion de Seguros (CCS) (Spain) – Government reinsurance Extremus AG (Germany) – Primary insurance for commercial property and business interruption GAREAT (France) – Reinsurance pool for commercial property and business interruption losses with government backstop Oesterreichischer Terrorpool (Austria) – Per event and per risk reinsurance pool with a government backstop Pool Re (United Kingdom) – Pool reinsurance on an XOL basis with a government backstop