2007 CAS Ratemaking Seminar

1. 2007 CAS Ratemaking Seminar SPE-3 Actuarial Analysis of Catastrophes & Terrorism for Commercial Insurance Rimma Maasbach - ISO

2. Terrorism Loss Costs Topics (1) Overview of TRIA (2) Loss Costs – International • Original (2002) • Revised (2004) (3) TRIA • Calculation of Federal Backstop Factors (4) Domestic Terrorism Pricing

3. Terrorism Pricing Terrorism Risk Insurance Act of 2002 (TRIA) Overview

4. Terrorism Rating Overview

5. Terrorism RatingAIR Commercial Property Results

6. Terrorism RatingCommercial Property Geographic Tiers

7. Commercial PropertyAdjustments to AIR Loss Costs • Insurance – to – Value • Divide by .80 • Nuclear/Bio-Chemical • Multiply by 2.00 • Federal Backstop Factor • Insurer Retained Losses  Total Terrorism Losses • Loss Adjustment Expenses • Add 5% of Adjusted Losses

8. Terrorism Pricing Initial Terrorism Loss cost filings Program Year 1 (2003) loss costs – Building coverage Tier 1 – NYC, Chicago, DC, San Francisco Tier 2 – Boston, Houston, LA, Philadelphia, Seattle Tier 3 – Remainder of Country

9. WASHINGTON, D.C. IMPLEMENTED TERRORISM LOSS COSTS .030 .018 .008

10. Changes to AIR Model (2004) • Revisions to Conventional Loss Estimates • Relatively small overall effect (10%) reduction) • Larger impact in certain zips/counties • Nuclear, Biological and Chemical (NBC) Loss Estimates • Refined treatment estimates NBC losses on the same geographic basis as conventional losses. • Replace the prior estimate which assumed NBC=Conventional • Compresses Loss Costs within Large Metropolitan Areas, i.e., smaller loss costs in the center city, higher loss cost in outlying counties

11. AIR Terrorism ModelCommercial Property Comparison of Annual Expected International Terrorism Losses * Preliminary Estimate

12. Terrorism Loss CostsSample Impacts of Updated Model Version Original Loss CostsNew Loss Costs

13. Terrorism Loss CostsDistribution of Conventional vs. NBC

14. Revised Terrorism Loss CostsNew Geographic Tier Definitions

15. TRIA Federal Backstop Mechanism

16. Terrorism Risk InsuranceExtension Act (TRIEA) Key Features • Two Additional years (2006 & 2007) • “Make Available” Requirement • International only (No Domestic) • Applies to Underlying Coverages only (e.g. No Mandatory CBRN) • Limited Lines of Insurance • Property/Casualty Only • Commercial Lines Only • Some Commercial Lines Excluded • Federal Backstop Mechanism Continues Unchanged • But Parameters Have Changed

17. TRIEA ParametersComparison Across Years

18. Calculation of TRIA Federal Backstop Factors • Calculate annual expected insured losses covered by the act – mean and the 99%ile – fit lognormal and gamma distributions. • Calculate industry deductible based on earned premium for the prior year. % market share impacted increases with the size of loss. • Relative impacts – losses will not be distributed exactly according to insurer’s market share. Assume each quintile incurs an uneven percentage of losses – e.g., 10%, 15%, 20%, 25%, 30%. • Calculate retained insured losses as a percentage of total losses, subject to the $100B cap. • Distribute average retention among tiers – greater impact for Tier 1 with greater loss potential.

19. Certified TerrorismFederal Backstop Factors

20. Commercial PropertyDomestic Terrorism Comparison of Annual Expected Losses based on AIR’s Terrorism Model Domestic as a percentage of International = 10%

21. Terrorism Pricing Domestic Terrorism Loss Costs AIR domestic terrorism loss costs for events $25M – no overlap with smaller terrorism losses included in ratemaking experience Compared domestic terrorism loss costs to average commercial property loss costs Domestic terrorism loading included in Basic Group I loss costs to achieve overall desired effect. 1.0% for Boston, Chicago, DC, Los Angeles and New York City 0.5% elsewhere

22. Commercial PropertyTerrorism Pricing Rimma Maasbach RMaasbach@iso.com 201-469-2605