Renewing TRIA: Political and Actuarial Issues

1. Renewing TRIA:Political and Actuarial Issues Michael G. McCarter, FCAS, MAAA Vice President, AIG Session CMT 1: Update on Terrorism CAS CLRS, September 11, 2007

2. Introduction • Background • Academy Analysis • Treasury Department • Congress – H.R. 2761 and CBO • Political Issues • Outlook • Actuarial Issues

3. Background • September 11, 2001 • Precursor events • Aftermath • November 2002: TRIA • December 2005: TRIEA • 2006 Elections

4. Academy Analysis • Terrorist use of WMDs could cause insurable losses in excess of $700 billion • Insurance industry has insufficient capital to bear such a loss and continue functioning • There are significant limitations on the insurance industry’s ability to control its own exposure

5. Treasury Department • Represents administration’s perspective; opposed to government interference in marketplace • June 2005 report • Secretary chairs President’s Working Group on Financial Markets • September 2006 report

6. Congress • Prior to 2007, the House generally favored extending and expanding TRIA while the Senate generally opposed both • Control of both the House and the Senate changed hands as a result of the 2006 elections

7. U.S. House • House Financial Services Committee now chaired by Rep. Barney Frank (D-Mass.) • Favors longer term (5 years or more) extension • Has indicated willingness to expand coverage to Group Life and Domestic Terrorists • Interested in more CNBR coverage • Has introduced H.R. 2761

8. H.R. 2761 • Approved by the House Financial Services Committee • Now expected to be voted on by the full House next week • In general, expands and extends the federal terrorism backstop • Current issue: CBO cost estimate and House PAYGO rules

9. H.R. 2761 Features - 1 • Extends TRIA for 15 years to 2022 • Covers domestic as well as foreign terrorism • Reduces event trigger to $50 million ($5 million after large attack) • At January 1, 2009 requires making available NBCR coverage • NBCR coverage starts with a 3.5% insurer deductible as compared with a 20% insurer deductible for conventional attacks • Larger NBCR attacks reduce insurer co-payment shares

10. H.R. 2761 Features - 2 • Provides additional legal certainty regarding the $100 billion insurance industry insured loss cap • Adds group life as a covered line with certain special features including a separate recoupment pool and use of “amount at risk” instead of premium as the metric • Requires Treasury market condition reports biannually • Blue-ribbon 21 member commission to report on long-term solutions to terrorism risk. Interim report in 5 years, final report in 8 years.

11. H.R. 2761 Features - 3 • Adds Farmowners Multiperil as a covered line • Adds “reset” mechanism to lower deductibles and triggers after significant terrorist attack • Creates voluntary terrorism buy-down fund at Treasury • Makes $100 billion cap “net” of industry participation • Small insurers can apply for NBCR exemption

12. CBO Cost Estimate • Uses an expected cash flows approach to estimate spending and revenue impact of H.R. 2761 for the next 10 years • Estimates H.R. 2761 would increase budget deficit by $200 million in 2008, $3.5 billion from 2008 to 2012, and $8.4 billion in 2008 to 2017 • Revenues from recoupments total $23.6 billion but extend well past 2017

13. U.S. Senate • Senate Banking Committee now chaired by Senator Christopher Dodd (D-Conn.) • Favors “permanent” extension of terrorism insurance program • Former chair Sen. Shelby (R-Ala.), now the Committee’s ranking member, still opposed to such extensions • Majority of only one seat as we speak

14. CBO Paper on Terrorism Issues - 1 • Requested by Senate Banking Committee and delivered in August 2007 • Explores economic effects of TRIA and of various options regarding reauthorization including extending, expanding, charging premiums, or allowing to expire • Does not reach conclusions, but expresses arguments “on the one hand, on the other”

15. CBO Paper on Terrorism Issues - 2 • TRIA’s subsidies may reduce incentives to mitigate risks of terrorism • TRIA may help preserve “agglomeration economies” arising from clusters of related businesses concentrated in specific areas • TRIA may encourage construction in areas of greatest risk, possibly increasing losses from terrorism

16. Political Issues • Desire for more CNBR coverage • Unwillingness to be perceived as increasing taxpayer obligations • Desire for maximum use of market mechanisms • Unwillingness to set up new federal bureaucracy • TRIA/TRIEA commercial lines oriented; successful in supporting economy • CNBR only for commercial lines?

17. Outlook • Many other issues, insurance and otherwise, competing for Congressional attention • Insurance issues are complex and subject to over-simplification • 2007 Congressional calendar is now very tight; potential “Christmas Tree” effect given support for renewal • Congress is aware of the importance of the issue to the economy

18. Outlook • Given intentions, appears highly likely that legislation should pass this year • But – many potential contingencies could work to slow or defeat legislation • Net outlook – legislation appears more likely than not, but the details of that legislation are hard to forecast

19. Actuarial Issues • Continue post-funding approach? • Include domestic terrorists? • Treatment of CNBR events? • Mandate “make available” for which coverages? • Include Group Life? • Restructure various limits? • Actuarial participation in new TRIA structures?