1937 Waterborne Agreement precluded Lloyd s underwriters from insuring land-based war risks.

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1 MOVING WITH THE TIMES Prior to 9/11, the market for stand-alone terrorism insurance was limited to providing solutions for property owners and trade/investment exposures in countries with elevated terrorism risk. Separately there were several local pooling solutions to address domestic terrorism including, Sri Lankan Pool, SASRIA, Consorcio. The largest providers, outside of the pools, were Lloyd s of London (Lloyd s) and American International Group (AIG) with whom limits of up to US$200m could be built. The market has evolved rapidly post 9/ July 1936 Start of the Spanish Civil War 1980S Iran-Iraq conflict IRA active Numerous bombings in London and across the UK. (Northern Ireland has a different scheme) We start to see the beginning of Islamic Terrorism (ex WTC ) William Farmer Strategic Head of Crisis Management & Special Risks, AXA XL 1937 Waterborne Agreement precluded Lloyd s underwriters from insuring land-based war risks. 1980S Skandia International leads Arab War Risks Insurance Syndicate (due to Iran-Iraq conflict). Terrorism was generally included/silent on commercial property insurance. LPO 437 was released 1982 and covered Terrorism and Riots, Strikes and Civil Commotion. 16

2 April 1992 Baltic Exchange Bomb City of London IRA 3 people killed and damage of 800 million April 1993 Bishopsgate Bomb City of London IRA 350 million of damage Beginning of Islamic Terrorism (ex WTC ) 11 September Attack on Twin Towers, New York, Pentagon killing 2,976 people and causing circa US$35bn insured loss 1993 was established in reaction to the market failure triggered by the Baltic Exch. bombing. pays out 262m (largest claim to date) after Bishopsgate bombing 1997 Lloyd s offers stand-alone war on land Lloyd s 667 Wording. Multiple claims came in on policies where Terrorism was silent Terrorism Exclusion Clauses introduced NMA2918 etc. Map Syndicate (Lloyd s) released the T3 Wording (a stand-alone Terrorism policy). T3A BI Extension Introduced January 2002, Treaty Reinsurers exclude Terrorism TRIA 2002 (US based) requires US insurers to offer terrorism coverage with Govt. backstop. Various country Pools established 2002 France GAREAT Germany EXTREMUS Australis ARPC (India/Netherlands/Denmark/ Belgium and others came later) July 2002 was extended to an all risks basis (no longer restricted to fire or explosion and CBRN exclusions were removed) 11 March Attack on commuter trains in Madrid, Spain Killing 192 people 7 July Attack on London tube trains and buses Killing 52 and injuring hundreds Arab Spring Beazley Syndicate releases full PV wording TRIA 2002 Extended (becomes TRIEA ) 2006 London Market produces updated version of T3 LMA3030 (Includes sabotage) Catlin Syndicates offer standalone NCBR coverage 2007 TRIEA Extended (becomes TRIPRA 2007) Terrorism Risk Insurance Program Reauthorization Act of Policies purchased didn t fit the problems posed by the Arab Spring. T3 and LMA3030 were built with properties and cities in mind LMA 3092 full PV wording introduced 17

3 An increased number of attacks on soft targets. These attacks can be carried out with guns, knives or via vehicles. Examples include: 2013: Westgate Shopping, Kenya 2014: Sydney café siege 2015: Charlie Hebdo, Paris 2015: Bataclan, Paris 2015: Sousse Beach, Tunisia 2016: Orlando Nightclub, USA A series of attacks using vehicles across Europe, 8+ attacks including: Nice: 86 killed, 434 injured Berlin: 12 killed, 56 injured Westminster: 5 killed, 32 injured Stockholm: 5 killed, 14 injured London Bridge: 8 killed, 45 injured Barcelona: 16 killed, 152 injured 2015 TRIPRA 2007 extended and becomes TRIPRA Introduction of niche products to market such as: Active Assailant, Threat and Loss of Attraction, Terrorism Liability and Contingent BI. Policies extended to include Vehicle Ramming Cyber extensions selectively available 2018 April 2018 lifts its cyber exclusion and announces intention to offer NDBI reinsurance. TODAY S MARKET CAPACITY AND NUMBER OF PLAYERS From a per risk capacity point of view, the direct market began to settle in with about US$1bn. There has been incremental growth since driven by existing underwriters increasing their capacity, and some new entrants especially in Lloyd s. Currently per risk global capacity stands around US$2bn. The stand-alone terrorism market is small compared to the global property insurance market (approximately US$1.5bn capacity for any one risk, compared to over US$6bn for property all risks). To make best use of available capacity, first loss policies are the norm with limits normally aggregated. Despite large pricing reductions, premium has increased significantly since 2002, peaking in Despite HIM (Natural Catastrophe events in late 2017), soft conditions prevail in Estimated global terrorism premiums (US$m) Premiums have increased significantly since, peaking US$1,050m in ,200 1, $1,050m Changes in demand In the early days after 9/11, the US market contributed more than 50% of worldwide stand-alone terrorism premium. This share has declined (post Terrorism Risk Insurance Act) to around 30% but the US is still by far the most significant market. Demand is well spread globally; typical buyers are larger and multinational companies. Penetration is notably strong in Canada, Mexico, Scandinavia, Ireland, Turkey, Singapore, Hong Kong, India and UAE. A robust stand-alone market has also developed to compete against or complement local Governmentbacked pool arrangements in the UK, Germany, Israel, South Africa and the Far East. Factors that have contributed to increase demand include: Better distribution and product awareness Risk perception terrorism is rarely out of the news Reduced pricing Stronger corporate governance globally Broader coverage and flexible wordings Political Violence and War extensions becoming widely available E trade portals for SME business 18

4 PRODUCTS TO ADDRESS CHANGING ENVIRONMENT T3/LMA3030 based stand-alone terrorism policy wordings were born out of demand post 9/11. The focus was to cover property damage and consequent business interruption from catastrophic/major attacks. The spate of attacks in the UK, France, US, Belgium, Spain and Germany in the past three years has not resulted in any knee jerk reaction on pricing or capacity partly because losses paid have been low relative to the annual premium. Conversely, the stand-alone market has been very quick to offer new products to address the changing peril landscape. Key new products and product enhancements on offer include: Non Damage Business Interruption (NDBI) extensions see expanded section below Policies that can be triggered by Bodily Injury as well as property damage Follow form wordings following broadform property policies Extensions for malicious acts, workplace violence that are not certified as terrorism Terrorism and active assailant liability Cyber Terrorism and malicious cyber extensions Several solutions were brought to market. Active Assailant policies remove any grey area surrounding the motive of attack, and will trigger if there is bodily injury (in addition to triggering if there is property damage). This type of policy can be sold as stand-alone coverage or as an extension to a property damage policy. The spate of attacks in the UK, France, US, Belgium, Spain and Germany in the past three years has not resulted in any knee jerk reaction on pricing or capacity. BUSINESS INTERRUPTION AND NON DAMAGE BUSINESS INTERRUPTION (NDBI) The socio-economic climate differs to that 17 years ago. To show the scale of this difference in % of the value of the S&P 500 came from Tangible Assets (structure, equipment, property); in 2015 this number fell to 13% with 87% of all value coming from intangible assets such as brand, customer databases, reputation, employees, IP, R&D and technology. Swing of S&P 500 Index value from tangible to intangible assets (%) 1975 Tangible assets Intangible assets 2017 Tangible assets Intangible assets Property damage is typically not the largest concern of a company. Business interruption following property damage can have a huge effect on the top line, but the same event might have unspecified long-term effects on the brand. Terrorism events are often critical to a country s security as well as being highly emotive and politically charged events. This can result in significant disruption due to cordons, post-event investigations and lock-downs. The events at Borough Market in London (3 June 2017) and aftermath are a key example. Terrorism policies and extensions have a relatively short history and started out as very basic property coverage, often with little or no coverage for NDBI. Coverage has broadened to include the likes of denial of access of incoming utility, supplier and customer extensions. Other NDBI extensions such as Loss of Attraction and Threat have become more widely available since Loss of Attraction cover will trigger if a peril covered under the master policy occurs at a scheduled attraction property or at a location within a stipulated radius of the insured property, which subsequently results in a measurable downturn at the Insured s premises. Threat cover will trigger if there is a specific threat against the insured to inflict bodily injury to any employee, or contractor, or threat to damage, destroy or contaminate any property at the scheduled location. Cover can also be triggered if there is a threat against any director, partner or officer. Extended Extra Expense cover is available as well. Extra expense can include, public relations costs, relocation expenses, counselling and or psychiatric care costs, medical expenses, job retraining costs, recruitment costs, forensic accounting and temporary security costs. Coverage will assist in rehabilitating any damage to brand and ensure duty of care responsibilities are met. has taken a lead in UK in seeking to extend coverage to include NDBI within a radius of the insured location. Business interruption following property damage can have a huge effect on the top line, but the same event might have unspecified long-term effects on the brand. 19

5 ATTRACTING SME BUYERS Most terrorism purchases are voluntary and price sensitive. Pools that are mandatory or dominant in the local market (such as GAREAT, ARPC, NHT) have fewer issues around anti-selection. Non mandatory pools and stand-alone insurers have to work hard to attract SME clients. The challenge is that no insurer wants a portfolio made up of the worst risks and trophy buildings clustered in the top accumulation zones. This was probably acceptable in the stand-alone market of 2002/, but the distressed pricing was never going to last. There are several reasons why SME businesses are less inclined to buy terrorism coverage: Perception that the business is not a target Lower level of corporate governance Mortgage covenants on property less onerous than for large loans Lack of awareness of products available The vanilla terrorism products not being suitable SMEs not approached by brokers and insurers due to relatively low premiums CHALLENGES FOR THE TERROR/POLITICAL VIOLENCE MARKET ON THE NEAR HORIZON Drones are certainly a realistic delivery method for small IEDs. Existing terrorism policies cover use of drones, but it is doubtful that drones are specifically factored in to pricing models. CBRN (Chemical, Biological, Radiological, Nuclear) attacks remain a major concern but is not a threat that has emerged recently. Capacity in private markets remains very limited with only a handful of direct insurers offering products. Government pools (, GAREAT and ARPC in particular) are able to offer large limits by virtue of strong capitalisation, reinsurance and Government backstops. Drones might be an effective means of delivering Chem/Bio/Radioactive agents. Drone technology for agricultural spraying is advancing rapidly and could be used to devastating effect if terror groups can obtain a suitable chem/bio agent. Recent events, including the aftermaths of Borough Market (3 June 2017), Westminster (22 March 2017) and the Boston Marathon bombing (15 April 2013) have illustrated that SME business may not be targeted but can suffer badly from being in the vicinity of an attack. is in the vanguard of work to attract more SME buyers. This includes offering improved risk related pricing, providing meaningful NDBI extensions (launching soon), initiatives to encourage good risk management and improving access to the product via marketing campaigns Recent events [...] have illustrated that SME business may not be targeted but can suffer badly from being in the vicinity of an attack. 20