Global Terror Update 2009

Transcription

1 09 Global Terror Update 2009 T W O T H O U S A N D N I N E

2 Table of Contents Introduction 1 North America 2 United States 2 Canada 5 Europe 6 Austria 6 Belgium 7 Denmark 9 Finland 9 France 9 Germany 15 Italy 17 Netherlands 17 Norway 19 Portugal 19 Spain 19 Sweden 20 Switzerland 20 United Kingdom 21 Asia/Pacific 23 Australia 23 China 24 India 25 Japan 25 Korea 25 Malaysia 25 Philippines 26 Taiwan 26 Latin America 27 Argentina 27 Brazil 27 Chile 27 Colombia 27 Mexico 28 Peru 28 Middle East 29 Bahrain 29 Israel 29 Africa 30 Namibia 30 South Africa 30 Aviation Insurance 32 Overview 32 Market Conditions 33 WMD Update 33 Terrorism Models 34 AIR U.S. Terrorism Model 34 RMS U.S Probabilistic Terrorism Model (PTM) and 34 Global Terrorism Risk Modl Targets 34 Appendix: Definitions of Terror Worldwide 36 Europe 36 The Americas 43 Asia Pacific 48

3 Global Terror Update 2009 Guy Carpenter 1 1 Introduction The global terror insurance market continues to evolve. Government initiatives are shaped by activities on the ground from new or changing threats to developments in insurance and reinsurance markets. Since the terror attacks of September 11, 2001 in the United States, government involvement in the global terror insurance market has increased. Several countries have developed comprehensive programs for terror coverage and terror pools though some still have no governmental support at all. We have also added a section on modeling and an appendix on the definition of terror around the world. Last year, AIR Worldwide Corporation ( AIR ), following two years of research, updated its damage functions to include the impact of reflected pressure waves following a conventional bomb blast. Prior models had only taken account of incident pressure waves. Reflected pressure is always greater than incident pressure by a factor of up to 13X, depending on the density of the area in question. And, In 2008, Risk Management Solutions ( RMS ) implemented updates to the U.S. model (PTM), including the Target Database, VRG Footprints, Attack Likelihoods, and Building Vulnerability. The target database was updated to include 98 new targets, including chemical plants, government buildings, and convention and entertainment centers. To account for the added targets, the number of potential attacks has also increased, and some existing attack footprints have been repositioned. Since the definition of terrorism can differ from country to country, there can be gaps in cover for insureds and reinsureds. To assist countries, insurers, and reinsurers in understanding the differences, Guy Carpenter has collected information on the definition of terror in countries around the globe. A common theme exists, as a number of nations utilize the Lloyd s Market Association terrorism wording definition. This year s installment of the Global Terror Update addresses terror insurance market developments in 34 countries on six continents in addition to impacts on the aviation market and an update on models. Terrorism is an evolving threat, and the marketplace is adapting to it.

4 Global Terror Update 2009 Guy Carpenter 2 2 North America United States The Terrorism Risk Insurance Act of 2002 (TRIA) was extended in 2007 for another seven years, following a two-year extension passed in TRIA, in its current iteration, requires insurers to offer coverage to a large majority of commercial policyholders. In return, carriers receive reinsurance protection above a deductible, calculated at 20 percent of direct earned premium. They are also subject to 15 percent coinsurance. Following the terror attacks of 2001, insurers moved to eliminate cover from their policies. The United States created a program to support the insurance industry in providing terror cover to ensure that adequate coverage remained available and to mitigate the effects of a future catastrophe on the broader economy. The U.S. Congress passed and implemented TRIA to provide a financial backstop for commercial insurers from potential insolvency arising from underwriting terrorism risks. Per the latest extension, TRIA is set to expire at the end of In a document on budget cutbacks totaling USD17 billion, the Obama Administration on May 7, 2009 proposed scaling back the TRIA program. Industry observers viewed the proposal as more of a political statement than a formal statement of policy. Having spent so much time passing the renewal of TRIA in 2007, Congress is not believed to be willing to revisit the legislation for some years.

5 Global Terror Update 2009 Guy Carpenter 3 TRIA s Essential Features Limitation Program Trigger Insurer Deductible Covered Lines Insurer Shares (Co-Participation) Program Cap Events less than USD5 million are not certified Events more than USD100 million 20 percent of direct earned premium Exclusion of coverage on commercial auto, burglary and theft, surety, professional liability and farm owners multiple peril insurance 85 percent federal government, 15 percent insurer USD100 billion per year for insured losses (federal and insurer combined). Policies to provide clear and conspicuous disclosure to the policyholder of the existence of the USD100 billion cap Requires US Treasury to promulgate regulation for pro rata shares when losses exceed cap Recoupment of Mandatory recoupment of all federal payments if insuredloss < USD25 billion in 2006 and USD27.5 Federal Share via billion in 2007 Policyholder Surcharge Foreign versus Domestic Surcharges not to exceed 3 percent of premiums per year All acts of terrorism are covered Expiration December 31, 2014 Studies The President s Working Group on Financial Markets is required to report to Congress in 2010 and 2013 concerning the long-term availability and affordability of terrorism insurance, including the availability and affordability of group life insurance and nuclear, biological, chemical, and radiation (NBCR) Source: Guy Carpenter & Company, LLC, U.S. Treasury Department The issue of terrorism cover has been addressed at the state level as well. Prior to the events of September 11, 2001, 31 jurisdictions had laws that required that property policies be based on the 1943 New York Standard Fire Policy (SFP). The SFP contains few exclusions and does not exclude terror as a cause of loss by fire. Further, the hazard of fire following an event is covered even if the peril that causes the fire is not covered in the policy. SFP laws have prevented insurers from denying cover for fire caused by terror events, even in cases where insurers had terror exclusions. According to the National Association of Mutual Insurance Companies (NAMIC), 14 states have allowed terrorism exclusions to be added to the SFP since September 11, 2001: Arizona, Connecticut, Idaho, Louisiana, Michigan, Minnesota, Nebraska, New Hampshire, North Dakota, New Jersey, Oklahoma, Pennsylvania, Rhode Island, and Virginia.

6 Global Terror Update 2009 Guy Carpenter 4 Study on NBCR by United States Government Accountability Office (GAO) While the September 11, 2001, terrorist attacks killed nearly 3,000 people and resulted in an estimated USD32.5 billion in insured losses as of 2006, analysts estimate that casualties and property damage involving unconventional weapons (e.g., Nuclear, Biological, Chemical, and Radioactive materials) could be substantially worse in some scenarios. For example, in a RAND Corporation simulation of a terrorist-detonated nuclear explosion in the Port of Long Beach, California, instant fatalities were estimated to be 60,000, with another 150,000 estimated to require emergency medical treatment. Losses could reach USD1 trillion. Although TRIA requires companies that offer commercial property/casualty insurance (i.e., coverage for building damage and related legal costs for injuries to third parties) to provide coverage for terrorist attacks and specifies that the federal government assume a significant share of the associated financial responsibility, insurers standard exemptions may exclude coverage for terrorist attacks involving NBCR materials. The reauthorization of TRIA in 2007 directed the GAO to review: (1) the extent to which insurers and reinsurers offer coverage for NBCR attacks, (2) the factors that contribute to the willingness of insurers and reinsurers to provide coverage for NBCR attacks and their ability to manage these risks, and (3) any public policy options for expanding coverage for these risks, given current insurance market conditions. Representatives of most commercial property/casualty insurers said that they continue to exclude coverage for terrorist attacks involving NBCR materials, and representatives from several reinsurance companies that do offer such coverage reported placing significant restrictions on it. Insurance representatives reported that they continued to rely on long-established exclusions, such as the nuclear and pollution exclusions, to exclude or limit coverage. However, some insurance industry participants said the applicability of these exclusions could be challenged in court because they were not specifically developed to address terrorist attacks. Representatives from life and health insurers also reported that state regulators generally have not permitted them to exclude NBCR risks from their policies. Commercial property/casualty insurers and reinsurers generally limit NBCR coverage strictly because of the uncertainties about the risk and the potential for catastrophic losses. Insurers that are required to provide such coverage in workers compensation, life, and health reported challenges in managing the associated risks. In its study, GAO reviewed some proposals to address the NBCR issue, but did not make any recommendations.

7 Global Terror Update 2009 Guy Carpenter 5 Canada Terror risk management has remained relatively unchanged since September 11, Under current Canadian law terror including fire following may be excluded, though fire following exclusions have not been adopted for personal lines. The fire following aspect is being reviewed in a number of provincial jurisdictions. With respect to commercial property, terror can be excluded and there is a broader view that the practice of excluding fire following is acceptable. The Insurance Bureau of Canada has been in discussions with a number of the provinces on the definition of terror. Current Definition of Terrorism in Canada: Terrorism means an ideologically motivated unlawful act or acts, including but not limited to the use of violence or force or threat of violence or force, committed by or on behalf of any group(s), organization(s), or government(s) for the purpose of influencing any government and/or instilling fear in the public or a section of the public. Insurance Bureau of Canada The insurance industry continues to support a government-backed terror pool, and there are hopes that these discussions will start again with the federal government in the near future. Canada is one of few industrialized nations worldwide that does not have a national back stop for terror risk. While the issue of fire following terror on commercial policies seems to be getting clearer, the definition of terror has become an item of discussion. In some jurisdictions, there is a concern that the current Canadian definition of terror could include ideologically motivated acts of vandalism. Vandalism coverage is currently offered under most broad multi-peril property policies.

8 Global Terror Update 2009 Guy Carpenter 6 3 Europe Austria Prior to September 11, 2001, terrorism risks were not considered to be a threat to Austria s population or industries and tended not to be excluded in primary insurance policies. On October 1, 2002, Austrian insurers in the Verband der Versicherungunternehmanen Oesterreichs (VVO, the Austrian insurance association) created Oesterreichischer Versicherungspool zur Deckung von Terrorisiken (The Austrian Terrorpool) in a response to the changing perception of risk following the terrorist events in the United States. The Austrian Terrorpool was created as a mixed co-insurance and reinsurance pool, with the primary object of offering affordable property cover against risks arising from an insured peril triggered by terrorism. The Terrorpool acts as reinsurance, with the direct writing insurer issuing a separate terrorism policy and then ceding the business to the Terrorpool. While terrorism cover and Terrorpool membership are optional, 99 percent of the Austrian Insurance Association (VVO) members belong to the pool. Members shares of the pool are prorated to their market share in property insurance. The Terrorpool consists of two layers, with the first layer rising to EUR50 million (USD70 million), and the second exhausting at EUR200 million (USD280 million). In an effort to avoid deterring the private sector from accommodating terror risks, the Austrian Ministry of Finance decided against offering a third layer of cover in the form of a state guarantee. EUR200M EUR150M in excess of EUR50M annual aggregate. Coverage by international reinsurance market. EUR50M EUR50M in annual aggregate. Coverage by primary insurers per market share. Euros (millions)

9 Global Terror Update 2009 Guy Carpenter 7 The Terrorpool also acts as reinsurance for property damage and business interruption arising from acts of terrorism. Initial premium covers up to a maximum limit of EUR5 million (USD7 million) per policy and location. If the sum insured is smaller than EUR5 million, then the corresponding sum insured applies. Insurance coverage also includes any kind of damages, losses, costs, or expenses that are the subject matter of the contract and are directly or indirectly caused by, result from, or are connected with actions taken for containing, preventing, or suppressing acts of terrorism or that are related to them in any way. Belgium Belgium s Terrorism Reinsurance & Insurance Pool (TRIP) was created on February 1, TRIP, a non-profit organization, distributes the loss costs of terrorism cover among all participants according to their market share, and it acts also as a reinsurance buyer. TRIP guarantees the cover of terrorism claims during a calendar year up to a global annual limit of EUR1 billion (USD1.4 billion). This amount will be adjusted every January based on the Consumer Price Index (relative to December 2005). The Belgian government can change the amount based on several factors, including economic developments, the financial capitalization of the (re)insurers, and the development of terror risk. Carriers are not required to participate in the pool, but participant liability is capped at EUR1 billion, while non-participant liability is not capped at all. Membership in TRIP represents more than 90 percent of the market. The current annual TRIP limit, based on the December 2008 CPI, is EUR1,075,398,743 (USD1.5 billion). Thus, the first layer becomes EUR475,398,743 (USD665 million) in excess of EUR300 million (USD420 million) for Beyond the EUR700 million (USD 980 million) capacity (indexed) provided by the (re)insurance industry, the Belgian government will provide an additional capacity of EUR300 million. Market retention is based on TRIP member market shares. The first layer is placed in the reinsurance market, and the insurers can also participate as reinsurers at their discretion.

10 Global Terror Update 2009 Guy Carpenter 8 The classes of business are required to cover damages caused by terrorism are: Workmen s Compensation Insurance Motor Liability Insurance Strict Liability Insurance for public places or scenes in case of fire or explosion Property Simple Risks Insurance Life Insurance classified by the Banking, Finance and Insurance Commission (CBFA) under n 21, 22, and 23 Health Insurance classified by the CBFA under n 02 Accident Insurance classified by the CBFA under n 01 For other classes of business, the law is applicable as far as the insurance policies provide terrorism coverage. Following classes of business are excluded: Terrorism insurance contracts written as such Insurance for businesses classified by the CBFA as: railway hull (04), aviation hull (05), ocean hull (part of class 06), aircraft liability (11), ocean-going vessel liability (part of class 12) and railway liability (part of class 13) Insurance companies covering liabilities from nuclear risks pertaining to Public Liability and damage to nuclear installations in accordance with the Law of July 22, 1985 (the Law ) Theoretical surrender value of life insurance NBC terrorism is covered for policies where terrorism coverage is compulsory and where it is included in specific policies. When it is covered, as defined in the law, nuclear can include damage caused by weapons or machines intended to explode by a modification of structure of the atomic nucleus, but the law allows the exclusion of nuclear bombs. Buildings, including contents located at a single company site, are allowed a recovery of up to EUR75 million (USD105 million). All insured objects of a company in an area of less than 50 meters on the same risk-address are deemed to be one and the same location. The parent company and its subsidiaries are considered to be one insurance entity. The Law provides a broad definition of terrorism, based on that provided by the Organization for Economic Co-operation and Development (OECD). The flexibility of the definition has made it necessary for a committee to decide whether a specific event can be attributed to terrorism. This committee includes a representative of the Minister of Economy, CBFA members and two representatives from the (re)insurance industry.

11 Global Terror Update 2009 Guy Carpenter 9 The committee meets on a monthly basis of its own accord or at the behest of the government to decide if any events that have occurred since the last meeting could be construed as resulting from terror. A final decision must be rendered within six months of the event s occurrence. The total compensated amount will be set for the first time at this meeting, and revision is possible every six months. The final decision with respect to the total compensated amount will be set after three years (analogous to the consolidation principle of the Belgian workers compensation business). Denmark Currently, there is no terror pool or government involvement in terror coverage. In regards to commercial policies, physical damage to buildings is always fully covered, though there are limitations/exclusions on contents and business interruption. There are no exclusions for Nuclear, Biological, and Chemical (NBC) terrorism in the original conditions of workers compensation. Reinsurance generally follows the original conditions but excludes NBC terrorism. However, terrorism is not excluded from personal lines. Finland All Finnish insurance companies, except Pohjola and If, participate in the Finnish Terrorism Pool. The pool is intended as a last resort in the event of a major terrorism loss in Finland, and recovery will be made under the pool only after all traditional reinsurance programs have been exhausted. For personal lines, there are no terrorism exclusions. On industrial and commercial lines, exclusions are imposed, but with a EUR3 million per policy write-back. Reinsurance generally follows the original conditions, but excludes NBC terrorism. France GAREAT Large Risk Scheme (Limit above EUR6 Million) Following the tragic events of September 11, 2001 in the United States, the reinsurance community adopted a much tougher line with regard to these risks and imposed terrorism coverage exclusions, especially on the largest risks. The result was that market capacity for terrorism coverage dropped substantially and that the capacity available was to a large extent limited to small and medium-sized risks. This situation confronted the insurers of large French risks with a difficult choice: reduce their exposure on large risks, insure them against attacks without resort to reinsurance, or find alternative reinsurance solutions (the third option being scarcely practical, given the market context and the limited timeframe in which to set up and complete the arrangements).

12 Global Terror Update 2009 Guy Carpenter 10 The Public Authorities (through the intermediary of the Treasury Division) along with France s two main professional Insurance Associations the Federation Francaise des Societes d Assurance (FFSA) (stock companies) and Groupement des Entreprises Mutuelles de l'assurance (GEMA) (mutuals) began discussions in order to find a suitable solution. A compromise solution was found with the creation with effect from January 1, 2002 of Gestion de l Assurance et de la Réassurance des risques d Attentats et Terrorisme (GAREAT), which is structured around five guiding principles: 1. Maximum coverage (perils covered amount frequency) with French state intervention for an unlimited amount in excess of a certain threshold 2. Distinction drawn between small risks (the responsibility of traditional reinsurance) and large and medium-sized risks (GAREAT s responsibility) 3. The largest possible mutualization of large and medium sized risks (the risks in question are those with sums insured, including business Interruption, or a contractual loss limit above EUR6 million obligatory scheme for the members of the FFSA and of GEMA) 4. Progressive rating, depending on the size of the risks (rate between 6 percent and 18 percent of property premiums up to 24 percent in specific cases); these rates are reinsurance rates charged by GAREAT to their members, though the insurers (GAREAT members) are free to charge these rates or different rates to their insured as they whish 5. Limitation of unlimited Motor coverage (waiver of recourse against the insurer of any vehicle involved in an attack) Renewal for 2009 The 2008 placement was done through a tender offer mechanism. The 2009 placement is a mix of a tender and a more traditional placement, where each layer is ultimately placed at a fixed and unique price for all participants. Quoting reinsurers having offered the best terms have benefited from a privileged signing. Total capacity and functioning of the cover remain unchanged with: EUR1.8 billion XS EUR400 million Above EUR2.2 billion (USD3.1 billion), the unlimited state warranty (through Caisse Centrale de Réassurance vehicle) comes into play Layering remains unchanged over last year with six layers of EUR300 million (USD420 million) each.

13 Global Terror Update 2009 Guy Carpenter 11 Summary of 2009 Reinsurance Structure Euros Millions Unlimited State Guarantee via CCR 2,200 1,900 1,600 1,300 1, xs 1,900 (7th layer) 300 xs 1,600 (6th layer) 300 xs 1,300 (5th layer) 300 xs 1,000 (4th layer) 300 xs 700 (3rd layer) 300 xs 400 (2nd layer) Retention (1st layer) It is a Per Risk, Per Event, and Aggregate program The retention of EUR400 million is split among the members of GAREAT in relation to their respective shares in GAREAT Above EUR400 million capacity is placed up to EUR2.2 billion in the open reinsurance market, with the possibility for the members, if they wish, to assume cover. The unlimited state guarantee has been renewed in 2007 for another three-year period (2007 to 2009) The estimated income to GAREAT for 2009 is EUR240 million (EUR242 million in 2008, EUR252 million in 2007, and EUR254 million in 2006) Original insurance premiums related to risks subject to GAREAT: EUR1.9 billion Source: Guy Carpenter & Company, LLC The program has been loss free since inception, worst cumulative loss situation being estimated below EUR7 million (USD 9.8 million) for the 2002 underwriting year. Pricing for 2009 Despite difficult market conditions due to the global financial crisis, the overall price has again decreased for 2009.

14 Global Terror Update 2009 Guy Carpenter 12 Summary of Reinsurance Structure Premium Layer Limit Deductible ROL for 100% % (Millions of euros) 2 300,000,00 xs 400,000,000 8,20% 24,600, ,000,000 xs 700,000,000 6,80% 20,400, ,000,000 xs 1,000,000,000 5,50% 16,500, ,000,000 xs 1,300,000,000 4,70% 14,100, ,000,000 xs 1,600,000,000 4,20% 12,600, ,000,000 xs 1,900,000,000 3,60% 10,800,000 Total 1,800,000,000 xs 400,000,000 5,50% 99,000,000 EPI 2009: 240,000,000 Source: Guy Carpenter & Company, LLC GAREAT Small Risks Scheme (Limit below EUR6 Million) Terrorism coverage on small risks (Personal Lines, commercial and agricultural risks below EUR6 million) began to pose a problem on the reinsurance market when programmes were renewed at January 1, In contrast with the large and mediumsized risks, a market solution including an unlimited state guarantee could not be found at that time. After more than a year of negotiation, the Public Authorities (through the intermediary of CCR) agreed to give an unlimited guarantee with effect from January 1, 2006 in order to cover small risks. This cover protects against terrorism losses for: Personal Lines (no cession limit) Professional, Commercial Risks and Agricultural Risks on which the insured amounts (Property and Business Interruption) are below EUR6 million Motor branch physical damage business only (excluding Third Party Liability TPL) Per the law passed in 2006, the cover has been extended, with specific agreement of GAREAT, to damage to the hulls of pleasure craft and to aircraft designed for private use whose value does not exceed EUR1 million

15 Global Terror Update 2009 Guy Carpenter 13 The state, through CCR, continues to provide its full unlimited warranty in case of aggregate Terrorism losses during the year above retention calculated as follows: Twenty percent of the premium declared in Statement C4 for the following categories: Personal Lines (Category 24) Professional Risks (Category 25) Agricultural Risks hail excluded (Category 262) Two percent of the premiums declared in Statement C4 for Category 23, Motor (excluding liability), is also included. Renewal for 2009 For 2008 the overall market retention, when applying the above percentages, is estimated at EUR2.53 billion (USD 3.5 billion) while 2007 has been revised at EUR2.45 billion (USD3.4 billion). For 2009 GAREAT is estimating a figure of EUR2.65 billion (USD3.7 billion), split as follows: Attachment Point for Reinsurance for Small Risks C4 Categories Revised C4EPI Estimated State Estimated C4EPI Estimated state point 2009 attachment point 2009 attachment Personal Lines 7,080 1,416 7,450 1,490 Professional Risks 3, , Agricultural Risks (excl Hail) Motor Vehicles (excl TPL) 10, , TOTAL 22,370 2,530 23,150 2,650 Source: Guy Carpenter & Company, LLC Note: EUR millions Each insurance company in France negotiates directly with CCR the unlimited coverage after a retention applying the above calculation method to its own premium income. Below this threshold, insurers have access (on a voluntary basis) to the GAREAT Scheme which has been reviewed as follows in order to match with the new level of attachment of the State guaranty. Furthermore you will notice that the old second layer has been split into two layers in order to ease the 2009 placement

16 Global Terror Update 2009 Guy Carpenter Reinsurance Structure Euros Millions 2, th layer Unlimited by company (CCR) Reinsurance m xs m Reinsurance 100% (ex unlim.) EUR2,250M xs EUR400M (est) Reinsurance EPI EUR88 million (est) Basis premium (est) EUR13 billion 1, % av. market share (est) EUR2,70M xs EUR48M 3rd layer m xs m Reinsurance EPI EUR10,56 million (est) Basis premium (est) EUR1.56 billion 2nd layer m xs 400 m st layer Members 265M deductible Type of cover: Annual Aggregate XOL Period of cover: one year (losses occurring during) In 2008, the insurers who joined the Small Risks Pool, mainly small mutuals, regional companies, and bank-insurers, represented an estimated market share of 14.4 percent. Since it is too early to know the exact weight of companies joining the Small Risks Scheme for 2009 (estimated so far at 11.4 percent), the overall placement for GAREAT 2009 market share is based on an approximate figure of 12 percent Reinsurance Structure Limit ( m ) Priority ( m) Flat Premium ( m) Layers 100% 12% 100% 12% 100% 12% ROL ,937,500 2,632, % ,312,500 1,957, % 4 1, , ,250,000 3,510, % Total 2, ,500,00 8,100, % Guy Carpenter & Company, LLC Note: Reduction slightly over 5 percent compared with 2008 price.

17 Global Terror Update 2009 Guy Carpenter 15 Once again, as we only attract part of the market within the GAREAT Small Risks Scheme, the exposure and the probability to attach the cover is therefore very much reduced. Furthermore, the fact that, each insurance company in France will negotiate individually the unlimited cover of the state with CCR, creates a mechanism that is reducing the effective retention of each individual company protected under the Scheme and even further reduces the probability of attaching the GAREAT Small Risks Scheme. Germany Historically, for most German policies, terrorism was included but not compulsory. Following the events of September 11, 2001, the widespread inclusion of terrorism cover highlighted the vulnerability of German insurers to terrorist risks. On September 3, 2002, EXTREMUS, a German specialist company covering terror-caused property damage, was created. The company was founded by the Gesamtverband der Deutschen Versicherungwirtschaft (GDV, Association of German Insurers) and is supported with a backstop by the German government. The primary objective of EXTREMUS is to protect the interests of medium-sized companies and industry in Germany through insurance against property and business interruption losses caused by terrorism. The shareholders consist of primary insurers and reinsurers operating in Germany, and the company is capitalized with EUR50 million (USD70 million) in total. EXTREMUS Versicherungs-AG, being the original insurer, is the contract partner of the policyholders. The company issues insurance policies and assumes all administrative processes (including underwriting and accumulation control), as well as accounting. Insurance companies and insurance brokers mainly domiciled in Germany with some production sources from abroad are handling the policy sales for EXTREMUS Versicherungs-AG.Total capacity provided on an annual aggregate basis is EUR10 billion (USD14 billion). The first EUR2 billion (USD2.8 billion) of capacity is placed with approximately 50 domestic and foreign insurers and reinsurers. Structure of Extremus EUR10B EUR2B EUR8 billion in excess of EUR2 billion in aggregate. Coverage by State guarantee EUR2 billion in annual aggregate. Coverage by primary insurers and domestic and foreign regulations Source: Guy Carpenter & Company, LLC

18 Global Terror Update 2009 Guy Carpenter 16 EXTREMUS provides cover for industrial plants and buildings with sums insured of more than EUR25 million for property damage and business interruption. Only risks located within the territory of the Federal Republic of Germany will be insured. The cover is not compulsory. It can be limited to buildings only, or to the contents of buildings, or to losses arising from business interruption, provided that there is a relevant original property insurance policy for a sum insured above EUR25 million. The maximum (first loss) aggregate limit of indemnity is EUR1.5 billion per policyholder per year. The maximum annual aggregate indemnification for all events adds up to EUR10 billion. War, warlike events, looting, acts by the authorities, and NBC attacks do not fall under the EXTREMUS terrorism coverage. The Finance Minister of Germany, Peer Steinbrück, extended the government guarantee in November 2007 for another two years until the end of The German government is likely to extend the backstop again, although to a lesser extent than in the past, with the insurance industry expected to increase its share of the risk. The German government has demonstrated its ambition as being a consistently attractive production place for global companies that need terrorism cover. More than 1,100 companies took out insurance terror cover for their large domestic exposures in 2007 i.e., approximately 44 percent of all domestic terror exposed property risks are covered by EXTREMUS. Given an increased fear of terrorism and due to the new tariff introduced for the 2008 underwriting year, which allows EXTREMUS to specifically price risks according to its location and vulnerability, terrorism cover demand rose nearly 10 percent in Germany at the January 1, 2009 renewal. The number of polices increased to 1,300 in 2009 (from 1,225 in 2008), while premiums remained stable. Demand has increased, in part because of the perceived rise in the threat of terrorism in Germany. Extremus Business 2007 Premium prt Premium p.a. EUR61,383,402 EUR63,450,666 Number of Contracts 1,225 Total Sum Insured Annual Aggregate Limit EUR456,196,175,936 EUR105,262,130,556

19 Global Terror Update 2009 Guy Carpenter 17 Since 2005 EXTREMUS has been additionally offering cover for industrial risks in the European Union through acting as an intermediary. The risk carrier for those kinds of risks includes a pool of leading Lloyd s of London syndicates and the Inter Hannover in London. Italy There is no terror pool or government involvement in terror coverage. However, the Italian National Insurance Companies Association (ANIA) is considering a possible proposal to the government for the creation of a specific pool. The majority of insurance policies covering property damage in Italy exclude terrorism risks where the sum insured exceeds EUR50 million (USD70 million). Risks in personal lines and small- to medium-sized risks in commercial lines generally fall within this limit. The options open to insurance companies are fairly restricted. If available at all, terrorism cover in excess of EUR50 million (USD70 million) is quite costly. Netherlands Nederlandse Herverzekeringsmaatschappij voor Terrorismeschaden (NHT, Netherlands. Reinsurance company for terrorism losses) was established as a reinsurance company, entering into a reinsurance contract with each of its individual participants. The NHT pooling arrangement limits the total exposure to EUR1 billion per event per year for all lines. The process involves attaching the NHT clauses to the underlying insurance policies. The exposure for property business interruption risks is limited to EUR75 million per location per year. It is possible to insure excess amounts elsewhere. However, this has happened on a very limited scale. Participating insurers, once having decided to become members of the NHT, are deemed to cede all their terrorism exposure to the pool. There is no obligation for an insurer to declare individual risks to the pool because the entire participant s portfolio is pooled. The NHT participants are charged for the reinsurance premium. The yardstick for distributing the reinsurance premium is the market share of the respective NHT member (applying its premium income as part of the total market premium volume).

20 Global Terror Update 2009 Guy Carpenter 18 The total NHT capacity for 2008 has been maintained at the level of EUR1 billion per year, according to the distribution below. If the overall loss exceeds the capacity of EUR1 billion, the indemnification to policyholders by NHT participants will be reduced proportionally to the capacity available. The NHT buys retrocession capacity from international reinsurers, as well as the Dutch government. Market Share of Bermuda Composite Companies Source: Guy Carpenter & Companies, LLC From January 1, 2006, public healthcare business (as far as written by the NHT members) also falls under the scope of NHT, due to the introduction of a basic healthcare coverage for all Dutch citizens. Excluded lines include aviation and aviation liability policies, as well as policies that have taken on terrorism as such. In order to be recognized as an event of terrorism, the NHT applies a franchise deductible of EUR7.5 million per event and per annum.

21 Global Terror Update 2009 Guy Carpenter 19 Norway There is no terror pool or government involvement in terror coverage. No terrorism exclusions exist for personal lines, although an aggregate sub-limit per year is common. For commercial and industrial lines, terrorism is generally excluded but with a limited write-back. Workers compensation is regulated by Norwegian law and covers terrorism. Reinsurance generally follows the original conditions, but excludes NBC terrorism. Portugal Currently, there is no terror pool or government involvement in terror coverage. Terrorism is usually not included for personal or commercial lines. Policies can be restrictive for large risks according to their exposure to terrorism. For casualty and workers compensation lines, terrorism is generally excluded. Reinsurance policies have an absolute exclusion for large industrial risks and restrictions for smaller industrial and commercial lines through total insured value (TIV) limits or Aggregate Annual Limit (AAL). Spain In 1941, Spain created the Consorcio de Compensacion de Seguros (CCS) as an institution to provide compensation for civil commotion losses arising from the Spanish Civil War. Following a series of major catastrophes in the 1940s, the CCS gained permanent legal status as a government-controlled company in Although CCS is a government-owned entity, it is managed as a private company with a board drawn from both the insurance and government sectors. Since 1954, coverage for extraordinary risks, including natural catastrophes and political risks (including terrorism), has been compulsory. CCS functions as a state insurance facility guaranteeing such cover for these risks. After deregulation in 1990, it became possible to insure the risks privately. Since then CCS provides cover for those risks that are not covered in the private insurance market, subject to a continuing requirement for all policyholders to pay a CCS premium to maintain a full mutualization of all terrorism risks. Following the events of September 11, 2001, reinsurance capacity became scarce for industrial and commercial risks. CCS broadened its operations to include business interruption due to terrorism, offering reinsurance for terrorist-related business interruption risks, provided the direct insurers were signatories to the agreement. In 2004, business interruption was added to the extraordinary risk cover, and the reinsurance agreement with CCS came to an end. With sufficient reserves at its

22 Global Terror Update 2009 Guy Carpenter 20 disposal, CCS has the ability to protect and provide economic compensation for extraordinary perils on behalf of the Spanish government on a direct basis or through reinsurance. If claims exceed CCS s resources, it offers an unlimited state guarantee, which has never gone into effect. The CCS covers personal lines, including life, personal accident, commercial, and industrial lines for properties located in Spain and, in the case of personal accident, terrorist acts that occur in Spanish territory. Also included under commercial and industrial lines are theft, plate glass, machinery breakdown, electronic equipment, civil works, motor vehicles, and railtrack vehicles. Casualty lines covered by CCS do not include terrorism, but this cover is available in the private market. Sweden Currently, there is no terror pool or government involvement in terror coverage. In the primary insurance market, terrorism is generally not excluded for personal lines. Terrorism is excluded for commercial and industrial lines but with a limited write-back. Reinsurance generally follows the original conditions but excludes NBC terrorism. Switzerland Although terrorism was not considered a major threat to Switzerland due to its neutral political stance, many private Swiss insurers began to include terrorism exclusion for property risks in In early 2002, the Schweizer Sachversicherungs- Verband (SVV, Swiss association of property insurers) set up a committee to study domestic terrorism insurance issues. This resulted in a terrorism facility being put into place for all private property insurers licensed to operate in Switzerland. Since September 2003, insurers can cede all property risks for buildings, contents, or business interruption with a sum insured between CHF10 million and CHF100 million for treaty cover and above CHF100 million for facultative cover to the terrorism reinsurance facility. All primary property insurance policies incepting on or after September 1, 2003, with a sum insured in excess of CHF10 million exclude terrorism risks. On property lines with an insured sum less than CHF10 million, there is no exclusion for terrorism and no additional premiums for buildings, content or bodily injury. In addition, there is no exclusion for terrorism in workers compensation lines (Accident Insurance Act). For commercial and industrial lines, there is a general exclusion for risk with a total sum insured for less than CHF10 million. Terrorism cover can be reinstated (even on a first-risk basis ) with respect to risks with a sum insured between CHF10 million and CHF100 million subject to the conditions of the scheme.

23 Global Terror Update 2009 Guy Carpenter 21 United Kingdom In 1993, the United Kingdom established Pool Reinsurance Company Limited (Pool Re) as a government-backed terrorism reinsurer in response to the restrictions of cover available to UK commercial property insurers. The terrorist events in London, stemming from political turmoil in Northern Ireland in the late 1980s and early 1990s, led to restrictions in terrorism cover. The UK government agreed to be the insurer of last resort with an unlimited cover should the assets accumulated by the program become exhausted. Reinsurance cover available in the UK from the international reinsurance market was designed to dovetail with the cover provided by Pool Re so insurers would not face a gap between the market and Pool Re. The Pool Re program limited itself to reinsurance cover for property damage and business interruption losses arising from fire and explosion but did not provide cover against other forms of terrorist attack. Following the events of September 11, 2001, UK insurers felt they were no longer able to provide cover to the same extent that they had previously. They began to apply exclusions for damages caused by perils other than fire and explosion, such as cyber risks. Concerns arose over the definition of terrorism and the broadening range of terrorist weapons. The UK Treasury recognized the need to enter into discussions to extend the scope of Pool Re to cover the full range of property damage and consequential loss perils that were being excluded in the market. In 2003, terrorism cover was extended to an all risks basis, but excludes acts of war. Each member must pay losses up to a threshold, which is determined individually by member. When losses exceed that threshold, the Member can claim upon reserves accumulated by the insurance industry on a mutual basis. Under the Pool Re program, the reinsurance cover provided to Members is subject to a maximum loss retention per event per member combined with an aggregate limit. Each member s retention is set annually in advance by Pool Re using an agreed formula based on the premium ceded by that Member. Should terrorism claims exceed these reserves, Pool Re can, in turn, draw funds from government to enable it to meet its obligations in full, regardless of the scale of losses.

24 Global Terror Update 2009 Guy Carpenter 22 Pool Re membership is optional. Lloyd s Underwriters and any insurance company authorized to transact property insurance in the UK is eligible to become a member. Policyholders who decide to purchase UK terrorism cover from a Pool Re member must include all the exposures eligible for cover, although it is permissible to purchase material damage cover only without business interruption. Insurer members of the scheme cannot decline to offer terrorism cover (as defined) nor are they permitted to select which of those risks are ceded to Pool Re. Insurer members of the scheme agree that they will offer Terrorism cover (as defined under the Scheme) to any relevant policyholder upon request. Insurers cede all relevant terrorism exposures to Pool Re; it is not open to elect to retain selected risks for their own account. Pricing Although the price for cession to Pool Re is fixed by the scheme, it is for the members to determine the original policy pricing for Terrorism cover. No commission is paid to the member by Pool Re, but members can decide to pay whatever commission they feel appropriate on the original premiums and they can seek appropriate premiums to reflect their retentions. The Member Review Process Pool Re undertakes regular reviews with members, looking at their administration. A proactive approach is also adopted to claims management practices, with the intention of maintaining members awareness of their responsibilities should there be a certified event. The Certification Process Whenever an incident occurs that may be the result of an act of terrorism, there will be informal discussions involving the Pool Re members affected, Pool Re, and Her Majesty s Treasury. Once the facts are known and it is established that the act in question falls within the definition, HM Treasury will issue a certificate under an agreed procedure.

25 Global Terror Update 2009 Guy Carpenter 23 4 Asia/Pacific Australia The Australian government retains a high level of vigilance against the threat of terrorism against the mainland and its territories. The government funds border security measures and provides advice to near neighbors on matters of counter terrorism. The harmony existing between Australia and its neighbors has resulted in the early identification and break up of several planned activities by terrorist cells. Arrests have been made and charges pressed against the individuals caught by authorities under the increased powers available to them under Australian legislation. Insurance companies are able to reinsure the risk of claims for eligible terrorism losses through the Australian Reinsurance Pool Corporation. Insurance companies pay premiums to the Australian Reinsurance Pool Corporation, which builds up the first layer of funds to AUD300 million/usd240 million) available to cover claims from declared terrorist incidents. The pool is supplemented by a back-up bank line of credit of USD1 billion, underwritten by the Commonwealth, as well as a Commonwealth Government indemnity of USD9 billion, giving aggregate cover of up to AUD10.3 billion (USD8.24 billion). The definition of a terrorist act for the purpose of the scheme, together with the process to determine when an event is a terrorist act, is set out in Section 6 of the Act. The legislation requires a declaration from the Treasurer, following consultation with the Attorney General, that an act was a terrorist act for the purpose of the scheme. The Australian Reinsurance Pool Corporation (ARPC) recently arranged AUD2.3 billion of retrocession for the scheme. The retrocession was placed in excess of AUD300 million and cover incepted on December 31, The retrocession cover will lead to a substantial reduction in the Commonwealth s level of risk to meet any excess liability under the scheme.

26 Global Terror Update 2009 Guy Carpenter 24 Retrocession contracts have been entered into with reinsurers from the Australian, European, Lloyd s, and Bermudan markets. The Australian Government s intention is that the scheme will operate only while terrorism insurance cover is unavailable commercially on reasonable terms. The decision by ARPC s Board to arrange retrocession for the scheme was made after a thorough investigation of the availability of terrorism cover in the global reinsurance market. That investigation showed that global capacity is returning for national pooled arrangements, but that there is little capacity at reasonable prices for individual insurance portfolios. The next review of the need for the scheme to continue in operation is due by June 30, China Mainland There are two forms of property insurance one for foreign investments and another for domestic insureds. In recent years, foreign investment property insurance is being used increasingly for domestic policyholders because of its broad coverage. There is an exclusion clause in the foreign form that excludes war and war-like activities but no specific mention of terrorism. Insurers generally insert terrorism exclusion clauses in policies, though terrorism cover is available by endorsement. Hong Kong The Motor Insurance Bureau (MIB) in Hong Kong has established a limited facility of up to HKD200 million (USD25 million) to provide cover for the claims of innocent third parties in the event of bodily injury caused by a terrorism act through the use of a motor vehicle on the road in Hong Kong. This Hong Kong Motor Terrorist Pool is funded out of the MIB First Fund that has already been established. If this is exhausted, there will be additional levies by the MIB on motorists. In order to retain its motor license in Hong Kong, Lloyd s has executed a facility via a Supplemental Memorandum of Agreement to the original Motor Memorandum of Agreement for the MIB.

27 Global Terror Update 2009 Guy Carpenter 25 India Following international reinsurers withdrawal of cover for the risks of terrorism and sabotage after September 11, 2001, non-life insurance companies pooled their resources to establish a terrorism risk insurance pool. Terrorism cover through the pool is offered as a buy-back. There is a separate rate for terrorism cover, depending on the type of risk and the sum insured, which is approximately 0.01 percent to 0.03 percent of total sums insured. Aggregate losses to any one location for all Indian insurers will be limited to INR7.5 billion (USD169 million), and any further loss will involve prorating all recoveries. Excess of loss retrocessional coverage is purchased on the international market. The General Insurance Corporation of India manages the pool on behalf of all non-life insurance companies. Japan The Marine & Fire Insurance Association of Japan has renewed support for the establishment of an industry-wide fund designed to cover losses from terrorist attacks on Japanese soil. War risks are commonly excluded in the general policy conditions for ordinary Japanese non-life insurance policies. However, acts of terrorism are generally treated differently, and many Japanese non-life insurance companies cover acts of terrorism, which is not excluded from most personal property lines. Many non-life insurance companies have set limits on terrorism losses to be covered under the renewed contracts for commercial risks. Korea Terrorism is excluded from all primary insurance commercial lines, and reinsurance is not available locally. However, it is possible to buy a standalone terrorism cover if the reinsurance is available from the overseas market. Malaysia There is no terror pool or government involvement in terror coverage. The Malaysian government has not enacted terror cover legislation, and it appears unlikely to do so, since it is satisfied with the availability of cover on an extension basis. Prior to January 1, 2002, terrorism was covered on an optional basis for both commercial and personal lines. After January 1, 2002, terrorism cover was excluded from all commercial and personal lines policies. Extensions, however, may be granted.