2007 CAS Ratemaking Seminar

SPE-3 Actuarial Analysis of Catastrophes & Terrorism for

Commercial Insurance

Rimma Maasbach - ISO

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

Terrorism Pricing

Terrorism Risk Insurance Act of 2002 (TRIA) Overview

Terrorism Rating Overview

Line of Insurance Product Derivation

• Commercial Property

Loss Cost AIR Model + ISO Adjustment

• General Liability • Commercial Auto

Percentage Loadings To Current Loss Costs

ISO Modeling

• Businessowners Combination of Property and GL

• Other Lines (e.g. CIM, Farm)

Refer to Company

Terrorism RatingAIR Commercial Property Results

City/County Rank Loss Cost (Bldgs. & Cont.)

Manhattan 1 $.173

Chicago 4 .068

Seattle 8 .010

Marin County 36 .001

Terrorism RatingCommercial Property Geographic Tiers

Tier Cities/Counties Approx. Loss Cost

• High Hazard NYC, Chicago, SF, DC

$.100

• Medium Hazard LA, Boston, Houston, Phil., Seattle

.010

• Low Hazard Remainder of USA .001

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

Terrorism Pricing

Initial Terrorism Loss cost filingsProgram Year 1 (2003) loss costs – Building coverage

Tier 1 – NYC, Chicago, DC, San FranciscoTier 2 – Boston, Houston, LA, Philadelphia, SeattleTier 3 – Remainder of Country

Tier Loss Cost1 .1082 .0183 .001

#

20019

20032

20011

20002

20020

2001620008

20007

20015

20018

20003

20012

20001

20024

20017

20004

20009

20010

2003720005

20006

20036

20064

20057

20059

20004

Washington

District of Columbia

WASHINGTON, D.C.IMPLEMENTED TERRORISM LOSS COSTS

.030

.018

.008

Changes to AIR Model (2004)

1. Revisions to Conventional Loss Estimates

• Relatively small overall effect (10%) reduction)• Larger impact in certain zips/counties

2. 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

AIR Terrorism ModelCommercial Property

Comparison of Annual Expected International Terrorism Losses

2002 AIR Version 2004 AIR VersionConventional $1.45 Billion $1.30 Billion

      NBC           $1.45 Billion*       .95 Billion   

Total $2.90 Billion $2.25 Billion

* Preliminary Estimate* Preliminary Estimate

Terrorism Loss CostsSample Impacts of Updated Model Version

Original Loss Costs New Loss Costs

Location Conv. NBC Comb Conv. NBC Comb.

Downtown $.100 $.100 $.200 $.090 $.020 $.110

Outlying Area

.001 .001 .002 .001 .015 .016

Terrorism Loss CostsDistribution of Conventional vs. NBC

Original Loss Costs New Loss Costs

Location Conv. % NBC % Conv. % NBC %

Chicago 50% 50% 85% 15%Lake Co., IL. 50 50 3 97

San Francisco 50 50 95 5Marin Co., CA 50 50 1 99

Houston, TX 50 50 55 45

Revised Terrorism Loss CostsNew Geographic Tier Definitions

Tier (a) Nature Definition (b) Approximate #1 By Zip Loss Cost = $.10 ~ 40 Zips contained in 4

cities2 By City/County (c) $.01 < Loss Cost <

$. 04~ 80

3 By County (C) Loss Cost < $.01 ~ 70 with loss cost = $.005 remainder = $.001

(a) “Tiers” still have relevance for the purpose of backstop factor application.

(b) Loss costs are unadjusted for backstop.

(c) There are around 3200 counties in the US.

TRIA Federal Backstop Mechanism

Program Trigger: Minimum Threshold for Total Industrywide Loss

Insurer Deductible: Each Insurer Pays 100% Under Deductible (Determined based on % of prior year’s total premium)

Coinsurance: Insurer’s Share Above Deductible

Recoupment Threshold:

Portion of Loss (after application of Deductible & Coinsurance) below this threshold to be recouped by Feds, via Policyholder Surcharges

Program Cap: Maximum Liability for [Industry + Feds]

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

TRIEA ParametersComparison Across Years

2005 2006 2007Event Trigger $5 Million $50 Million $100 MillionDeductible 15% 17½% 20%Coinsurance 10% 10% 15%Recoupment Threshold

$15 Billion $25 Billion $27½ Billion

Program Cap $100 Billion $100 Billion $100 BillionLines of Insurance

All Comm. Lines except Medical Malpractice (& Miscellaneous)

All Commercial Lines, except Professional Liability, Commercial Auto, Farmowners, Surety (& Miscellaneous.)

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.

Certified TerrorismFederal Backstop Factors

Tier 2005 2006 2007*

1 (High Hazard) .75 .75 .80 – .85

2 (Medium Hazard) .90 .90 .95

3 (Low Hazard) .95 .95 .95 – 1.00

* Preliminary estimate based on latest version of AIR Model and current methodology for calculating Backstop factors.

Commercial PropertyDomestic Terrorism

Comparison of Annual Expected Losses based on AIR’s Terrorism Model

2004 Domestic

2004 International

Conventional $155M $1.30B

      NBC           65M     .95B

Total $220M $2.25B

Domestic as a percentage of International = 10%

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 City0.5% elsewhere

Commercial PropertyTerrorism Pricing

Rimma MaasbachRMaasbach@iso.com

201-469-2605