INSIGHTS June 2015 2015 Terrorism Risk Insurance Report INSIGHTS June 2015

CONTENTS

1 Key Findings

2 Introduction

3 Terrorism Insurance After the Passage of TRIPRA

5 Captives

5 Political Violence Coverage

6 Cyber Terrorism Risks

7 Property Terrorism Insurance Market Take-up Rates

10 The Cost of Property Terrorism Insurance

13 The Terrorism Reinsurance Market

14 International Schemes — Government Pools and TRIPRA

15 Managing Global Terrorism Risks

16 Conclusion

17 Appendix INSIGHTS June 2015

KEY FINDINGS

• The enactment in the US of the Terrorism Risk Insurance Program Reauthorization Act of 2015 (TRIPRA) through 2020 brought greater certainty to organizations that depend on terrorism coverage and blunted any short-term increase in pricing that may have been caused by the law’s temporary lapse.

• Terrorism insurance take-up rates have remained relatively stable since 2009, although they decreased slightly in 2014 as a result of the anxiety surrounding TRIPRA at the end of 2014. With the new law’s passage, however, the take-up rates of embedded TRIPRA coverage are expected to revert to their historical pattern.

• The uncertainty that surrounded TRIPRA’s renewal, and the potential terms of the new law, prompted some organizations to look for certainty of coverage elsewhere — namely the standalone property terrorism insurance market.

• Underwriters continue to scrutinize employee concentration exposures, highlighting the importance of accurate data and risk differentiation, particularly for workers’ compensation exposures.

• Organizations that purchased terrorism coverage in the first half of 2015 typically saw competitive rates offered by standalone property terrorism insurers.

• While organizations can benefit from captive insurance companies’ ability to access the federal terrorism insurance backstop, few US captives used TRIRPA for that coverage in 2014.

• Large companies are more likely to purchase property terrorism insurance, and to see the lowest cost as a percentage of overall property premiums.

• Among industry sectors, education organizations had the highest take-up rate for terrorism insurance in 2014.

2015 Terrorism Risk Insurance Report 1 INSIGHTS June 2015

INTRODUCTION

A shooting at the offices of a French satirical magazine kills a dozen employees and spills onto busy city streets. Three gunmen attack tourists at a national museum in Tunisia. Armed militants storm a university in Kenya, targeting students. Two gunmen open fire at a politically charged event in Texas before being shot by police.

These incidents are but a sample threat of terrorism at the forefront disruption and provided greater of recent acts of terrorism and for organizations. certainty to terrorism insurance terrorism-related violence, which markets in the US. continues to increase worldwide Terrorism and political violence (see FIGURE 1). Instability in insurance are key components for This report summarizes the countries around the world, protecting a company’s bottom-line current outlook on TRIPRA’s including Syria, Libya, Yemen, against terrorism and terrorism- authorization and terrorism Venezuela, and Ukraine, has related risks. While acts of terrorism insurance, provides benchmarking fostered regional uncertainty and and political violence remain a related to terrorism insurance opportunities for terrorist groups significant threat to a company’s take-up rates and pricing, and offers to strengthen and thrive. And the global operations, the authorization risk management solutions for recent spate of lone wolf attacks in of the Terrorism Risk Insurance terrorism risks that will be useful the US, Canada, Australia, France, Program Reauthorization Act of for organizations even if they Denmark and elsewhere has kept the 2015 (TRIPRA) helped prevent purchase terrorism insurance.

FIGURE 1 Terrorist Attacks and Casualties Worldwide Source: Country Reports on Terrorism 2014, US Department of State

THE NUMBER OF LIVES THE NUMBER OF LOST TO TERRORIST TERRORISM INCIDENTS ATTACKS INCREASED INCREASED 81% 35%

2013 2014 2013 2014 17,891 32,727 9,964 13,463

2 Marsh INSIGHTS June 2015

TERRORISM INSURANCE AFTER SPOTLIGHT THE PASSAGE OF TRIPRA Standalone Terrorism Insurance Trends

The Terrorism Risk Insurance Program STANDALONE The absence of a major US terrorism event Reauthorization Act of 2015 descends TERRORISM INSURANCE and the abundance of capacity have reduced from the original Terrorism upward pricing pressure in the standalone Risk Insurance Act of 2002 (see The drawn-out process to reauthorize property terrorism insurance marketplace APPENDIX). The law — created TRIPRA shone a spotlight on and can at times be more competitive than in response to a severe insurance alternative terrorism insurance the pricing of embedded terrorism coverage market shortage after the September solutions. Standalone terrorism in property programs. Markets have the 11, 2001, terrorist attacks — provides insurers offer an alternative source ability to follow the property form with a reinsurance coverage to insurers in of capacity in instances when follow form endorsement that narrows the the event of a certified terrorist act. property insurers are either unable policy to terrorism and sabotage only and to offer TRIPRA coverage or are no allows the client to benefit from the sub- Terrorism insurance take-up rates longer the most competitive option. limits and coverage offered within the property form. The limit of coverage dropped off toward the end of 2014, Many organizations have decided that is available for a single risk can vary due to the anxiety stemming from to move to the standalone terrorism considerably, primarily due to: TRIPRA’s unexpected expiration at marketplace, where they can secure the end of 2014. However, Congress long-term contracts that offer more • Location of risk. The demand for coverage quickly authorized a slightly certainty in terms of coverage being in major metropolitan areas has a amended version in January 2015 available. Companies that purchase substantial effect on the available capacity. and buyers of terrorism insurance standalone coverage can also avoid • An insurer’s accumulation of since have generally experienced a certain requirements under TRIPRA, exposure. Capacity can be limited in favorable rate environment, a trend including that Congress must certify certain locations, particularly in major that is expected to continue, barring an act of terrorism for coverage to metropolitan areas. unforeseen events or market changes. take effect. • Concentration of exposure. Although it is entirely possible that an attack could occur FIGURE 2 Standalone Terrorism Insurance Market Capacity (in $millions) anywhere — including a remote town, Source: Marsh an entertainment venue, or a shopping mall — demand for coverage will likely be higher in metropolitan areas because there INSURER/REINSURER CAPACITY INSURER/REINSURER CAPACITY is a greater concentration of exposures.

AIG $250 to $1,000 WESTERN RE $100 Standalone property terrorism insurance

NATIONAL FIRE & MARINE XL SPECIALTY $100 capacity has increased significantly (see $1,000+ INSURANCE CO. FIGURE 2). For exposures outside of central ASCOT $75 LLOYD’S OF LONDON $1,000+ business districts: ACE GLOBAL MARKETS $50 IRONSHORE $300 • Approximately $750 million to $2 billion MONTPELIER RE $50 HISCOX INSURANCE COMPANY INC. $200 per risk in standalone capacity is available TRANSATLANTIC RE $50 to companies that do not have sizeable LANCASHIRE INSURANCE $200 COMPANY LTD. GLACIER REINSURANCE AG $40 exposures in locations where insurers

TALBOT UNDERWRITING SERVICES WESTPORT INSURANCE CO. $40 have aggregation issues. $200 (VALIDUS) ASPEN SPECIALTY INSURANCE CO. $30 • Capacity excess of $2 billion is available AXIS SPECIALTY LTD. $150 but may be more expensive. INTERNATIONAL INSURANCE CO. $30 BEAZLEY INSURANCE CO. $100 OF HANNOVER For locations where markets have aggregation Note: The theoretical marketwide capacity would be difficult to acquire at a reasonable cost for any individual client, and few clients issues — particularly New York City — the seek coverage above $1.5 billion. For a client with significant exposures in central business districts of Tier 1 cities or those with estimated market capacity is approximately exposure schedules with properties perceived as targets for terrorist attacks or where there have been instances of foiled plots, the available capacity is likely to be lower. Insurer capacity (and pricing) is also likely to be affected by accumulation of aggregates within $850 million; additional capacity can be ZIP codes including Tier 1 cities such as New York, Chicago, Washington, and San Francisco. accessed at significantly higher rates.

2015 Terrorism Risk Insurance Report 3 Maximum achievable limits in the standalone terrorism insurance market are approximately INSIGHTS June 2015 $4.3 billion.

The standalone terrorism insurance • The improper security and storage FIGURE 3 SFP States market can replace TRIPRA of existing weapons. Source: Marsh coverage, which is embedded either partially or completely in a property • The possibility that scientists policy. Maximum achievable might sell their knowledge THE SFP IS MANDATED IN THE FOLLOWING STATES: limits in the standalone terrorism to terrorist organizations or ALASKA insurance market are approximately rogue states. NEBRASKA* (PERSONAL LINES ONLY) $4.3 billion. Available capacity is significantly lower for exposures • Access to material and ARIZONA* NEW HAMPSHIRE* in the central business districts of components to make NBCR CALIFORNIA NEW HAMPSHIRE* Tier 1 cities, which include Atlanta, weapons. CONNECTICUT* NEW JERSEY*

Boston, Chicago, New York City, San GEORGIA NEW YORK Francisco, and Washington, D.C. • Potential weaknesses in ports. HAWAII NORTH CAROLINA Following TRIPRA’s renewal, Although NBCR insurance is IDAHO* NORTH DAKOTA* standalone terrorism insurance accessible under TRIPRA, insurers ILLINOIS OKLAHOMA* pricing generally decreased, and are not required to offer this IOWA OREGON some insurers offered competitive coverage. A captive insurer can write LOUISIANA* PENNSYLVANIA* terms as they competed with the direct policies covering NBCR losses embedded terrorism markets; and secure the reinsurance offered MAINE RHODE ISLAND* however, supply and demand will by TRIPRA. Also, a standalone MASSACHUSETTS VIRGINIA* continue to determine pricing for marketplace offering NBCR MICHIGAN* WASHINGTON organizations located in the Tier 1 insurance is available; however, MINNESOTA* WEST VIRGINIA cities. Organizations that purchased policies can be limited in scope and MISSOURI WISCONSIN terrorism coverage typically saw command high prices. competitive rates from standalone *This state has passed legislation to exclude (or allow insurers property terrorism insurers, in some to exclude) acts of terrorism from SFP policies. cases successfully competing against STANDARD FIRE POLICY embedded TRIPRA coverage. (SFP) STATUTES

An SFP can cover direct losses NBCR from fire and lightning. It sets forth the conditions under which such a The use of nuclear, biological, loss is deemed to have occurred. chemical, and radiological (NBCR) In some situations, where terrorism weapons in a terrorism incident is excluded under a property policy could have devastating effects covering the peril of fire, there on people and organizations. could be an issue whether losses An NBCR attack could cause are covered if they arise from a fire significant property damage and caused by a terrorist attack. It is business interruption losses also important to note that state for organizations with global insurance regulations in 15 of 29 operations. The potential for an states where SFPs are mandated NBCR attack can be intensified by: do not permit property terrorism exclusions or sublimits for fire caused by a terrorism event (see FIGURE 3).

4 Marsh INSIGHTS June 2015

CAPTIVES SPOTLIGHT Political Violence Coverage Organizations with captive insurers THE BENEFITS OF USING can benefit from their captive’s YOUR CAPTIVE Losses stemming from political instability ability to access the federal and violence are a significant concern for terrorism insurance backstop. Of The key benefits of using a captive to organizations that operate internationally. the 324 US-domiciled captives that access TRIRPA include: Some companies with global operations Marsh managed in 2014, 83 (22%) buy terrorism coverage and assume it accessed TRIPRA for property • Premium savings: If there is no covers all violent human acts that result in coverage, writing terrorism coverage terrorism loss, premiums paid to a property and/or business interruption for conventional perils and/or for a related party are retained on a loss. However, without enhanced coverage, the company’s assets may not be fully nuclear, biological, chemical, and consolidated basis. protected against political violence radiological perils (NBCR) that are perils. Political violence insurance (PVI) commonly excluded by commercial • Broader coverage: Captives can provides coverage for terrorism and for insurers. Organizations should offer coverages that are often exposures that are typically excluded work with their insurance brokers restricted by or unavailable from within standalone terrorism policies, such and captive solutions advisors to commercial insurers, including as strikes, riots, civil commotion, rebellion, evaluate whether using a captive for NBCR attacks, cyber risks and revolution, war, civil war, and insurrection. for TRIPRA could provide a more contingent time element losses. effective solution for managing Political violence risks can vary terrorism exposures — particularly • Policy wording flexibility: geographically. For companies with for higher risk areas such as for Captives are not generally subject operations in emerging markets, strikes, property or employee-related to strict policy form requirements, riots, civil commotion, and other political violence risks are a significant concern; coverages in major cities. allowing them greater flexibility to risk exposures in developed regions customize policy wording. are often mainly terrorism. As a result, As US-domiciled captives are consideration of PVI is recommended for obligated under TRIPRA to offer CAPTIVES AND global insurance programs with significant terrorism insurance when offering emerging market exposures, and policies TRIPRA-subject lines of insurance — TRIPRA 2015 should be coordinated with property and such as property and general liability standalone terrorism policies as well as — organizations should carefully Owners of captives that provide local insurance pools. examine their captive structures TRIPRA-subject lines of insurance and TRIPRA’s requirements to should ensure that existing policies For more information on PVI and ensure compliance and to take best and policy renewals reflect the political risk insurance, read Marsh’s political risk insurance report, “Strong advantage of the program. requirements of the reauthorization Capacity Drives Buyer’s Market for of TRIPRA. Organizations with Political Risk Insurance,” also available captives that buy out their trigger on www.marsh.com. and co-insurance obligations should also plan for the likelihood of increased premiums starting in 2016 when the new law’s trigger and co-insurance phased increases take effect. The increases are likely to be more impactful on companies underwriting risks with Tier 1 locations.

2015 Terrorism Risk Insurance Report 5 INSIGHTS June 2015

CYBER TERRORISM RISKS

Cyber vulnerability is becoming With little financing, adversaries However, exposure to cyber a reality in a number of risk and develop and persistently attempt terrorism extends beyond the insurance areas, including terrorism. cyber-attacks against the US and coverage typically offered by other countries, often from the safe cyber insurance. For example, Consider the following: harbor of a foreign nation. As in the cyber-attacks against operational Sophisticated hackers penetrate the case of the German iron plant, such technology can result in physical defenses of an important iron plant threats can be dangerous and may property losses and bodily injuries using a spear phishing campaign. inflict physical damage. by causing explosions or releasing Once inside the perimeter, the toxic materials. hackers successfully navigate their Some insurers have treated access from the business systems cyber insurance as an offshoot of Although the language of TRIPRA to the productions network. From professional liability coverage, is silent to cyber as a vector attack, there, the hackers disrupt the which was previously covered by the a cyber terrorism event that meets plant’s control system and prevent legislation but is now exempt from TRIPRA’s prerequisites, including an orderly shutdown of a furnace, TRIPRA. Even with the divergent being certified as terrorism by causing it to explode and resulting treatment by insurers, the cyber the Secretary of Treasury, would in widespread damage. This may insurance market has provided a likely be eligible for coverage sound like a plot for a Hollywood broad cyber terrorism coverage under TRIPRA, although the movie, but it happened in Germany, grant — either through an express specific conditions would need where government officials in 2014 grant of coverage or through silence to be considered. acknowledged the attack. (no terrorism exclusion) — that goes beyond TRIPRA-defined terrorism.

6 Marsh The terrorism insurance take-up rate has remained relatively constant since 2009, although it decreased to 59% in 2014. INSIGHTS June 2015

PROPERTY TERRORISM INSURANCE MARKET TAKE-UP RATES

Due to the uncertainty that TAKE-UP RATES BY • Companies with TIV less than surrounded TRIPRA’s eventual COMPANY SIZE $100 million generally have a reauthorization, terrorism smaller spread of risks, lower insurance market take-up rates overall premiums, and often When looking at take-up rates by in 2014 decreased. However, most work with a single insurer. company size (see FIGURE 5), it is companies that purchased terrorism useful to consider four categories insurance in the past still do so as Changes in take-up rates by of total insured value (TIV): insurers continue to underwrite company size have been marginal the risk with the support of the new since 2011. Companies with TIV less • Companies with TIV in excess TRIPRA authorization. The passage than $100 million had the lowest of $1 billion typically work with of TRIPRA brought greater certainty take-up rates among those analyzed, several insurers and likely pay to organizations that depend on with 54% purchasing property large premiums. Most companies terrorism coverage, and generally insurance in 2014. The take-up rates in this group use their existing blunted any short-term increase in for companies with TIV between captives or establish new ones to pricing. Had TRIPRA not been put $100 million and $500 million access TRIPRA. back into place — or had it taken slipped slightly from 61% in 2013 significantly longer to do so — the to 59% in 2014. • Companies with TIV between market dynamics for terrorism $500 million and $1 billion insurance likely would have been As was the case in previous years, are large organizations that severely disrupted, leading to the take-up rate for companies also typically work with increased pricing and reductions with TIV higher that $500 million multiple insurers and have in capacity. was approximately 68% in 2014. layered programs. This may be due to the perception Property insurers in 2015 typically that larger organizations are more • Companies with TIV between are able to include terrorism susceptible to an attack or because $100 million and $500 million insurance in their risk portfolios at smaller companies typically have tend to have no more than lower rates to insureds. The demand lower insurance purchasing budgets. three insurers involved in their for terrorism insurance remains insurance programs. and TRIPRA plays a major role in the availability and affordability of the coverage. FIGURE 4 Terrorism Insurance Take-up Rates by Year Source: Marsh TERRORISM INSURANCE 2014 2013 2012

TAKE-UP RATES BY YEAR 2014 TAKE-UP RATE: 59% 62% 62% The terrorism insurance take-up rate — the percentage of companies FIGURE 5 Terrorism Insurance Take-up Rates by Total Insured Value (TIV) buying property terrorism insurance Source: Marsh — has remained relatively constant since 2009, although it decreased to 59% in 2014 as a result of the TIV RANGE 2014 2013 2012 uncertainty that surrounded <$100M 54% 60% 59% TRIPRA’s authorization (see $100M - $500M 59% 61% 64%

FIGURE 4). $500M - $1B 68% 68% 66%

>$1B 64% 64% 64%

2015 Terrorism Risk Insurance Report 7 INSIGHTS June 2015

TAKE-UP RATES among the 17 industry segments TAKE-UP RATES BY INDUSTRY surveyed, all at or above 70%. This BY REGION may be due in part to concentrations in those sectors of organizations Education organizations purchased A higher percentage of companies in in central business districts and in property terrorism insurance at a the Northeast — 74% — purchased major metropolitan areas, which higher rate (82%) than did those in property terrorism insurance are likely perceived as being at any other industry segment in 2014. than in any other region. This is higher risk for terrorism. The likely attributed to the Northeast’s manufacturing, chemicals, and Financial institutions, real concentration of large metropolitan energy and mining were among the estate, and technology and areas, including Washington, and industry segments with the lowest telecommunications companies New York; the perception that major take-up rates (see FIGURE 6). had the next highest take-up rates cities may be at higher risk of a terrorist attack; population density; and that the region was the site of FIGURE 6 Terrorism Insurance Take-up Rates by Industry the 2001 terrorist attacks. The South Source: Marsh and West saw the lowest take-up rates in 2014, both at 54% (see

INDUSTRY 2014 2013 2012 FIGURE 7).

EDUCATION 82% 81% 75% FINANCIAL INSTITUTIONS 73% 74% 75% TERRORISM INSURANCE REAL ESTATE 71% 68% 69% STATE INDUSTRY TECHNOLOGY/TELECOM 70% 69% 69% TAKE-UP RATES HEALTH CARE 67% 75% 72% Among the US states that purchased POWER AND UTILITIES 65% 68% 65% property terrorism insurance, TRANSPORTATION 61% 66% 66% 12 were above the national average MEDIA 61% 70% 81% take-up rate of 59% (see FIGURE

HOSPITALITY AND GAMING 58% 60% 60% 8). Organizations headquartered in Maryland purchased property PUBLIC ENTITY AND 57% 66% 71% NONPROFIT ORGANIZATIONS terrorism insurance at the highest

RETAIL/WHOLESALE 56% 61% 55% rate — 84% in 2014. Massachusetts, Connecticut, and New York followed LIFE SCIENCES 55% 64% 59% with the next highest take-up rates, FOOD & BEVERAGE 50% 45% 50% ranging from 77% to 83%. CONSTRUCTION 48% 44% 56%

MANUFACTURING 47% 45% 48%

CHEMICALS 42% 47% 42%

ENERGY AND MINING 38% 47% 43%

FIGURE 7 Terrorism Insurance Take-up Rates by Region Source: Marsh

REGION 2014 2013 2012

MIDWEST 56% 57% 58%

NORTHEAST 74% 77% 77%

SOUTH 54% 61% 63%

WEST 54% 55% 53%

8 Marsh INSIGHTS June 2015

FIGURE 8 Terrorism Insurance Take-up Rates By State* Source: Marsh

At or Above the 2014 National Average Terrorism Insurance Take-up Rate

Below the 2014 National Average Terrorism Insurance Take-up Rate

Not Enough Data

ARIZONA CALIFORNIA COLORADO CONNECTICUT DISTRICT OF COLUMBIA FLORIDA 48% 58% 73% 77% 73% 42%

GEORGIA HAWAII ILLINOIS INDIANA MARYLAND MASSACHUSETTS 68% 38% 76% 57% 84% 83%

MICHIGAN MINNESOTA MISSOURI NEW JERSEY NEW YORK NORTH CAROLINA 36% 58% 56% 74% 77% 49%

OHIO OREGON PENNSYLVANIA TENNESSEE TEXAS UTAH 44% 38% 69% 56% 52% 39%

VIRGINIA WASHINGTON WISCONSIN The 27 states listed met the minimum threshold of 71% 46% 63% available 2014 peer data.

* Based on the state in which a company is headquartered.

2015 Terrorism Risk Insurance Report 9 INSIGHTS June 2015

THE COST OF PROPERTY TERRORISM INSURANCE

It is useful to measure the cost terrorism premium rates remained of terrorism insurance both as a significantly higher than those of premium rate — premium divided larger companies. Median rates for by TIV — and as a percentage the largest companies remained of a company’s overall property at $18 per million in 2014. This premium. Analyzing costs by generally reflects overall insurance premium rate allows companies pricing patterns: Larger companies to track what they paid in absolute typically purchase more insurance, terms; evaluating the costs as a which leads to lower rates when percentage of their total premiums compared with smaller companies. shows how terrorism coverage affected their overall property The cost as a percentage of insurance budgets. overall property premiums (see FIGURE 10) was similar for all companies, regardless of TIV. COST BY COMPANY SIZE There were little to no changes in percentage points seen across the Property terrorism insurance board in 2014. Only companies rates typically decrease as the size with TIV between $500 million to of the company increases (see $1 billion experienced an increase FIGURE 9). On an overall basis, in the last three years. No industry companies with TIV less than sectors showed decreases in the $100 million experienced slight cost of terrorism insurance as a rate increases from $51 per million percentage of property premiums. to $53 million in 2014 and their

FIGURE 9 Terrorism Insurance Take-up – Median Rates by TIV (Price per million) Source: Marsh

TIV RANGE 2014 2013 2012

<$100M $53 $51 $49

$100M - $500M $25 $23 $25

$500M - $1B $18 $16 $20

>$1B $18 $18 $19

FIGURE 10 Terrorism Insurance Pricing as a Percentage of Property Premium by TIV Source: Marsh

TIV RANGE 2014 2013 2012

<$100M 4% 4% 4%

$100M - $500M 4% 4% 4%

$500M - $1B 5% 5% 3%

>$1B 5% 5% 5%

10 Marsh INSIGHTS June 2015

COST BY INDUSTRY FIGURE 11 Terrorism Insurance Pricing – Median Rates by Industry (Rate per million) Source: Marsh Compared with rates in 2013, median property terrorism insurance premiums decreased or stayed INDUSTRY 2014 2013 2012 the same in 2014 for nine of the 17 CONSTRUCTION $77 $66 $63 industry categories (see FIGURE MEDIA $53 $36 $50

11). Organizations in the energy and TRANSPORTATION $48 $46 $42 mining, public entity and nonprofit, and life sciences sectors experienced POWER AND UTILITIES $47 $48 $53 the most significant decreases. Rates CHEMICALS $40 $37 $49 increased most significantly for FINANCIAL INSTITUTIONS $39 $42 $45 media, hospitality and gaming, and REAL ESTATE $39 $32 $34 construction organizations. PUBLIC ENTITY AND NONPROFIT ORGANIZATIONS $33 $39 $29

Although each company’s policy HOSPITALITY AND GAMING $32 $22 $41 typically is priced based on its ENERGY AND MINING $28 $45 $38 unique exposures, it is possible that LIFE SCIENCES $24 $28 $30 a combination of prior catastrophe TECHNOLOGY/TELECOM $22 $24 $24 (CAT) losses and location — namely RETAIL/WHOLESALE $20 $21 $22 businesses located in a central business district — may have MANUFACTURING $19 $17 $20 contributed to any increases. FOOD & BEVERAGE $18 $18 $14

EDUCATION $17 $17 $16 Overall, construction companies HEALTH CARE $14 $14 $17 again paid the most for their terrorism insurance in 2014, at a median rate of $77 per million, FIGURE 12 Terrorism Insurance Pricing as a Percentage of Property Premium by Industry up from $66 per million the Source: Marsh previous year. Companies in the food and beverage, education, and INDUSTRY 2014 2013 2012 health care sectors paid the least FINANCIAL INSTITUTIONS 7% 7% 4% for coverage, with median rates less than $20 million. TRANSPORTATION 6% 6% 7% REAL ESTATE 4% 6% 5%

When analyzing terrorism RETAIL/WHOLESALE 3% 5% 3% insurance pricing as a percentage MEDIA 5% 6% 4% of overall property premiums, financial institutions paid the largest PUBLIC ENTITY AND NONPROFIT ORGANIZATIONS 6% 5% 5% share, allocating 7% of their total MANUFACTURING 3% 3% 2% property programs (see FIGURE TECHNOLOGY/TELECOM 4% 2% 3%

12). Transportation, education, EDUCATION 6% 4% 4% and public entity and nonprofit HEALTH CARE 5% 5% 5% organizations paid 6% of their total property programs. In 2014, seven POWER AND UTILITIES 5% 5% 4% industry groups saw an increase in HOSPITALITY AND GAMING 5% 3% 7% their terrorism insurance pricing ENERGY AND MINING 3% 2% 1% as a percentage of overall property CONSTRUCTION 4% 2% 3% premiums. Chemical companies FOOD & BEVERAGE 4% 2% 4% paid the lowest, allocating only 2% of total property premium in 2014 to CHEMICALS 2% 3% 4% terrorism insurance. LIFE SCIENCES 3% 4% 3%

2015 Terrorism Risk Insurance Report 11 INSIGHTS June 2015

COST BY REGION — are likely to pay a higher premium for their terrorism coverage, which “Most insureds Companies in the Midwest paid the results in a larger percentage of lowest rates, on average, for property their overall property insurance are seeing rate terrorism insurance in 2014, costs being allocated to terrorism followed by companies in the West coverage. and premium (see FIGURE 13). Based on median premium rates, terrorism insurance decreases as well was most expensive in the South at COST OF TERRORISM $31 per million. INSURANCE IN 2015 as coverage AND BEYOND Terrorism insurance pricing as a improvements, percentage of property premium The authorization of TRIPRA, values varied slightly in the four robust flows of capital in both US regions analyzed (see FIGURE mostly driven by the insurance and reinsurance 14), accounting for an average of 3% segments, and moderate CAT for companies in the West, 4% for a competitive losses have combined to create companies in the Midwest, and 5% pricing conditions favorable to for companies in the Northeast and marketplace.” most insureds. Most insureds South. Much of this difference can be are seeing rate and premium explained by variations in terrorism decreases as well as coverage exposure. Companies in major improvements, mostly driven by metropolitan areas — for example, a competitive marketplace. New York, Washington, and Boston

FIGURE 13 Terrorism Insurance Pricing – Median Rates by Region (Rate per million) Source: Marsh

REGION 2014 2013 2012

MIDWEST $23 $21 $24

NORTHEAST $29 $32 $31

SOUTH $31 $28 $31

WEST $24 $27 $26

FIGURE 14 Terrorism Insurance Pricing as a Percentage of Property Premium by Region Source: Marsh

REGION 2014 2013 2012

MIDWEST 4% 5% 3%

NORTHEAST 5% 6% 6%

SOUTH 5% 3% 3%

WEST 3% 3% 6%

12 Marsh The reinsurance market will continue to grow, develop, and provide capacity. INSIGHTS June 2015

THE TERRORISM SPOTLIGHT REINSURANCE MARKET Insurers and Rating Agencies Reinsurance capacity for terrorism nature of TRIPRA and the “per TRIPRA’s renewal included increased trigger risks continued to develop and grow occurrence” definition of loss of and co-insurance obligations, which will in 2014, with most insurers having standard reinsurance structures. impact insurers, particularly smaller ones. the option to use reinsurance to buy They will need to address solvency concerns down their TRIPRA deductibles Year-on-year pricing typically from the rating agencies, and customers at acceptable prices, particularly decreased for CAT reinsurance could potentially see higher premium for conventional weapon attacks. programs that included terrorism costs as insurers take steps to ensure they When Congress adjourned at the coverage. Reinsurance rates for maintain sufficient policyholder surplus. end of 2014 without renewing coverage that includes NBCR TRIPRA, the reinsurance industry protections were relatively more Rating agency portfolio reviews identified potential losses associated with specific scrambled to offer capacity to help expensive in 2014; reinsurers have aggregations that exposed gaps in the offset its expiration, challenging specific capacity limits for NBCR coverage provided by standard reinsurance some January 1, 2015 reinsurance loss scenarios that are generally protections and TRIPRA recoveries. renewals. However, market less than conventional weapon TRIPRA will only provide reimbursements disruptions were minimal due to terrorism loss scenarios. once a loss has been certified and the TRIPRA’s quick reauthorization in industry trigger point is exceeded. The the beginning of the year. TRIPRA capacity remains crucial TRIPRA trigger points will increase from to the insurance industry as private $100 million to $200 million, which will Insureds generally were able to market reinsurance capacity is not be phased in starting in 2016 by annual expand the coverages provided in sufficient to provide the same level increments of $20 million for five years. their standard reinsurance programs of capacity as offered by TRIPRA. Insurers with these rating agency-related to include terrorism. As a result, With a multi-year TRIPRA solution accumulations — as well as other notable several standalone reinsurance and incremental changes limiting terrorism accumulations — accessed coverages were canceled in 2014 and the government’s potential exposure specialty, treaty, and facultative reinsurers other standalone programs were over time, it is anticipated that the to cover specific locations or aggregations structured on an aggregate basis to reinsurance market will continue to that produced loss scenarios in excess of mirror TRIPRA. Ceding companies grow, develop, and provide capacity standard reinsurance program limits. in 2014 generally became more for ceding companies that do not comfortable with the difference in want to increase their net exposure conditions between the aggregate to terrorism. Reliance on TRIPRA

The TRIPRA statistics by policyholder FIGURE 15 TRIPRA Statistics by Policyholder Surplus surplus table is created from an annual Source: Guy Carpenter statement database. More than 800 insurers are represented in the table. As in previous years, Guy Carpenter found that $100M $300M $50M TO $500M $1B TO POLICYHOLDER SURPLUS <$50M TO TO >$5B the TRIPRA deductible as a percentage $100M TO $1B $5B $300M $500M of surplus is higher for small to midsize APPLICABLE TRIPRA PREMIUM 8,786 39,023 89,761 198,099 319,931 910,723 4,439,360 insurers (see FIGURE 15).

AVG. TRIPRA DEDUCTIBLE 1,757 7,805 17,952 39,620 63,986 182,145 887,882

AVG. TRIPRA DEDUCTIBLE AS A 12.0% 11.1% 10.2% 9.9% 8.9% 9.0% 4.7% PERCENTAGE OF SURPLUS

2015 Terrorism Risk Insurance Report 13 capacity.

INSIGHTS June 2015

INTERNATIONAL SCHEMES — GOVERNMENT POOLS AND TRIPRA

Terrorism pools have been created reinsurance experienced broad price local pool (see FIGURE 16). In such to help organizations manage the decreases due to increased capacity situations, the application of the global threat of terrorism. The in the marketplace and the absence of standalone terrorism, sabotage, pools were established in response a recent, major terrorism loss. and/ or political violence policy to specific terrorist threats within should be either difference in each country. Typically, each pool In the countries where compulsory or conditions (DIC), difference in requires a declaration by the national optional terrorism reinsurance pools conditions and limits (DIC/DIL), or government that a terrorist event has exist, property insurance policies primary of the locally issued property occurred to trigger coverage. In 2014, can be extended to include terrorism policy pool coverage depending on those terrorism pools that purchase coverage in accordance with the the pool being accessed.

FIGURE 16 TRIPRA Statistics by Policyholder Surplus Source: Guy Carpenter

COMPULSORY COUNTRY NAMES OF TERRORISM POOL OR REINSURANCE MECHANISM POOL (Y/N)

AUSTRALIA N Austrailian Reinsurance Pool Corporation (ARPC)

AUSTRIA N Österreichischer Versicherungspool zur Deckung von Terrorrisiken (The Austrian Terrorpool)

BAHRAIN N Arab War Risks Insurance Syndicate (AWRIS)

BELGIUM N Terrorism Reinsurance & Insurance Pool (TRIP)

DENMARK N Danish Terrorism Insurance Scheme

FINLAND N FINNISH TERRORISM POOL

FRANCE Y Gestion de l’Assurance et de la Réassurance des Risques d’attentats et Terrorisme (Gareat)

GERMANY N Extremus Versicherungs-AG

HONG KONG - CHINA N The Motor Insurance Bureau (MIB)

INDIA N The General Insurance Corporation of India

INDONESIA N Indonesian Terrorism Insurance Pool

ISRAEL Y Terrorism (Intifada Risks) - The Victims of Hostile Actions (Pensions) Law and the Property Tax and Compenstion Fund Law

NAMIBIA N Namibia Special Risk Insurance Association (NASRIA)

NETHERLANDS N Nederlandse Herverzekeringsmaatschappij voor Terrorismeschade (NHT)

NORTHERN IRELAND N Criminal Damage Compensation Scheme Northern Ireland

RUSSIA N Russian Anti-terrorism Insurance Pool (RATIP)

SOUTH AFRICA N South African Special Risk Insurance Association (SASRIA)

SPAIN Y Consorcio de Compensación de Seguros (CCS)

SRI LANKA N SRCC/Terrorism Fund - Government

SWITZERLAND N Terrorism Reinsurance Facility

TAIWAN N Taiwan Terrorism Insurance Pool

UNITED KINGDOM N Pool Reinsurance Company Limited (POOL RE)

UNITED STATES N Terrorism Risk Insurance Program Reauthorization Act of 2007 (TRIPRA)

14 Marsh INSIGHTS June 2015

MANAGING GLOBAL TERRORISM RISKS

Recent acts of terrorism and TERRORISM RISK business continuity plans as a terrorism-related violence around QUANTIFICATION foundation of good risk management. the world highlight the importance of risk management best practices — Many companies have already Terrorism risk modeling and including the importance of risk developed business continuity, other analytical tools can help differentiation. Terrorism risk emergency response, and crisis organizations determine how much models and effective business management plans that consider coverage to purchase, whether continuity plans can play a key role the effects of a terrorist attack. capacity is in short supply or not. in improving business resiliency Such plans may suffer from Such models can help organizations: and accessing alternative outdated facility floor plans, contact terrorism markets. information, and technology. Staff • Better understand their awareness of roles, responsibilities, financial exposure. and actions to be taken during an EMPLOYEE DATA event also may be an issue. To ensure • Determine appropriate insurance that business continuity plans help deductibles and limits. Underwriters carefully select risks preserve and protect operations to insure, for example, paying close and people, organizations should • Optimize risk finance strategies. attention to employee concentration assess their plans and validate them exposures. For insureds, this means through training and exercises, • Rate the terrorism risk to that accurate data and risk profile with scenarios ranging from walk- negotiate insurance premiums. differentiation is one of the most throughs to tabletops to full-scale important considerations. simulations. Such measures can • Understand the risk’s potential help organizations think through impact on capital. The quality of the data provided their terrorism related risks and to underwriters can make a get a better understanding of their • Prioritize risk mitigation significant difference in how exposures ahead of insurance strategies. insurers evaluate an organization’s negotiations or an actual event. terrorism risk. Insurers strive to • Build efficient business understand the exact risk a company continuity plans. presents — simple payroll data by location is not sufficient. For • Understand the correlation example, underwriters may want and potential benefits of to know about: diversification among sites, locations, and regions — a • Multiple shifts. key component in addressing terrorism risk aggregation issues. • Campus settings.

• Telecommuters. SHARPEN BUSINESS

Insurers will likely request details of CONTINUITY PLANS employee exposures in a particular Organizations that review and building at a particular time. This update their business continuity can impact insurers’ employee plans to ensure they are prepared concentration concerns, one of the in the event of a terrorist attack key issues in workers’ compensation can improve their risk profile underwriting for terrorism risk. for underwriters, who often look for current and well-formulated

2015 Terrorism Risk Insurance Report 15 INSIGHTS June 2015

CONCLUSION

Amid greater concerns over global terrorism risks — including the recent spate of lone-wolf attacks in developed countries — the passage of TRIPRA brings greater certainty to organizations that depend on terrorism coverage to protect their assets. And coupled with PVI and the broad set of perils the coverage can respond to, organizations have greater access to cost-effective options as they seek to safeguard their operations from terrorism risks in the US and abroad.

16 Marsh INSIGHTS June 2015

APPENDIX

The Evolution of TRIPRA Source: Marsh’s Property Practice

NOVEMBER 26, 2002 – JANUARY 1, 2006 – JANUARY 1, 2008 – JANUARY 12, 2015 — TERM DECEMBER 31, 2005 DECEMBER 31, 2007 DECEMBER 31, 2014 DECEMBER 31, 2020

OFFICIAL Terrorism Risk Insurance Act of Terrorism Risk Insurance Extension Act Terrorism Risk Insurance Program Terrorism Risk Insurance Program LEGISLATIVE NAME 2002 (TRIA). of 2005 (TRIEA). Reauthorization Act of 2007 (TRIPRA). Reauthorization Act of 2015.

Must make coverage available for Covered acts committed by Covered acts committed by certified acts of terrorism on same individual(s) acting on behalf of individual(s) acting on behalf of any terms and conditions as for other any foreign person or interest to foreign person or interest to coerce Eliminated the distinction between covered risks. Covers foreign and COVERAGE SUMMARY coerce the civilian population of the civilian population of the US or acts of foreign or domestic terrorism. domestic terrorism in the US and on the US or to influence the policy to influence the policy or affect US interests abroad. or affect the conduct of the US the conduct of the US government government by coercion. by coercion. Includes an act of war for workers’ compensation policies only.

TERRITORY US only. US only. US only. US only.

CERTIFICATION $5 million $5 million $5 million $5 million THRESHOLD

Phased in increase starting on January 1, 2016: • 2015 – $100 million • 2016 – $120 million FEDERAL BACKSTOP • 2006 – $50 million $5 million $100 million TRIGGER • 2006 – $100 million • 2017 – $140 million • 2018 – $160 million • 2019 – $180 million • 2020 – $200 million

7% in 2003, 10% in 2004, 15% in 17.5% in 2006, 20% in 2007: 20%: Applied against prior-year 85%: Applied against prior-year INSURER DEDUCTIBLE 2005: Applied against prior-year Applied against prior-year direct direct earned premiums to direct earned premium. direct earned premium. earned premium. TRIPRA eligible lines of insurance.

Phased in decrease starting on January 1, 2016. GOVERNMENT • 2006 – 90% 90% 85% • 2015 – 85% • 2016 – 84% PARTICIPATION • 2007 – 85% • 2017 – 83% • 2018 – 82% • 2019 – 81% • 2020 – 80%

Phased in increase starting on January 1, 2016. • 2006 – 10% INSURER PARTICIPATION 10% 15% • 2015 – 15% • 2016 – 16% • 2007 – 15% • 2017 – 17% • 2018 – 18% • 2019 – 19% • 2020 – 20%

Formula will be calculated using Increases the current mandatory several factors: the size of the total recoupment amount of $27.5 billion loss, the amount of the industry by $2 billion each calendar year until aggregate retention as defined, the mandatory recoupment amount the amount that the insurers actually reaches $37.5 billion. Once the Included with discretion on part Included with discretion on part of retain, and the amount of the federal insurance marketplace aggregate of Secretary of Treasury — subject Secretary of Treasury — subject to RECOUPMENT government reimbursement. There is retention amount reaches $37.5 billion, to maximum 3% per year applied maximum 3% per year applied to no maximum on the amount that will the Treasury Secretary is to issue a final to policyholders’ premiums. policyholders’ premiums. be applied to future policyholders’ rule to annually revise the amount so premiums. For events that occur after that it is equal to the annual average of 1/1/2012, the mandatory portion of the sum of insurer deductibles for all any recoupment must be collected by insurers participating in the program 9/30/2017. for the prior three calendar years.

2015 Terrorism Risk Insurance Report 17 INSIGHTS June 2015

APPENDIX CONTINUES

Industry Categories Methodology

This report examined property terrorism insurance purchasing The report analyses relied on data from Marsh clients that patterns for 17 industry sectors, selected based on such criteria purchased property terrorism insurance across the United States. as sample population size, perceived exposures, take-up rates, Purchasing patterns were examined in the aggregate and and premium rates. Other industry groups were part of the overall were also based on client characteristics such as size, industry, analysis but not reported on individually. The industry groupings and region. included, but were not limited to, the following lines of business: The 2014 data came from property insurance placements • Chemicals: specialty chemicals, agrochemicals, distributors, incepting during calendar year 2014. The study population does industrial gases, and personal care and household companies. not include placements in the US for foreign-based multinationals or for small-firm placements made through package policies. • Construction: contractors, homebuilders, and general contractors. The 2014 study was based on a sample of 2,254 firms with the following characteristics: • Education: colleges, universities, and school districts.

• Energy: oil, gas, and pipelines. 1ST QUARTILE MEDIAN 3RD QUARTILE

• Financial institutions: banks, insurers, and securities firms. TIV $51 MILLION $228 MILLION $958 MILLION

• Food and beverage: manufacturers and distributors. PROPERTY PREMIUM $ 72,398 $ 240,000 $ 749,603 TERRORISM PREMIUM $ 1,728 $ 6,802 $ 25,724 • Hospitality: hotels, casinos, sporting arenas, performing arts centers, and restaurants. It is important to note: • Health care: hospitals and managed-care facilities. • The sample size for the energy industry sector was relatively • Life sciences: research, manufacturers, biotechnology, small and therefore may not be statistically significant. and pharmaceuticals. There may be a larger margin of error in the data analyzed, • Manufacturing: all manufacturers, excluding aviation. which may result in property terrorism take-up rates and pricing for energy companies varying more widely than the • Media: print and electronic media. data indicates. • Public entity and nonprofit: city, county, and state entities • For some companies, insurers quoted only a nominal terrorism and nonprofit organizations. premium of $1. These $1 premiums were omitted from the • Real estate: real estate and property management companies. calculations of the median terrorism premium rates.

• Retail and wholesale: retail entities of all kinds. • Companies were assigned to regions based on the locations of the Marsh offices that served them. Generally, this was • Technology/telecom: hardware and software manufacturers the Marsh office most closely located to a company’s and distributors, telephone companies, and internet headquarters. Many clients have multiple facilities across service providers. the US and the world, meaning the potential risk for a • Transportation: trucking and bus companies. terrorist attack may not be fully represented by where a company is headquartered. That said, the decision as to • Power and utility: public and private gas, electric, and whether to purchase terrorism insurance is typically made water utilities. at headquarters.

18 Marsh INSIGHTS June 2015

About Marsh

Marsh is a global leader in insurance broking and risk management. We help clients succeed by defining, designing, and delivering innovative industry-specific solutions that help them effectively manage risk. Marsh’s approximately 27,000 colleagues work together to serve clients in more than 130 countries. Marsh is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), a global team of professional services companies offering clients advice and solutions in the areas of risk, strategy, and people. With 57,000 employees worldwide and annual revenue exceeding $13 billion, Marsh & McLennan Companies is also the parent company of Guy Carpenter, a global leader in providing risk and reinsurance intermediary services; Mercer, a global leader in talent, health, retirement, and investment consulting; and Oliver Wyman, a global leader in management consulting. Follow Marsh on Twitter @MarshGlobal.

About this report

This report is a coordinated effort among Marsh’s Property Practice, Marsh’s Casualty Practice, Marsh Captive Solutions, Marsh Global Analytics, Guy Carpenter, and Marsh & McLennan Companies Government Relations. For more information, please contact your Marsh or Guy Carpenter or other Marsh & McLennan Companies representative, send an email to [email protected], or visit marsh.com and guycarp.com.

2015 Terrorism Risk Insurance Report 19 MARSH IS ONE OF THE MARSH & McLENNAN COMPANIES, TOGETHER WITH GUY CARPENTER, MERCER, AND OLIVER WYMAN.

This document and any recommendations, analysis, or advice provided by Marsh (collectively, the “Marsh Analysis”) are not intended to be taken as advice regarding any individual situation and should not be relied upon as such. The information contained herein is based on sources we believe reliable, but we make no representation or warranty as to its accuracy. Marsh shall have no obligation to update the Marsh Analysis and shall have no liability to you or any other party arising out of this publication or any matter contained herein. Any statements concerning actuarial, tax, accounting, or legal matters are based solely on our experience as insurance brokers and risk consultants and are not to be relied upon as actuarial, tax, accounting, or legal advice, for which you should consult your own professional advisors. Any modeling, analytics, or projections are subject to inherent uncertainty, and the Marsh Analysis could be materially affected if any underlying assumptions, conditions, information, or factors are inaccurate or incomplete or should change. Marsh makes no representation or warranty concerning the application of policy wording or the financial condition or solvency of insurers or reinsurers. Marsh makes no assurances regarding the availability, cost, or terms of insurance coverage. Although Marsh may provide advice and recommendations, all decisions regarding the amount, type or terms of coverage are the ultimate responsibility of the insurance purchaser, who must decide on the specific coverage that is appropriate to its particular circumstances and financial position. Copyright © 2015 Marsh LLC. All rights reserved. Compliance MA15-13528 18431