Transcript Download Handout 1

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
•
Business Owners
Combination of
Property and GL
•
Other Lines
(e.g. CIM, Farm)
Refer to Company
Terrorism Rating
Commercial Property
AIR Loss Costs
•
•
•
•
•
Conventional vs NBC
International vs. Domestic
Property Damage (Bldgs. vs. Contents)
Exposure Base: per $100 of Total Value
Geographic Detail: by County/City/Zip Code
Terrorism Rating
Commercial Property
AIR Results
City/County
Rank
Loss Costs (Bldgs. & Cont.)
Manhattan
1
$.173
Chicago
4
.068
Seattle
8
.010
Marin County
36
.001
Terrorism Rating
Commercial Property
Geographic Tiers
Approx. Loss
Costs
$.100
Tier
Cities/Counties
•
High Hazard
NYC, Chicago, SF, DC
•
Medium Hazard
LA, Boston, Houston,
Phil., Seattle
.010
•
Low Hazard
Remainder of USA
.001
Commercial Property
Adjustments 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
– No Backstop Adjustment
The Terrorism Risk Insurance Act
of 2002 – Lines of Insurance
•
Commercial Lines, except:
– Crop insurance
– Mortgage guarantee
– Financial guaranty
– Medical malpractice
– National flood insurance program
– Life and health insurance
The Terrorism Risk Insurance Act of
2002 -- Duration
• Three years, lasting through 2005
• First two years mandatory
• Third year optional
Terrorism Rating
Impact of Federal Backstop
Industry-Retained
“Backstopped”
• Company Deductible • Direct Federal Share
• 10% Over Deductible • Federal Recoupment (via
Policyholder Surcharges)
• Losses Above $100
Billion
The Terrorism Risk Insurance Act
of 2002 - Structure
• Amount of an insurer’s deductible:
–
–
–
–
2002 = 1% of prior year’s earned premium
2003 = 7%
2004 = 10%
2005 = 15%
• Annual cap – Losses in excess of $100 billion
may not be covered; Congressional review
Federal Backstop Pricing
Modeling Assumptions
Issue
 Expected Annual Terrorism Losses
 All Lines
 International Only
 Distribution of Losses Around Mean
 99th Percentile 
 Curve Fitting 
 Premium Growth
 for Deductible input
 Industry Involvement in Loss
 Industry Market Share 
 Insurer Proportions of Loss 
Assumption
Mean = $5.75 Billion
$50 Billion ---- $60 Billion
Log Normal, Gamma
2002
+17%
2003
+15%
2004
+10%
$100 Billion Loss
$1 Billion Loss
70%
15%
Various “Disproportionate” Scenarios
Federal Backstop Modeling
Calculation of Mean Expected Losses
• Annual Expected Comm. Prop. Terrorism Loss for P.D.
(“Conventional” Losses from AIR Model = $1.5 Billion)
• Business Interruption Losses = 20% of P.D. Losses
• “NBC” Losses = 100% of “Conventional” Losses
• Alternative Markets = 20% of Total CP Market
• Terrorism Loss Allocation by LOB: Comm. Prop. = 50%
of Total
(All Lines total) = $1.5 Billion x 1.20 x 2.00 x .80 X 2.00 = $5.75
Billion
Federal Backstop Pricing
Insurer Retention Percentages
Program Year 1
Program Year 2
Program Year 3
Geographic Tier
2003
2004
2005
High Hazard
Medium Hazard
Low Hazard
40%
75%
90%
55%
85%
95%
70%
95%
100%
Average
47%
61%
74%
Commercial Property
ISO Loss Costs
Geographic Tier
1
2
3
Year 1
Building
Contents
$.108
$.078
.018
.012
.001
.001
Terrorism Rating
Commercial Property
Dispersal of Loss Costs
Number of Zip Codes
Loss Cost Range(Buildings)
> $.25
$.10 - $.24
$.05 - $.09
$.01 - $.04
Under $.01
District of Columbia
2
2
3
5
14
San Francisco
3
1
5
15
ISO Terrorism Loss Costs
Commercial Property
“Tier 1” Jurisdictions
 Reduction in Tier 1 Loss Costs
 Cities sub-divided into Tiers 2 & 3
 Habitational further reduced
 25% cap on premium increase
WASHINGTON, D.C.
IMPLEMENTED TERRORISM LOSS COSTS
District of
Columbia
Tier
1
20012
20015
Year 1
Buildings Loss Cost
.030
2
.018
3
.005
20011
20016
20017
20008
20010
20009
20007
20064
20018
20059
20001
20057
20036
20005
20037 20006
#
20002
Washington
20019
20004
20004
20003
20024
20020
20032
Potential Future Revisions
• Loss Costs Based on AIR Model
– NBC
– Domestic Terrorism
• Re-evaluation of current geographic rating
approach
•
– New Tiers
– Tiers Within Cities
Re-Pricing of Federal Backstop
– Reflect Insureds Declining Coverage