TRIA: Political Update & Long Term Solutions: TRIA: Political Update & Long Term Solutions Glenn Pomeroy Associate General Counsel GE Insurance Solutions May 16, 2005


Political Update: Political Update Two-year extension failed in 108th Congress Key obstacles in 2004 House Majority Leader Tom DeLay Senate Banking Chairman Richard Shelby Mandated Treasury Department study on marketplace Lack of Treasury Department and White House support Outlook for 109th Congress... Push for two-year extension Accelerate consideration of a long-term solution Treasury Department marketplace study - due June 2005 White House support critical Partisan distractions


Point: House Majority Leader DeLay (R. Tex.): Point: House Majority Leader DeLay (R. Tex.) * * * As a true believer in the power of the free market, I am disappointed that the insurance industry has not come up with solutions to the problem of insuring against terrorism as it said it would. I know some people believe terrorism is unlike any other risk insurance companies face, and they’re right. But I also understand that terrorism is a fact of life today. The insurance industry is made up of creative and motivated thinkers who have always been able to accommodate new risks, new challenges, and new technologies. It took the wisdom of a remarkable thinker and one of our founding fathers, Ben Franklin, to use the free market to develop a solution to the threat that fire posed to the citizens of Philadelphia. * * * It is important for the industry to work with Congress to develop a long-term solution that does not involve the federal government serving as a reinsurer or permanent backstop. Nor can the government become a funding mechanism for the insurance industry. That is not the business of government, and that is not the philosophy of the Republican Party. Letter to PCIAA dated March 15, 2005


Counterpoint: Senate Minority Leader Reid (D. Nev.): Counterpoint: Senate Minority Leader Reid (D. Nev.) * * * * * *


Other views : Other views "...the Terrorism Risk Insurance Act needs to be extended and now, not later. Why the urgency? Because companies that are now negotiating insurance policy renewals for next year and beyond are finding that their terrorism coverage will be severely limited or dropped altogether if TRIA is not extended." -- U.S. Chamber of Commerce President and CEO Thomas J. Donahue, March 17, 2005 "There are regrettable instances in which markets do not work, cannot work. I have yet to be convinced [that the terrorism insurance market can be made to work]." -- Federal Reserve Chairman Alan Greenspan, February 17, 2005 “Congress should promptly act to extend TRIA for two years.” --Acting Superintendent of Insurance New York Howard Mills, April 14, 2005


Coalition to Insurance Against Terrorism : Coalition to Insurance Against Terrorism www.insureagainstterrorism.org


Slide7: American Bankers Association American Bankers Insurance Association American Council of Engineering Companies American Gas Association American Hotel and Lodging Association American Land Title Association American Public Gas Association American Public Power Association American Resort Development Association American Society of Association Executives America's Community Bankers Associated Builders and Contractors Associated General Contractors of America Association of American Railroads Association of Art Museum Directors The Bond Market Association Babson Capital Management Building Owners and Managers Association Boston Properties CCIM Institute Century 21 Department Stores Chemical Producers and Distributors Association Commercial Mortgage Securities Association Cornerstone Real Estate Advisers, Inc. CSX Corporation Edison Electric Institute Electric Power Supply Association The Financial Services Roundtable The Food Marketing Institute General Aviation Manufacturers Association Helicopter Association International Hilton Hotels Corporation Host Marriott Hyatt Hotels Independent Electrical Contractors Institute of Real Estate Management Intercontinental Hotels International Council of Shopping Centers International Franchise Association International Safety Equipment Association The Long Island Import Export Association Marriott International Mortgage Bankers Association of America National Apartment Association National Association of Home Builders National Association of Industrial and Office Properties National Association of Manufacturers National Association of REALTORS® National Association of Real Estate Investment Trusts National Association of Waterfront Employers National Association of Wholesaler-Distributors National Basketball Association National Collegiate Athletic Association National Council of Chain Restaurants National Football League National Hockey League National Multi Housing Council National Petrochemical & Refiners Association National Restaurant Association National Retail Federation National Roofing Contractors Association National Rural Electric Cooperative Association The New England Council Office of the Commissioner of Baseball Public Utilities Risk Management Association Partnership for New York City The Real Estate Board of New York The Real Estate Roundtable Society of American Florists Starwood Hotels and Resorts Taxicab, Limousine & Paratransit Association Trizec Properties, Inc. Travel Business Roundtable UJA-Federation of New York Union Pacific Corporation U.S. Chamber of Commerce Westfield (as of 9/24/04)


Slide8: 5 Reasons Why America Needs A Terrorism Insurance Backstop 1. The Unique Nature of the Risk 2. The State of the Insurance Market 3. The Proper Role of Government 4. A Matter of Fairness 5. Lack of Cover Already Hurting our Homeland's Economic Security "Planning the day before for the day after an attack should be viewed as equally important to protect ourselves against such an attack." Robert Lowe, CEO Lowe Enterprises, Chairman of Real Estate Roundtable and CIAT Spokesperson, Senate Hearing April 15, 2005


Legislative Options: Legislative Options Clean 2-year extension 2-year extension w/transition to public/private partnership Redefine govt. backstop – (e.g., $25B per year for mega-catastrophes) Develop long-term solution


Post-TRIA Alternatives: Post-TRIA Alternatives Rely on Private Markets Capacity of Private Reinsurance Market Capital Markets - Capacity/interest? Pre-Funded Tax-Free Catastrophe Reserves Voluntary Pools Problems: Insufficient capacity for large losses High prices/few buyers NBCR not covered Expectation of post-event government funds – reduce incentive for voluntary purchase Regulatory restrictions – Exclusions allowed? SFP? Workers Compensation? Adequate Pricing?


Post-TRIA Alternatives: Post-TRIA Alternatives Government/Private Market Shared Risk TRIA Extension without modification TRIA Expansion TRIA Roll-back Mandatory Government Sponsored Insurance Problems: Subsidized rate, but many remain uninsured NBCR uninsured Domestic terrorism, Life, and Personal lines risks retained Exposure is capped, but retention levels a solvency threat for some insurers


Post-TRIA Alternatives: Post-TRIA Alternatives Government Direct Compensation Partial Recovery Full or Near-Full Recovery Problems High taxes and substantial bureaucracy Determining fair compensation amounts


Post-TRIA Alternatives : Post-TRIA Alternatives Concepts Under Consideration by Primary Industry Modified TRIA – 2 program components NBCR (WMD) – U.S. government first dollar coverage Conventional Coverage – modified TRIA Increase post-event surcharges, lower deductible, and/or allocated/split deductible Modified TRIA – private pool & federal catastrophe cover Federal catastrophe layer excess of $40 billion Industry retention of $40 billion – private pool/program Insurer co-participation at 5% of losses 95% first dollar quota share reinsured by Pool Pool funded by premiums, private reinsurance, post-event bond issue, post-event surcharges to re-pay bonds Federal tax exemptions and contingent guarantees to support bond offering


Slide14: Non US Government Programs Consorcio de Compensacion de Seguros (CCS) (Spain) – Government reinsurance GAREAT (France) – Reinsurance pool for commercial property and business interruption losses with government backstop Pool Re (United Kingdom) – Pool reinsurance on an XOL basis with a government backstop Extremus AG (Germany) – Primary insurance for commercial property and business interruption Oesterreichischer Terrorpool (Austria) – Per event and per risk reinsurance pool with a government backstop