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Real Estate Industry Session TRIPRA Risk Management Perspective

Real Estate Industry Session TRIPRA Risk Management Perspective. Monday, April 28 2014. Panel. Michael Horvath Senior Vice President, Risk Management, Simon Property Group Kenneth K. Dort Partner, Drinker Biddle & Reath LLP Patricia Henry Global Government Affairs Officer, ACE Group

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Real Estate Industry Session TRIPRA Risk Management Perspective

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  1. Real Estate Industry SessionTRIPRARisk Management Perspective Monday, April 28 2014

  2. Panel • Michael Horvath • Senior Vice President, Risk Management, Simon Property Group • Kenneth K. Dort • Partner, Drinker Biddle & Reath LLP • Patricia Henry • Global Government Affairs Officer, ACE Group • Eamonn Cunningham • Chief Risk Officer, Westfield, LLC • Jennifer Owens • Manager Environmental Health and Safety, Comcast Corporation

  3. Current Terrorism Risk Insurance Program • U.S. Government is a reinsurer for “certified” acts of terrorism • Program is triggered when commercial losses exceed $100M • Coverage is for P&C commercial lines only including WC, Property, and Liability, etc. • Personal Lines & Group Life are excluded • NBCR and Cyber Terrorism losses are covered in program IF covered by underlying policy • Commercial insurers are required to “make available” coverage for certified acts of terrorism • Insurers can only exclude coverage for terrorism if insured declines coverage • Individual company retention (deductible) is 20% of DEP • The Federal government pays 85% excess of an individual insurer retention, while the insurer pays 15% • Recoupment mechanism for Federal share (up to a 3% surcharge) • Total program and insurer losses capped at $100B (per year) • Extended in 2005 and again in 2007 - Expires December 31, 2014

  4. Private Sector is Responsible for Most Expected Terror Losses • Insurers have made great strides in improving the management of conventional terrorism losses – largely managing these risks within TRIA’s existing retentions. However, no private insurance mechanism is sufficient for pooling the risk of unconventional or large-scale losses. • TRIA is a balanced public-private partnership – privatizing the management of terrorism risk and the pooling of conventional terrorism losses while maintaining the financing mechanism needed for truly catastrophic terror losses. • Under existing TRIA retentions, the insurance industry is managing almost all of the risk from single-site, conventional terrorism losses. • A RAND study (2014) estimated that total federal expenditures following a conventional terrorist attack are likely lower with TRIA in place than without TRIA. • Make available provision increases take-up rates for insurance • High retentions keep conventional risk in private sector • Lowers need for post-disaster government assistance

  5. Private Sector is Bearing Largest Share of Expected Terror Losses Delivery Method:2-ton truck bomb5-ton truck bomb10-ton truck bomb Estimated Industry Losses ($B) ~6.0 ~12.0 ~16.5 Estimated Fatalities ~1,600 ~4,500 ~7,000 Historical Events Oklahoma City Beirut Marine Khobai Towers Bombing Barracks Bombing Bombing, Saudi Arabia Year 1993 1983 2006

  6. NBCR Terrorism Loss Potential is Considerably More Severe than Natural Catastrophes

  7. Cyber-risk and TRIA • No precedent where TRIA has been applied in response to a cyber attack • A cyber terrorist attack arguably could trigger coverage under TRIA, if: • Certified as an “act of terrorism” by Treasury • All other statutory requirements were met • TRIA could be instrumental in providing stability in the event of a “Cyber Pearl Harbor,” in which catastrophic damages resulted • As the severity and frequency of cyber attacks have grown more prominent, several proposals have been made to clarify that TRIA could apply as reinsurance in the event of a massive cyber attack

  8. $100B Program Cap The 2007 extension clarified that the $100B cap on payments applies to both the federal government and insurer obligations for covered terrorism losses in any one year • The Treasury Secretary shall not make any payments for any portion of the amount of aggregate losses that exceed $100B • No insurer that meets its deductible shall be liable for the payments of any portion of the amount of losses that exceed $100B • The Treasury Secretary shall determine the pro-rata share of insured losses to be paid by each insurer that incurs under the Program • The Treasury Secretary must notify Congress within 15 days after certification if losses are estimated to exceed $100B

  9. $100B Program Cap – Final Rule Once Treasury determines that losses exceed the $100B Cap: • Treasury must determine the Pro Rata Loss Percentage (PRLP) and provide notice in the Federal Register or through DOI’s • Insurers will make pro-rated payments • All prior claims settlements are final • Treasury may call for a 2 week payment hiatus and may revise PRLP as loss data comes in • Each insurer must estimate if payments will exceed its deductible • If yes, begin making payments using PRLP • If no, continue paying at 100% of value

  10. TRIPRA - Current Legislative Position • Three Bills in the Congress including the Grimm Bill (5 year extension). • Recent bill in the Senate. • Sub Committee on this seeking research from the GAO. • CIAT testified at the Senate Banking Committee.

  11. Legislative Activity Regarding TRIA • Representative Mike Grimm (R-NY) House Financial Services Committee member • H.R. 508: 5-year extension (12/31/2019) • 88 regionally diverse/bi-partisan co-sponsors (40R 48D) • Representative Bennie Thompson (D-MS) • Homeland Security Committee Ranking Member • H.R. 1945: 10-year extension plus homeland security enhancements (12/31/2024) • 7 co-sponsors (7D) • Representative Mike Capuano (D-MA) • House Financial Services Committee member • H.R. 2146: 10-year extension (12/31/2024) • 43 co-sponsor (42D 1R) • Senator Chuck Schumer (D-NY) • Senate Banking Committee member • S. 2244: 7-year extension with changes to co-share and recoupment (12/31/2021) • 12 co-sponsor (6D 6R)

  12. S. 2244Introduced by Senator Schumer (D-NY) • Co-share would be increased from 85/15 to 80/20 • Recoupment would be increased from $27.5B to $37.5B • Both co-share and recoupment changes would be phased-in over 5 years • Program would be reauthorized for 7 years • Co-sponsors include: Kirk (R-IL) Heller (R-NV) Johanns (R-NE) Blunt (R-MO) Crapo (R-ID) Isakson (R-GA) Reed (D-RI) Murphy (D-CT) Warner (D-VA) Menendez (D-NJ) Johnson (D-SD) Gillibrand (D-NY)

  13. REPORTS ON TRIA President’s Working Group on Financial Markets

  14. Terrorism Insurance Take-up Rates • Real Estate 68% • All Industries 62% (44% - 81%) • Worker’s Compensation 100%

  15. Workers Compensation • Terrorism cannot be excluded. • Carriers have to be able to cede this risk. • All about concentration in workplace(s). • Carrier not just focusing on the larger cities. • New more detailed focus on numbers in individual buildings and time of day concentrations. • Not a lot of certainty in this space. • Ultimate options are very expensive.

  16. TRIPRA – Insurers Position • Accept the net position • Sunset provisions • Cover expiry 31 December • London • FM Global • Captives • Stand-alone program • Workers Compensation: • Short term policies to 12/31, or • Full year with AP if TRIPRA not extended

  17. TRIPRA – Lenders Position • Bank Financing. • Syndicated (CMBS) Facilities.

  18. TRIPRA – Insured’s Position • The Risk Managers perspective: • Uncertainty • Timing • Other factors

  19. Role of Capital Markets?

  20. TRIPRA Structure up for ReviewWhat possibly to expect • ? •  •  •  •  •  • X • ? • ? • Individual losses greater than $5 million • Trigger (aggregate annual) - $100 million of insurance losses • Deductible - 20% of prior year direct earned premiums • Co-payment (insurer) - 15% • Post Funding/Recoupment of Federal assistance through surcharges • Less than $27.5 Billion losses – mandatory recoupment at 133% • Above $27.5 Billion in insured losses – discretion to recoup • Total program and insurer losses capped at $100 Bn per annum • Pre-funding model • Cyber Terrorism • Streamlining the certification process

  21. TRIPRA - Current Legislative Position • Conservative Republicans being approached (Need good stories from Texas to spread the word including Oil and Energy). • Need more evidence of difficulties being faced – lending/investment. • Send a letter to your Representative or Senator – • CIAT Website: http://www.insureagainstterrorism.org • Look for the Call to Action letter in the Get the Facts section. • Email: info@insureagainstterrorism.org • Spread the word to other businesses with mass gathering locations as well e.g. football stadiums/theatres/sporting venues.

  22. Policyholder Advocates • The Coalition to Insure Against Terrorism represents a wide range of businesses and organizations throughout the transportation, real estate, manufacturing, construction, entertainment and retail sectors. • These groups banded together to speak for business insurance policyholders in search of a long-term solution to make comprehensive terrorism risk insurance coverage available and affordable through the Terrorism Risk Insurance Program Reauthorization Act.

  23. Coalition to Insure Against Terrorism • American Bankers AssociationAmerican Bankers Insurance AssociationAmerican Bankers Securities AssociationAmerican Council of Engineering CompaniesAmerican Gaming Association American Hotel and Lodging AssociationAmerican Land Title AssociationAmerican Public Gas AssociationAmerican Public Power AssociationAmerican Resort Development Association American Society of Association ExecutivesAssociated Builders and Contractors Associated General Contractors of America Association of American RailroadsAssociation of Art Museum DirectorsBuilding Owners and Managers Association InternationalFinancial Services Roundtable • Institute of Real Estate ManagementInternational Council of Shopping CentersInternational Franchise AssociationInternational Safety Equipment Association  • Long Island Import Export Association  • Mortgage Bankers AssociationNAIOPNational Apartment AssociationNational Association of Chain Drug StoresNational Association of Home Builders • National Association of ManufacturersNational Association of REALTORSNational Association of Real Estate Investment TrustsNational Association for Stock Car Auto Racing (NASCAR)National Association of Waterfront EmployersNational Basketball Association National Collegiate Athletic AssociationNational Council of Chain Restaurants National Football League National Hockey League National Multifamily Housing CouncilNational Restaurant AssociationNational Retail Federation National Roofing Contractors AssociationNational Rural Electric Cooperative AssociationNew England CouncilPartnership for NYCPublic Utilities Risk Management AssociationThe Real Estate RoundtableThe Real Estate Board of New YorkSecurities Industry and Financial Markets AssociationSelf-Insurance Institute of America, Inc.Taxicab, Limousine & Paratransit AssociationUJA-Federation of New YorkUniversity Risk Management and Insurance AssociationU.S. Chamber of CommerceU.S. Travel Association

  24. Representative Members of theCoalition to Insure Against Terrorism • Boston PropertiesCampbell Soup CompanyCitigroup Inc.Cornerstone Real Estate Advisers, LLCCRE Finance CouncilCSX CorporationEmersonFood Marketing InstituteHelicopter Association InternationalHilton WorldwideHost Hotels & Resorts, Inc.InterContinental Hotel GroupInternational Speedway CorporationMarriott InternationalOffice of the Commissioner of BaseballStarwood Hotels and ResortsUnion Pacific • http://www.insureagainstterrorism.org/

  25. Possible Timeline for Renewal Only 54 Legislative Days before the Mid-term Elections on November 4th • 2 days left in April • 12 days in May • 12 days in June • 16 days in July • August Recess • 10 days in September • 2 days in October • After Nov 4 - Lame Duck

  26. Questions, Final Comments and Contact Information

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