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Corporate Risk Management and the Perception of Terrorism Risk: The Case of Germany Christian Corporate Risk Management and the Perception of Terrorism Risk: The Case of Germany Christian Thomann* J. -Matthias Graf von der Schulenburg Bruno Gas Razvan Pascalau* *U of Alabama Quebec, August, 6 th, 2007

Research Question How do corporations learn about dynamic risks? l Terrorism Risk is highly Research Question How do corporations learn about dynamic risks? l Terrorism Risk is highly dynamic, potentially catastrophic and not well known l l It thus provides for an opportunity to: Test if Prospective Reference Theory (Viscusi, 1989) can be applied in a corporate context l Learn how the inflow of new information changes a corporation‘s risk management l Understand how corporations weigh new information l Thomann / Graf von der Schulenburg / Gas / Pascalau ● August 6 th 2007 2

Overview Introduction: Terrorism, Insurance and Extremus Dataset Corporate Risk Attitudes and Individual Risk Perception Overview Introduction: Terrorism, Insurance and Extremus Dataset Corporate Risk Attitudes and Individual Risk Perception Hypotheses and Empirical Investigation Conclusion Thomann / Graf von der Schulenburg / Gas / Pascalau ● August 6 th 2007 3

Overview Introduction: Terrorism, Insurance and Extremus Dataset Corporate Risk Attitudes and Individual Risk Perception Overview Introduction: Terrorism, Insurance and Extremus Dataset Corporate Risk Attitudes and Individual Risk Perception Hypotheses and Empirical Investigation Conclusion Thomann / Graf von der Schulenburg / Gas / Pascalau ● August 6 th 2007 4

Terrorism A definition An Act of Terrorism means an act of any person acting Terrorism A definition An Act of Terrorism means an act of any person acting on behalf of or in connection with any organisation with activities directed towards the overthrowing or influencing of any government de jure or de facto by force or violence. Reinsurance (Acts of Terrorism) Act 1993 Thomann / Graf von der Schulenburg / Gas / Pascalau ● August 6 th 2007 5

Terrorism has changed l Old Terrorism (Wilkinson 1986, Hoffman 1992) Motivation: Separation, Nationalism, Marxist Terrorism has changed l Old Terrorism (Wilkinson 1986, Hoffman 1992) Motivation: Separation, Nationalism, Marxist Ideology, Economic Inequality, Goals are well defined l Organizational Structure: Command Control. Terrorists are trained and are committed full-time to their cause l l New Terrorism (Enders and Sandler 2000, Hoffman 1997) Motivation: Less comprehensible, embrace amorphous religious aims l Organizational Structure: International networks that can be diffuse and spontaneous. Terrorists may live normal lives l l Terrorism in its present form poses a new and significant challenge to Risk Managers Thomann / Graf von der Schulenburg / Gas / Pascalau ● August 6 th 2007 6

Dynamics of Terrorism Homeland Security Advisory System Date March 12, 2002 September 10, 2002 Dynamics of Terrorism Homeland Security Advisory System Date March 12, 2002 September 10, 2002 September 24, 2002 February 7, 2003 February 27, 2003 March 17, 2003 April 16, 2003 May 20, 2003 May 30, 2003 December 21, 2003 January 9, 2004 August 1, 2004 November 10, 2004 July 7, 2005 August 12, 2005 August 10, 2006 August 13, 2006 Threat Level Introduction: Yellow Orange Yellow Orange financial services sectors in NYC, NJ and DC Yellow financial services sectors in NYC, NJ and DC Raised from Yellow to Orange for mass transit Lowered from Orange to Yellow for mass transit Red for flights from the UK to the United States Orange for flights from the UK to the United States Thomann / Graf von der Schulenburg / Gas / Pascalau ● August 6 th 2007 7

Dynamics of Terrorism Homeland Security Advisory System Date March 12, 2002 September 10, 2002 Dynamics of Terrorism Homeland Security Advisory System Date March 12, 2002 September 10, 2002 September 24, 2002 February 7, 2003 February 27, 2003 March 17, 2003 April 16, 2003 May 20, 2003 May 30, 2003 December 21, 2003 January 9, 2004 August 1, 2004 November 10, 2004 July 7, 2005 August 12, 2005 August 10, 2006 August 13, 2006 Threat Level Introduction: Yellow Orange Yellow Orange financial services sectors in NYC, NJ and DC Yellow financial services sectors in NYC, NJ and DC Raised from Yellow to Orange for mass transit Lowered from Orange to Yellow for mass transit Red for flights from the UK to the United States Orange for flights from the UK to the United States Thomann / Graf von der Schulenburg / Gas / Pascalau ● August 6 th 2007 8

Assessing Terrorism Risk l Difficult to assess risk of a terrorist attack l GAO Assessing Terrorism Risk l Difficult to assess risk of a terrorist attack l GAO (2004): Homeland Security Advisory System: No explicit criteria or quantifiable factors are used to determine the treat level. Threat levels include a certain amount of subjectivity l Fischhoff et al. (2003): Individuals significantly overestimate their exposure to terrorism risk: l l 11/2001: 43 % (19 %) of respondents living within (outside) a 100 miles of the WTC: 50 % or higher chance of themselves being hurt in a terrorist attack. In Addition: Information provided by governments and media is likely to be biased Thomann / Graf von der Schulenburg / Gas / Pascalau ● August 6 th 2007 9

Terrorism and Insurance Before 9/11 Terrorism is commonly included in Standard Insurance Policies l Terrorism and Insurance Before 9/11 Terrorism is commonly included in Standard Insurance Policies l 9/11 l Highest Insured Loss Due to Terrorism l Results in Exclusion of Terrorism from Standard Insurance Contracts l l Governments Intervene on Terrorism insurance markets United States (TRIA) l Germany (Extremus) l France (GAREAT) l l Interventions in Germany and US must be prolonged in 2007 Thomann / Graf von der Schulenburg / Gas / Pascalau ● August 6 th 2007 10

Terrorism Insurance in Germany After September, 11 th Government Intervention: Primary Insurer (EXTREMUS) Cover Terrorism Insurance in Germany After September, 11 th Government Intervention: Primary Insurer (EXTREMUS) Cover Risks > 25 million € l Buildings, Content, Business Interruption and Clean up Costs l Exclusions l NBC, War, . . . Limit for Compensation: 1. 5 bn € 100 % reinsurance by insurance industry & German Government Thomann / Graf von der Schulenburg / Gas / Pascalau ● August 6 th 2007 11

Overview Introduction: Terrorism, Insurance and Extremus Dataset Corporate Risk Attitudes and Individual Risk Perception Overview Introduction: Terrorism, Insurance and Extremus Dataset Corporate Risk Attitudes and Individual Risk Perception Hypotheses and Empirical Investigation Conclusion Thomann / Graf von der Schulenburg / Gas / Pascalau ● August 6 th 2007 12

Data Set Overview l Data on all government-reinsured terrorism insurance purchases between 11/2002 and Data Set Overview l Data on all government-reinsured terrorism insurance purchases between 11/2002 and 3/2007 in Germany (n>5000) Name, Industry and Location of Policyholders l Amount of Coverage Purchased l Price of Insurance Coverage l Start and End of Insurance Coverage l Thomann / Graf von der Schulenburg / Gas / Pascalau ● August 6 th 2007 13

Data Set, Descriptive Statistics Policyholder 2002/3 Mean 2004 2005 2006 2007 20022007 554 377 Data Set, Descriptive Statistics Policyholder 2002/3 Mean 2004 2005 2006 2007 20022007 554 377 378 365 419 p 50 48. 30 54. 20 55. 80 58. 60 61. 10 55. 00 Mean 71. 20 73. 00 75. 60 80. 70 85. 80 77. 20 p 50 43. 30 46. 40 47. 60 50. 00 50. 30 47. 80 Degree of Coverage Mean 0. 85 0. 86 0. 85 0. 87 0. 86 p 50 1. 00 Net Premium (€) Mean 89, 014 73, 207 58, 934 57, 151 56, 220 67, 095 p 50 9, 558 11, 246 11, 389 11, 654 12, 858 11, 201 MPL (m €) UL (m €) Thomann / Graf von der Schulenburg / Gas / Pascalau ● August 6 th 2007 14

Data Set, Descriptive Statistics By Industry and Year Banks Asset Managers Construction Utilities Airports Data Set, Descriptive Statistics By Industry and Year Banks Asset Managers Construction Utilities Airports Real Estate Inv Funds Churches, Foundations Hospitals Logistics Media, IT Local Authorities Heavy Industry Transportation Stores, Art, Fairs, Other, Tourism Insurance Total 2002/3 99 19 19 26 490 96 21 9 11 34 32 28 10 92 194 1180 Thomann / Graf von der Schulenburg / Gas / Pascalau ● August 6 th 2007 2004 111 19 16 22 452 100 20 5 15 33 18 31 11 100 118 1072 2005 106 31 16 20 460 107 19 7 14 31 18 36 12 127 1117 2006 105 23 14 22 530 120 21 7 15 31 18 35 11 122 121 1195 15 2007 92 13 13 17 492 107 17 7 12 24 15 23 12 101 1050

Data Set, Descriptive Statistics By Industry and Year 2002/3 99 19 19 26 490 Data Set, Descriptive Statistics By Industry and Year 2002/3 99 19 19 26 490 96 21 9 11 34 32 28 10 92 2004 111 19 16 22 452 100 20 5 15 33 18 31 11 100 2005 106 31 16 20 460 107 19 7 14 31 18 36 12 112 2006 105 23 14 22 530 120 21 7 15 31 18 35 11 122 2007 92 13 13 17 492 107 17 7 12 24 15 23 12 101 Insurance 194 118 127 121 105 Total 1180 1072 1117 1195 1050 Banks Asset Managers Construction Utilities Airports Real Estate Inv Funds Churches, Foundations Hospitals Logistics Media, IT Local Authorities Heavy Industry Transportation Stores, Art, Fairs, Other, Tourism Thomann / Graf von der Schulenburg / Gas / Pascalau ● August 6 th 2007 16

Data Set, Descriptive Statistics By Month 1 2 3 4 Mean 924 40 30 Data Set, Descriptive Statistics By Month 1 2 3 4 Mean 924 40 30 30 5 6 7 8 9 10 11 12 Total 13 16 21 13 12 14 9 24 106 Policies Sold SD Min 186 599 63 9 40 2 37 5 6 12 8 9 4 8 6 22 273 5 9 11 7 7 6 3 10 2 Max 1054 153 101 84 Mean -329 126 306 273 17 33 30 26 16 23 19 62 1054 32 26 12 18 23 43 22 386 82 Thomann / Graf von der Schulenburg / Gas / Pascalau ● August 6 th 2007 ΔPRInc SD Min 2432 -3083 274 -6 841 -284 500 4 17 10 89 27 15 43 10 778 790 17 19 -107 -22 4 14 14 21 -3083 17 Max 3513 616 1792 1022 52 41 107 42 39 107 37 1778 3513

Data Set, Descriptive Statistics By Month Policies Sold SD Min Month Mean 1 924 Data Set, Descriptive Statistics By Month Policies Sold SD Min Month Mean 1 924 186 2 3 4 40 30 30 5 6 7 8 9 10 11 12 Total 13 16 21 13 12 14 9 24 106 ΔPRInc SD Min Max Mean 599 1054 -329 2432 -3083 3513 63 40 37 9 2 5 153 101 84 126 306 273 274 841 500 -6 -284 4 616 1792 1022 6 12 8 9 4 8 6 22 273 5 9 11 7 7 6 3 10 2 17 33 30 26 16 23 19 62 1054 32 26 12 18 23 43 22 386 82 17 10 89 27 15 43 10 778 790 17 19 -107 -22 4 14 14 21 -3083 52 41 107 42 39 107 37 1778 3513 Thomann / Graf von der Schulenburg / Gas / Pascalau ● August 6 th 2007 18 Max

Overview Introduction: Terrorism, Insurance and Extremus Dataset Corporate Risk Attitudes and Individual Risk Perception Overview Introduction: Terrorism, Insurance and Extremus Dataset Corporate Risk Attitudes and Individual Risk Perception Hypotheses and Empirical Investigation Conclusion Thomann / Graf von der Schulenburg / Gas / Pascalau ● August 6 th 2007 19

Corporate Risk Management Modigliani and Miller (1958) Mayers and Smith (1982), Stulz (1984), Froot, Corporate Risk Management Modigliani and Miller (1958) Mayers and Smith (1982), Stulz (1984), Froot, Scharfstein, and Stein (1993) Greater Efficiency in the allocation of risk among a company‘s stakeholders l Bankruptcy Costs / Costs of financial distress l Taxes l Agency Problems l Corporations act as if they were risk averse Thomann / Graf von der Schulenburg / Gas / Pascalau ● August 6 th 2007 20

Corporate Risk Management Empirical Studies and Extension l CRM: Empirical Studies (Insurance): l Mayers Corporate Risk Management Empirical Studies and Extension l CRM: Empirical Studies (Insurance): l Mayers and Smith (1990), Hoyt and Khang (2000), Kleffner and Doherty (1996), Cole and Mc. Collough (2006) CRM and Bankruptcy: Marin (2007) l CRM: Extension to Ambiguous Risks: l l l Kunreuther et al. (1995): Ambiguity aversion describes prices set by insurance underwriters. CRM of dynamic risks: has not been analyzed empirically Further Similarities between individuals’ and corporations’ behavior Thomann / Graf von der Schulenburg / Gas / Pascalau ● August 6 th 2007 21

Prospective Reference Theory Assessing Dynamic Risks l Viscusi (1989): Prospective Reference Theory Generalization of Prospective Reference Theory Assessing Dynamic Risks l Viscusi (1989): Prospective Reference Theory Generalization of the EU model l Decision makers assess Probability with a Bayesian process l Empirically tested Viscusi and Evans (2006), Viscusi and O’Connor (1984) l Posterior Probability (p*) is the weighted average of: l Prior Probability q (weight: γ) l Probability p of the outcome observed (weight: ξ= number of trials) l Thomann / Graf von der Schulenburg / Gas / Pascalau ● August 6 th 2007 22

Overview Introduction: Terrorism, Insurance and Extremus Dataset Corporate Risk Attitudes and Individual Risk Perception Overview Introduction: Terrorism, Insurance and Extremus Dataset Corporate Risk Attitudes and Individual Risk Perception Empirical Investigation Conclusion Thomann / Graf von der Schulenburg / Gas / Pascalau ● August 6 th 2007 23

Events Studied Event Window Event 3/2004 (-0; +3) 7/2005 (-0; +3) 7/2006 (-0: +2) Events Studied Event Window Event 3/2004 (-0; +3) 7/2005 (-0; +3) 7/2006 (-0: +2) March 11 th 2004: Attack on Commuter Trains in Madrid. Attacks took the lives of 190 people and wounded approximately 1500. July 7 th 2005: Attack on Busses and Trains, London. Attacks took lives of 52 people and wounded 700. Terrorist bombs were discovered on July 31 and August 1, 2006. Germany Thomann / Graf von der Schulenburg / Gas / Pascalau ● August 6 th 2007 24

Time Series Models JANUARY = dummy variable for January ATTACKi= Dummy variable: Attacks on Time Series Models JANUARY = dummy variable for January ATTACKi= Dummy variable: Attacks on Madrid (i=1), London (2) and the attempts to bomb two trains in Germany (3) INTERAi = Interaction term, denotes a January after an attack Thomann / Graf von der Schulenburg / Gas / Pascalau ● August 6 th 2007 25

OLS Estimates Δ Polt JANUARY -139. 39 Δ PRINC *** (5. 55) ATTACK 1 OLS Estimates Δ Polt JANUARY -139. 39 Δ PRINC *** (5. 55) ATTACK 1 4. 60 -3092249 (55732. 04) * 9831. 609 (2. 64) INTERA 1 4. 10 35944. 01 (29271. 9) 1. 60 46391. 62 (3. 31) ATTACK 3 (26587. 53) (2. 91) ATTACK 2 (33267. 96) 62 *** (7. 71) INTERA 2 82 1656964 *** 2986772 1 2529190 (77446. 18) 9. 39 *** 9093. 249 (1. 03) R² *** (77446. 18) (7. 71) _cons *** (77446. 18) (7. 71) INTERA 3 *** (10349. 18) 0. 97 0. 99 Absolute value of t statistics in parentheses, * significant at 10 %; ** significant at 5%; *** significant at 1% Thomann / Graf von der Schulenburg / Gas / Pascalau ● August 6 th 2007 26

OLS Estimates Δ Number of Policies JANUARY -139. 39 Δ Premium Income *** (5. OLS Estimates Δ Number of Policies JANUARY -139. 39 Δ Premium Income *** (5. 55) ATTACK 1 -3092249 (55732. 04) 4. 60 * 9831. 609 (2. 64) INTERA 1 4. 10 35944. 01 (29271. 9) 1. 60 46391. 62 (3. 31) ATTACK 3 (26587. 53) (2. 91) ATTACK 2 (33267. 96) 62 *** (7. 71) INTERA 2 82 1656964 *** 2986772 1 2529190 (77446. 18) 9. 39 *** 9093. 249 (1. 03) R² *** (77446. 18) (7. 71) _cons *** (77446. 18) (7. 71) INTERA 3 *** (10349. 18) 0. 97 0. 99 Absolute value of t statistics in parentheses, * significant at 10 %; ** significant at 5%; *** significant at 1% Thomann / Graf von der Schulenburg / Gas / Pascalau ● August 6 th 2007 27

Results Coefficients for the dummy Attack-variables are not significant l Yet terrorists’ activity during Results Coefficients for the dummy Attack-variables are not significant l Yet terrorists’ activity during the previous 12 months has a significant influence and apparently not declining importance on the demand for terrorism insurance: l Interaction terms are positive and significant. l Negative coefficient for the JANUARY variable: Captures the drop in demand that resulted from the absence of major terrorist attacks between November 2002 and January 2004. l Thomann / Graf von der Schulenburg / Gas / Pascalau ● August 6 th 2007 28

Further Evidence l The data on the renewal of policies also supports the importance Further Evidence l The data on the renewal of policies also supports the importance of recent terrorist activity for the demand for terrorism insurance in Germany 2002/3 2004 % of Contracts renewed in t+1 % of contracts renewed until 2007 2005 2006 20022006 76* 62 78 86 80 39 58 71 80 Thomann / Graf von der Schulenburg / Gas / Pascalau ● August 6 th 2007 29

Overview Introduction: Terrorism, Insurance and Extremus Corporate Risk Attitudes and Individual Risk Perception Hypotheses Overview Introduction: Terrorism, Insurance and Extremus Corporate Risk Attitudes and Individual Risk Perception Hypotheses and Empirical Investigation Conclusion Thomann / Graf von der Schulenburg / Gas / Pascalau ● August 6 th 2007 30

Conclusion Corporations’ Risk Assessments are very dependent upon recent experience with dynamic risks Overweighing Conclusion Corporations’ Risk Assessments are very dependent upon recent experience with dynamic risks Overweighing of recent events will be a serious obstacle for the development of a private insurance markets against highly dynamic risks Necessary to model corporate management of dynamic risks with the help of concepts that allow for dynamic updating Thomann / Graf von der Schulenburg / Gas / Pascalau ● August 6 th 2007 31

Terrorism Insurance Expectations and Experience in Germany When Extremus was founded in 2002 its Terrorism Insurance Expectations and Experience in Germany When Extremus was founded in 2002 its shareholders expected to generate premium income of € 250 millions. 2002/3 2004 2005 2006 2007 20022007 Contracts sold 1180 1071 1116 1195 1050 5612 Premium Income (€ m) 105 78. 4 65. 8 68. 3 59 377 Sum of Max. Poss. Losses (€ bn) 653 407 422 436 2350 Sum of Upper Limits (€ bn) 84 78. 7 84. 5 96. 5 90. 1 434 Thomann / Graf von der Schulenburg / Gas / Pascalau ● August 6 th 2007 32

Thank you Thomann / Graf von der Schulenburg / Gas / Pascalau ● August Thank you Thomann / Graf von der Schulenburg / Gas / Pascalau ● August 6 th 2007 33

Results Recent Terrorist Activity has a strong and not declining importance for a company’s Results Recent Terrorist Activity has a strong and not declining importance for a company’s insurance decision. The demand for terrorism insurance decreases in the absence of terrorist attacks Recent terrorist attacks stabilize the demand for terrorism insurance When making Risk Management Decisions Corporations place a great and not declining weight on their recent experience with terrorism risk. Necessary to model corporate management of dynamic risks with the help of concepts that allow for dynamic updating Thomann / Graf von der Schulenburg / Gas / Pascalau ● August 6 th 2007 34

Corporate Risk Management Empirical Studies and Extensions Mayers and Smith (1990) Demand for reinsurance Corporate Risk Management Empirical Studies and Extensions Mayers and Smith (1990) Demand for reinsurance by US insurers Hoyt and Khang (2000) Corporate demand for primary insurance (US) Kleffner and Doherty (1996) Supply of earthquake insurance in California Mc. Collough/ Thomann / Graf von der Schulenburg / Gas / Pascalau ● August 6 th 2007 35

Terrorism Insurance Experience in Germany and the U. S. Thomann / Graf von der Terrorism Insurance Experience in Germany and the U. S. Thomann / Graf von der Schulenburg / Gas / Pascalau ● August 6 th 2007 36

Terrorismus Definition „Terrorakte sind jegliche Handlungen von Personen oder Personengruppen zur Erreichung politischer, religiöser, Terrorismus Definition „Terrorakte sind jegliche Handlungen von Personen oder Personengruppen zur Erreichung politischer, religiöser, ethnischer oder ideologischer Ziele, die geeignet sind, Angst [. . . ] in [. . . ] Teilen der Bevölkerung zu verbreiten und dadurch auf eine Regierung oder staatliche Einrichtungen Einfluss zu nehmen. “ Extremus Allgemeine Bedingungen für die Terrorversicherung Thomann / Graf von der Schulenburg / Gas / Pascalau ● August 6 th 2007 37

Absence of Terrorism Insurance Economic Effects Hubbard et al. 2005 l Absent Major Attack: Absence of Terrorism Insurance Economic Effects Hubbard et al. 2005 l Absent Major Attack: “…GDP may be $ 53 billion (0. 4 %) lower, household net worth may be $ 512 billion (0. 9 %) lower, and roughly 326, 000 (0. 2 %) fewer jobs may be created. ” l In Case of an Attack “… tens of thousands more jobs could be lost due to the lack of insurance coverage and thousands of additional bankruptcies could occur compared to the 9/11 event, which was covered by the insurance industry. ” Thomann / Graf von der Schulenburg / Gas / Pascalau ● August 6 th 2007 38

Individual Risk Perception Individual’s perception of risk not systematically governed by probability of event: Individual Risk Perception Individual’s perception of risk not systematically governed by probability of event: Biases l Overestimation of Dread Risk, Unknown Risk (Slovic, 1987) Probabilities l Assessed with Availability Heuristic (Tversky and Kahneman, 1973) Thomann / Graf von der Schulenburg / Gas / Pascalau ● August 6 th 2007 39

Thomann / Graf von der Schulenburg / Gas / Pascalau ● August 6 th Thomann / Graf von der Schulenburg / Gas / Pascalau ● August 6 th 2007 40

Country Name of Insurance Scheme Israel * Victims of Enemy Action Northern Ireland* Criminal Country Name of Insurance Scheme Israel * Victims of Enemy Action Northern Ireland* Criminal Damage Compensation Scheme) Spain * Consorcio de Compensación de Seguros (CCS) France Gestion de l’assurance et la Réassurance des Risques Attentats et Actes de Terrorisme (GAREAT) South Africa * South Africa Special Risks Insurance Association. (SASRIA)) Great Britain * Pool Reinsurance Company USA Terrorism Risk Insurance Act Germany Extremus *=founded before 2001 Thomann / Graf von der Schulenburg / Gas / Pascalau ● August 6 th 2007 41

Data Set, Descriptive Statistics Number of Policies Sold by Month 1 2 3 4 Data Set, Descriptive Statistics Number of Policies Sold by Month 1 2 3 4 5 6 7 8 9 10 11 12 Total (n=5611) Mean 923. 6 40. 4 30 30. 25 13 15. 75 21 13. 25 12 13. 5 9 24. 2 105. 9 Std. Dev. 186. 24 63. 04 40. 22 36. 54 5. 66 11. 53 7. 87 8. 96 3. 92 7. 59 6. 32 21. 71 272. 61 Thomann / Graf von der Schulenburg / Gas / Pascalau ● August 6 th 2007 Min 599 9 2 5 5 9 11 7 7 6 3 10 2 Max 1054 153 101 84 17 33 30 26 16 23 19 62 1054 42

Data Set, Descriptive Statistics Number of Policies Sold by Month Mean Std. Dev. Min Data Set, Descriptive Statistics Number of Policies Sold by Month Mean Std. Dev. Min Max 1 923. 6 186. 24 599 1054 2 3 4 5 6 7 8 9 10 11 12 Total (n=5611) 40. 4 30 30. 25 13 15. 75 21 13. 25 12 13. 5 9 24. 2 105. 9 63. 04 40. 22 36. 54 5. 66 11. 53 7. 87 8. 96 3. 92 7. 59 6. 32 21. 71 272. 61 9 2 5 5 9 11 7 7 6 3 10 2 153 101 84 17 33 30 26 16 23 19 62 1054 Thomann / Graf von der Schulenburg / Gas / Pascalau ● August 6 th 2007 43

Terrorism l Terrorism is the premeditated use, or threat of use, of extra-normal violence Terrorism l Terrorism is the premeditated use, or threat of use, of extra-normal violence or brutality to gain a political objective through intimidation or fear against a targeted audience (United States Department of State, 2000) Thomann / Graf von der Schulenburg / Gas / Pascalau ● August 6 th 2007 44

International Terrorist Attacks 1990 -2003 Source: US Department of State Thomann / Graf von International Terrorist Attacks 1990 -2003 Source: US Department of State Thomann / Graf von der Schulenburg / Gas / Pascalau ● August 6 th 2007 45

Extremus Market Penetration in Germany 2003 2004 2005 2006 % of corporations that are Extremus Market Penetration in Germany 2003 2004 2005 2006 % of corporations that are customers of Extremus < 1 bn € 2. 9 2. 6 2. 7 2. 8 > 5 bn € 21. 7 15. 0 18. 3 16. 7 % of total sums insured by Extremus < 1 bn € 4. 6 4. 5 > 5 bn € - Thomann / Graf von der Schulenburg / Gas / Pascalau ● August 6 th 2007 40. 6 4. 7 5. 2 39. 0 38. 0 46

Private Public Partnership „Omar, I think the boat is not going straight“ Thomann / Private Public Partnership „Omar, I think the boat is not going straight“ Thomann / Graf von der Schulenburg / Gas / Pascalau ● August 6 th 2007 47

Terrorism and Insurance After September 11 th, 2001 Terrorism has been excluded from many Terrorism and Insurance After September 11 th, 2001 Terrorism has been excluded from many standard insurance contracts Terrorism poses significant problems for insurers: Dynamic Uncertainty l Asymmetric Distribution of Information between Government and Private Sector l Potential of Catastrophic Losses l Thomann / Graf von der Schulenburg / Gas / Pascalau ● August 6 th 2007 48