August 25th, 2011

Terrorism Solutions: Models

Posted at 1:00 AM ET

David Flandro, Global Head of Business Intelligence, Paul Knutson, Managing Director, Emil Metropoulos, Senior Vice Present, Julian Alovisi, Assistant Vice President

To support the process of managing and underwriting the terrorism peril, (re)insurers are increasingly using data management and modeling tools to analyze the risk. The dynamic nature of terrorism and the uncertainty in identifying the targets and frequency of attacks requires a different approach to manage the risk.

Modeling Terrorism

Modeling methodologies for terrorism have been continually refined and updated since the three major modeling companies - AIR Worldwide, EQECAT and Risk Management Solutions (RMS) - released their first terrorism models in 2002. Quantifying the economic, insured and human losses from a terrorist attack continues to pose major challenges for (re)insurers. There are three main techniques to model terrorism risk:

Probabilistic /modeling estimates losses based on a large number of events. A key factor is the estimated frequency a modeler applies to all the possible events that could occur. Due to the difficulty in predicting the probability of terror events, there is considerable uncertainty associated with probabilistic terrorism modeling.

Exposure concentration analysis identifies and quantifies concentrations of exposures around potential terrorist targets. Target-based accumulation assessment locates potential targets (typically with high economic, human and/or symbolic value) and aggregates an insurer’s exposures in and around various distances from these targets.

Deterministic modeling represents a compromise between the lack of accuracy in accumulation analysis and the uncertainty surrounding probabilistic models. By imposing an actual event’s damage “footprint” at a specified target, a specific-yet hypothetical-scenario can be analyzed with some certainty. Major modeling firms offer an array of deterministic-analysis tools for conventional and NBCR attacks at defined target and non-target locations.

Compared to natural hazards such as hurricanes and earthquakes, terrorism modeling is still in its infancy. Insurers, reinsurers and modeling companies are constantly refining their models and the assumptions that underlay those models, thereby increasing their ability to manage terrorism risk in an educated and more quantitative fashion. Currently, deterministic, scenario-based testing is the most common tool used by (re)insurers to assess their vulnerability to terrorism.

Commercial Models

The catastrophe modeling companies have regularly updated their terrorism models over the years to reflect the changing threat landscape and help (re)insurers perform robust terrorism risk assessments. Such updated products from RMS and AIR include:

RMS Probabilistic Terrorism Model (PTM) Exceedance Probability (EP) Analysis (for EP results and deterministic losses for certain weapon/target combinations)

RMS RiskLink Deterministic Analysis (for spider accumulations, specific area accumulations, target accumulations, spider simple footprint analyses, simple footprint analyses around any or all targets and A.M. Best Supplemental Rating Questionnaires)

AIR CLASIC/2 EP Analysis (for EP results and deterministic losses for certain weapon/target combinations)

AIR US Terrorism Model

AIR did not implement any significant changes to the terrorism model in Version 12.5 of CATRA DER® and CLASIC/2TM in 2010. However, the model was updated to reflect the current threat and revised target environments. Workers compensation benefit levels were also updated to reflect the latest legislation and cost estimates for injury payments.

RMS US Probabilistic Terrorism Model

RMS expanded the terrorism platform to include cities across North America, Europe and Asia in its PTM v3.0 release during the second half of 2010. New stochastic event sets and probabilistic risk outlooks were created for the new international cities while the terrorism target database was enhanced to include new non-US cities. Both the US and international models were recalibrated for all cities to reflect the current risk landscape. Religious buildings and sites were added into the target database for the first time.

PTM v3.0 also added support of the TRIPRA, while workers compensation benefit levels were updated to incorporate the latest legislation and cost estimates for injury payments. Overall, PTM v3.0 showed a decrease in the average annual loss (AAL) and all return periods for both property and workers compensation. The main driver for this change was the decreased relative likelihood of large conventional bombs and new lower casualty rates and injury rate distributions.

In 2011, RMS did not incorporate major model methodology updates in the release of PTM v3.1. However, new international cities were added and the models were again recalibrated for all cities to reflect the current risk landscape. Overall, PTM v3.1 shows a decrease in US losses from conventional attacks due to the reduced likelihood of aircraft impact attacks. Anthrax and sarin gas attacks also saw a small decrease (except in Turkey and the United Kingdom).

Forthcoming Releases

AIR is due to update its US terrorism model in Version 13.0 of CATRA DER® and CLASIC/2TM during the second half of 2011 to reflect the current threat and updated target environment, with revisions to both the frequency and severity of possible events. A target database for future terrorist attacks will also be updated with new locations. Each location will have a probability of attack based on input from AIR’s expert team of terrorism specialists. RMS has yet to announce when its next terror model update will take place.

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