February 2nd, 2017

Public Sector Risk Financing Perspectives – Terror Risk: Part IV

Posted at 1:00 AM ET

emma-karhan-sm1Emma Karhan, Managing Director

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Insurance is about the pooling of risk and providing support for impacted economies. Expanding insurance coverages to achieve these objectives against terror losses requires a more granular level of insight into the impacts of terrorist attacks. We have a relatively high level of loss impact knowledge for mature lines of business, such as property catastrophe coverages; this has been driven by losses and the ensuing needs for modeling and pricing improvements. However, the terrorism market is a less mature market that has not suffered a frequency of significantly large insured losses that would otherwise assist in a better understanding of the nature of the peril and its direct and indirect impacts on an economy. Additionally, this peril has the added complexity of unpredictable behavioral factors of terrorists that are very difficult to sensibly and consistently be included in pricing models. Consequently, the (re)insurance industry needs to devise improved transparency through innovative modeling and pricing methodologies to ensure that capital continues to support this line of business - underpinning further product development.

Five years ago, Guy Carpenter developed the first three dimensional models (the second generation in terror modeling) specifically designed to more accurately assess damage radii and impact fields, and to generate reasonable target scenarios that reflect the realistic potential of bomb size and accessibility of target. In order to progress to the third generation of modeling we have been asked to partner with Pool Re and Cranfield University to gain an even better understanding of how the physical environment may be damaged by traditional and non-traditional explosives.

With a better understanding of physical damage from various methods of attacks, the (re)insurance industry can allocate resources to start to provide solutions for the “non damage” element of terrorism losses - closing the gap between the economic and insured losses. Individual businesses and sectors of the economy need solutions that help manage economic disruption at the local level, as the government-supported pool mechanism focuses on providing the financial defenses required to withstand the large-scale, shock events that have the potential to severely damage economies. By aligning the role of the industry with the strategic focus of the government(s), a unified response to the terrorism threat will greatly enhance the contribution to societal resilience.

Link to Part I>>

Link to Part II>>

Link to Part III>>

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