David Flandro, Head of Global Business Intelligence and Julian Alovisi, Senior Vice President
To support the process of managing and underwriting the terrorism peril, (re)insurers
are increasingly using 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.
Guy Carpenter offers a comprehensive suite of tools to help clients assess their terror
exposures by lines of business. i-aXs®, Guy Carpenter’s web-based data management
platform, allows insurers to quantify their exposure to a potential terrorist attack and
highlight concentrated areas in their portfolio. The tools in i-aXs are built upon a powerful integrated report and mapping platform. Guy Carpenter also licenses AIR Worldwide Corporation’s (AIR) and Risk Management Solutions’ (RMS) terrorism models to help clients explore the possibilities of terror loss.
Guy Carpenter’s i-aXs platform comprises a full suite of web-enabled tools that provide
more efficient management of exposure and loss data as well as data mining, analytics
and real-time catastrophe information. Managing exposure to terrorism loss is an integral function within i-aXs, with several different tools on offer to help insurers assess their largest levels of accumulation.
The following global proprietary terrorism exposure reports are available within i-aXs:
- Cluster Accumulation (clusters of total insured value (TIV) within grid points
spaced at various grid sizes)
- Portfolio Accumulation (top portfolio accumulations for 1, 0.5, and 0.25 mile radiuses)
- Terror Accumulation (portfolio terror for all targets by total TIV and zone)
- Terror Target by Zone Accumulation (terror accumulation for global portfolios
using terror target lists)
Hazard layers embedded within the system allow users to calculate their exposure in
relation to several terror target lists provided by Exclusive Analysis, RMS, the Seveso Industrial target list and custom terror target databases built by Guy Carpenter.
The i-aXs Accumulator iX tool assists insurers in managing their aggregate concentrations to terror loss. By calculating risk concentrations around defined terror targets, insurers can effectively manage their insurance portfolio. Unlike other accumulation tools, output is produced instantly in both map and grid formats. Thematically shaded maps and satellite imagery along with easy-to-understand reports provide detailed accumulation information within a user-defined geographic range.
i-aXs Map showing Exposure to Terror Targets in Paris
i-aXs allows companies to measure parameters such as TIV, exposed limits, risk count,
deductibles and premiums. Users can also drill down to individual policy details within
terror accumulations such as construction type or line of business.
Other tools are available in i-aXs. Risk Profiler iX assesses new locations and combines
them with existing portfolios to determine proximity to terror targets and risks already in a portfolio. The tool also allows an overlay of infrastructure maps such as highways, railways and airports, while it geocodes the risk and accesses a satellite image. RealCat iX, meanwhile, enables companies to begin evaluating loss potential from the very onset of an event and deliver insight and guidance all the way through the claims management process. Such an event would include a major terrorist attack impacting a significant geographic area (e.g. large-scale bomb blast).
Commercial Models Licensed by Guy Carpenter
Guy Carpenter also licenses the following terrorism models from external vendors:
■ RMS Probabilistic Terrorism Model (PTM) Exceedance Probability (EP) Analysis (for EP results and variable resolution grid (VRG) 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 Supplemental Rating Questionnaires)
■ AIR Clasic(2) EP Analysis (for EP results and VRG deterministic losses for certain weapon/target combinations)
Neither AIR nor RMS implemented major changes to their terrorism models in 2009. AIR last updated its model in 2007 while an upgrade to the RMS model was implemented in 2008, with a number of changes to its PTM.
AIR US Terrorism Model
In September of 2007, AIR updated its damage functions to include the impact of reflected pressure waves following a conventional bomb blast. Earlier models had only taken account of incident pressure waves. Reflected pressure blast waves are up to 13 times greater than initial blast waves, and this change generally led to an increase in projected property losses by city.
The update to blast building damage functions is also reflected in enhanced injury severity distributions in AIR’s workers compensation model. AIR examined research data from the medical community on the issue of trauma arising from terrorist bomb blasts. The updated model has a mixed effect on loss estimates by city, producing significant to moderate decreases or slight increases in others.
RMS US Probabilistic Terrorism Model
In 2008, RMS updated its US PTM model with changes to terror targets, footprints, attack likelihoods and building vulnerability. The target database was updated to include 98 new targets, including chemical plants, government buildings and convention and entertainment centers. To account for the added targets, the number of potential attacks also increased and some existing attack footprints were repositioned.
The combined effect of all the changes incorporated into the RMS model resulted in an increased average annual loss (AAL) for property. For workers compensation, increased fatality rates from certain attack types lowered losses across all return periods. However, updates to the by state cost severities reduced the effects of the model changes and the AAL was ultimately flat to slightly increased.
There were no significant changes to RMS model methodology in 2009. Although an update to benefit levels increased permanent partial-minor injury costs, these were offset somewhat by a decrease in temporary total and fatality benefits.
2010 Forthcoming Releases
AIR is updating its terrorism model in 2010 to reflect the current threat levels and target environment. RMS is also planning a significant terror model update in 2010. To improve the management of terrorism risk outside the United States, the RMS RiskLink Deterministic Model has been expanded to include detailed terrorism modeling for North America, Europe and Asia. US model enhancements include updates to the US terrorism target list, stochastic event sets, hazard footprint and refinements to some vulnerability curves.
In addition to the terrorism model updates, the RMS International PTM will assess terrorism risk in nine major commercial centers worldwide: Ankara, Copenhagen, Dublin, Istanbul, London, Milan, Montreal, Rome, Toronto and the Vatican.
Terrorism and Rating Agencies
i-aXs and the commercial models licensed by Guy Carpenter can help (re)insurers perform a wide range of terrorism risk and accumulation analyses, including those required by legislation and the rating agencies. Rating agencies, including AM Best and Standard and Poor’s (S&P), ask (re)insurers to report their largest levels of ccumulation and their modeled losses for specific terrorism scenarios.
Following the attacks of September 11, 2001, AM Best asked (re)insurers to respond to a questionnaire about their concentrations of risk across lines of business, and their ability to calculate those accumulations at the location level of detail, as well as in aggregate. As data quality and modeling capabilities improved, the survey became part of the Supplemental Rating Questionnaire (SRQ). The main purpose of the terrorism SRQ was to identify (re)insurers with large exposures to terrorism risk, especially when TRIA expired. For 2008, AM Best introduced a new Terror Probable Maximum Loss (PML) capital charge for the Best’s Capital Adequacy Ratio (BCAR), a core component of AM Best’s rating methodology. The Terror PML is calculated from data gathered in the SRQ and is applied to the BCAR in place of the Natural Catastrophe PML if it is the larger of the two.
Today, AM Best’s key concerns include (re)insurers’ ability to assess their aggregate exposure to terrorism, the number of insured locations, the geographic concentration of insured exposures and the impact on capitalization. AM Best has also expressed concern about the long-term future of TRIA and the impact its expiration would have on (re)insurers’ portfolios, particularly after the Obama Administration’s proposal to reduce the fund from 2011.
Another issue highlighted by AM Best is the possibility of an attack occurring without any federal reimbursement to insurers following the decision to increase TRIPRA’s trigger point from a USD5 million industry loss to a USD100 million industry loss. This increase could leave small insurers in particular vulnerable if they provide coverage to remote businesses in locations situated far enough away from other structures. Under this scenario, an insurer could end up covering the entire loss if it is ultimately less than the USD100 million trigger.
AM Best also stresses that (re)insurers need to ensure they understand their exposure to a NBCR attack. The agency says the prospect of a NBCR attack should be contemplated as part of the enterprise risk management (ERM) process, with a risk catalog of potential losses. A method of accumulating the risks and having a risk mitigation plan in place that adequately reduces exposure to an acceptable level is also required.
S&P has a two-pronged approach to assessing (re)insurers’ risk management of terrorism. Like AM Best, S&P asks (re)insurers to complete a questionnaire in order to evaluate their exposures and management of terrorism risk. S&P gathers data to make an evaluation of gross and net terrorism exposure (by line of business), with specific questions regarding potential terrorist attacks and the location of insured risks. S&P released a new terrorism questionnaire in June of 2006, but there were no changes to its capital model risk charges used to measure the Capital Adequacy Ratio (CAR). Capital charges arising from terrorism exposure, if any, are applied on a discretionary basis.
S&P also assesses (re)insurers’ ability to manage terrorism by adopting an ERM approach. Operational risk management (ORM) is an important component of ERM, and S&P says it is fundamental to effective terrorism risk management. S&P expects companies’ ORM strategy to have a sound business continuity plan and systems in place that continually monitor and assess terrorism risk. S&P recognizes the challenge terrorism poses in quantifying the impact of potential attacks and, therefore, insists on closely examining the tools and procedures (re)insurers’ use to manage their exposure for various terrorism scenarios. S&P also assesses the quantitative and qualitative risk indicators that are used, and how the results are monitored.
Click here to read Terrorism – Reinsurers Standing By, Part III: Terrorism Analytics and Rating Agency Requirements»
Click here to read Terrorism – Reinsurers Standing By, Part II: Risks, Threats and Exposures »
Click here to read Terrorism – Reinsurers Standing By, Part I: Introduction »
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Securities or investments, as applicable, are offered in the United States through GC Securities, a division of MMC Securities Corp., a US registered broker-dealer and member FINRA/SIPC. Main Office: 1166 Avenue of the Americas, New York, NY 10036. Phone: (212) 345-5000. Securities or investments, as applicable, are offered in the European Union by GC Securities, a division of MMC Securities (Europe) Ltd., which is authorized and regulated by the Financial Services Authority. Reinsurance products are placed through qualified affiliates of Guy Carpenter & Company, LLC. MMC Securities Corp., MMC Securities (Europe) Ltd. and Guy Carpenter & Company, LLC are affiliates owned by Marsh & McLennan Companies. This communication is not intended as an offer to sell or a solicitation of any offer to buy any security, financial instrument, reinsurance or insurance product.