Category Archives: Terrorism Risk

Managing the Changing Landscape of Terrorism Risk

RMS has released an updated version of its Probabilistic Terrorism Model, which reflects the considerable changes in terrorism risk for Canada, Denmark, Ireland, Italy, and the U.K. as well as the decreased frequency of large-scale-terrorism events for each of the five countries.

To inform the new view of risk, our scientists carried out a comprehensive analysis of global attack and plot data from the past decade. We focused heavily on large-scale attacks – those with the potential to threaten the solvency of an insurer.

The analysis showed that incidents of large-scale attacks have steadily and significantly decreased, which corresponds with a rise in the funding and sophistication of major intelligence agencies in the west.

Our approach to terrorism modeling follows three principles, which have been validated by data on intercepted plots, past successful attacks, and recent intelligence leaks:

  • Effective terrorists seek to achieve optimal results relative to their effort
  • Their actions are highly rational
  • They are highly constrained by pervasive counter-terrorism measures

Of the estimated 200,000 documents taken or leaked by Edward Snowden, one of the most relevant validations of the RMS model is an N.S.A. presentation that explains the routing of international telecommunications traffic. A very significant proportion of international telecommunications traffic is routed through the U.S. and Europe which, coupled with advances in big data analytics and plummeting data storage costs, has made intelligence collection easier and more robust than it has ever been.

 an N.S.A. PRISM presentation explains the routing of international telecommunications traffic

According to available data on the frequency of plots and attacks, the risk of a large-scale attack has been in decline since 2007, but the risk of smaller-scale attacks perpetrated by lone-wolf operatives and homegrown militants remains high.

However, we have learned over the past decade that terrorism risk levels are fluid and can change quickly. With the rise of the Islamic State in Iraq and reports of its successful recruitment of foreigners, as well as ongoing instability in Afghanistan and Pakistan, the risk outlook can change at any moment.

The RMS Probabilistic Terrorism Model incorporates multiple risk outlooks to provide users with the agility to quickly respond to any changes in terrorism risk. RMS is committed to updating its terrorism model as frequently as necessary to provide the most up-to-date, granular, and accurate view of global terrorism risk.

Dueling Agendas on TRIA

On Thursday, July 17, the Senate passed a reauthorization of TRIA, the Terrorism Risk and Insurance Act, extending the bill for seven years after its expiration at the end of 2014. The bill was passed with a 93-4 vote and made minor modifications to the expiring legislation. This is a promising sign for the insurance industry, which has been lobbying vigorously for a renewal since last year. But before the bill becomes law, there is certain to be opposition from influential members of Congress who favor more significant reductions to the federal government’s participation.

The Senate bill reduces TRIA’s coverage in two key ways: by increasing the industry co-pay from 15% to 20% over a five year period, and by pushing the Federal Government’s “mandatory recoupment” responsibility from $27.5 billion to $37.5 billion. By contrast, a competing bill proposed by Congress calls for even more substantial modifications, most notably raising the program trigger from $100 million to $500 million for all acts of terrorism except those arising from CBRN (chemical, biological, radiological, and nuclear) events.

How the two bills are reconciled will have significant implications for the insurance industry, as any reduction in federal participation will amount to additional risk assumed by insurance carriers. However, property insurers today are more willing to take on terrorism risk that they would have previously excluded, as evidenced by the dramatic drop in terrorism insurance prices over the past decade. A recent study by the Wharton Center for Risk Management downplayed the impact of TRIA changes, noting that while the changes could increase the price of coverage, “firms’ demand for terrorism insurance is not very sensitive to gradual price changes under current market conditions.”

Whatever the case, the ultimate outcome of the TRIA will have a measurable impact on the price and availability of terrorism insurance, primary carriers’ risk appetites in urban areas, and the securitization of terrorism risk, which my colleague Gordon Woo recently wrote about. The U.S. has made great strides in the capability of its counterterrorism operations over the past decade, but even with these gains, insurers and reinsurers must continue managing their pricing, underwriting, and capital deployment strategies to address the risk of future catastrophic acts of terror.

RMS and the FIFA World Cup: Insuring Against Terrorism

As we reflect back on this year’s World Cup, which wrapped up without interruption after Germany’s victory on Sunday, it is clear that FIFA’s financial position is much stronger now than in 2006, due in part to the availability of terrorism insurance.

Eleven years ago, the global elite of the soccer world learned about innovative RMS risk analysis to help FIFA to prepare for the 2006 World Cup in Germany. Sponsorship money was essential for FIFA’s cash flow and sponsors insisted on having insurance coverage against event cancellation. After 9/11, terrorism insurance became a necessity, but was available only through Warren Buffet, the astute insurer of last resort, and was extremely expensive. So, FIFA pursued alternative risk transfer to the capital markets through a catastrophe bond.

FIFA’s bankers at Credit Suisse turned to RMS to do what had been thought impossible – to get a terrorism risk securitization rated. It took multiple RMS meetings with Moody’s in London and New York over the course of a year to present and discuss the unique terrorism risk analysis and eventually secure an investment grade rating for Golden Goal Finance Ltd. This $260 million deal remains to this day the only stand-alone securitization of terrorism risk. Prospects for further terrorism risk securitizations depend on the scope of the U.S. Terrorism Risk Insurance Act, which will be renewed at the end of 2014 with some further incremental reduction in the role of the federal government, but RMS was instrumental in instituting the precursors to these prospects.

Securitization of the cancellation risk of the 2006 World Cup was feasible in part due to the national importance of the event, which received extensive counter-terrorism protection.

While cancellation was still the biggest risk this year, the predominant local threat to the World Cup was disruption by public protest and riot. Following the start of the Arab Spring in 2011, there has been a surge of demand for international riot insurance, with a commensurate interest in riot analysis. As with terrorism, security is particularly crucial for the control of riot risk. With 170,000 Brazilian security personnel on duty for the month of the soccer tournament, insurers were able to enjoy the matches without concern that the July 13 final in Rio would be delayed.

While terrorism insurance is more widely available than in the past, it is still in short supply. Expanding modeling capabilities and increased demand for products such as terrorism and riot insurance will result in more insurance-linked securities (ILS) transactions such as the 2006 catastrophe bond, and ultimately promote a more resilient society.

Impending Terrorist Threat at Sochi Olympic Games?

The terrorist threat for the upcoming Sochi games is higher than any other games since I started tracking terrorist threats to the Olympics after 9/11. It’s almost certain there will be an attack attempted.

The attack could take place either inside of the cordon, where it’s already known that there are unaccounted black widows; or outside of the cordon on some of the other major cities outside Sochi itself.

RMS estimates terrorism risk based on attacks as well as plots. There has been a lot of activity on both the terrorism side and the counter-terrorism side prior to the games. The kind of analysis we do highlights the dependence of the attack on the number of people involved.

What’s concerning about Sochi is the certain style employed by Chechen separatists – namely the black widows. It’s known that several are unaccounted for in the Sochi area. Because they work on their own, it’s not possible to track them down based on their communication with other people. It’s very hard to stop an attack carried out by just one person.

It was President Putin’s decision to hold the games in Sochi, his favorite vacation destination, which makes it a bigger target for the Chechens who want to make a statement. Any attack on the games is a personal attack on the president. After the Volgograd bombings, he threatened to annihilate the terrorists responsible; he threw down the gauntlet and essentially invited a response. The Sochi Olympics are a huge honeypot target for the Chechen terrorists.

Although there were a number of threats to the London Olympic games, because of the work done by the MI5, there was no successful attack. These games are different due to the political climate and the proximity of Sochi to the Caucasus region. While the London Olympics had great attendance of world leaders, it’s likely that no Western leaders will be traveling to the Sochi games due to security concerns.

Putin obviously has confidence in his security services. There are more than a thousand security forces inside the ring of steel, but the threat is very high. The Olympics are a high value target, which is a real challenge for terrorists. But the terrorists are motivated.

Putin has made these games a much bigger target. The games should be politically neutral, but these are very much Putin’s games.

Everyone should be very vigilant. As a general principle, I believe people should live their lives as normal and not give into threat. Some advice for visitors: Get there as early as possible. Get inside the cordon and stay there until the end of the games. Threat to transportation will be at its highest right before and right after. If you get there a few days early, you likely won’t be exposed to the highest-level threat.

A Debate About The Numbers

Should TRIA, the Terrorism Risk Insurance Act, be renewed at the end of 2014?

It depends on who you ask. The insurance, real estate, and banking industries are lobbying forcefully for a renewal, citing the difficulty of providing adequate private capacity for terrorism insurance as well as its strong take-up rate (over 60%). On the other side of the debate, some think tanks and consumer advocacy groups believe TRIA should expire because it is an “unwarranted subsidy” that was never meant to be permanent.

Whatever the viewpoint, the debate over TRIA must be focused on the numbers:

  • the cost of terrorism risk
  • its impact on the insurance industry
  • the benefits of a renewal

Given the advances in risk modeling over the past decade, as well as the recently increased transparency into U.S. counter-terrorism operations, it is now possible to quantify terrorism risk with an ever-increasing degree of certainty.

RMS’ industry-leading terrorism model simulates over 90,000 large-scale terrorist attacks across 9,800 global targets using 35 different attack types. The attacks range from 600-pound car bombs to 10-ton truck bombs as well as chemical, biological, nuclear, and radiological attacks. Based on analyses using high-definition industry-wide exposure, the model results point to several key findings:

  • More than 75% of the nation’s expected annual loss from terrorist attacks is concentrated around high profile targets in just five urban areas where building value and population density is highest: New York, Chicago, Washington D.C., Los Angeles, and San Francisco.
  • The financial impacts of terrorist attacks are comparable with severe winter storms and convective storms including tornado, hail, and wind, at return periods commonly used in the reinsurance industry (100, 250, and 500-year return periods). At longer return periods, they are comparable with hurricanes and earthquakes.
  • Damage from attacks involving chemical, biological, nuclear, and radiological weapons is harder to estimate and far more severe than attacks involving conventional explosives. Several simulated attacks in RMS’ event catalog cause insured losses that approach the surplus level of the entire U.S. insurance industry.

The concentration of loss from a terrorist attack makes it extremely difficult to insure.

The September 11, 2001 attacks caused insured losses exceeding $40 billion, most of which occurred at the World Trade Center—an area of approximately 16 acres. This can be contrasted to Hurricane Katrina’s damage footprint, which spanned large swaths of Mississippi, Louisiana, and Florida. Insurance companies must geographically diversify their risk in order to manage the volatility of their losses; writing terrorism coverage makes this obligation difficult to achieve.

Terrorism risk can be thought of as a man-made peril, and it can be effectively modeled as a “control process”, whereby terrorists’ actions are constrained by counter-terrorism operations.

The recent revelations of Edward Snowden have revealed the pervasiveness of these operations. Just as flood insurance covers the breach of flood barriers, terrorism insurance covers the breach of the U.S. countersecurity infrastructure.

When deciding the fate of TRIA, policymakers should make use of the advances in terrorism modeling in order to best estimate the costs and benefits of terrorism legislation.

For more Information, please download the latest RMS Whitepaper, “Quantifying U.S. Terrorism Risk: Using Terrorism Risk Modeling to assess the costs and benefits of a TRIA renewal”.

TRIA Renewal #3: No Cake Walk

The Terrorism Risk Insurance Act (TRIA), which provides assistance to pay claims in the USA in the event of a terrorist attack, expires at the end of 2014.

The debate over whether the Act should be extended a third time is likely to be acrimonious given partisan divides over financial legislation. If the renewal fails, the banking, construction, and insurance sectors will be impacted in a significant and troubling manner.

RMS: TRIA Program Highlights, August 2013

RMS: TRIA Program Highlights, August 2013

TRIA was first passed in 2002 and has since been extended and amended, twice. Each extension of the Act has led to tightened coverage by raising deductibles, increasing minimum losses, and reducing the pro-rata government share of losses (currently 85% of a $100 billion layer).

Sponsoring members from both parties have proposed the upcoming 2014 extension three times in Congress this year. This is a hopeful sign of bipartisan support. But the potential for strong opposition should not be underestimated.

Opponents of a TRIA renewal will be quick to label the legislation a “subsidy”. They will correctly point out that TRIA’s federal guarantee has been provided—and insurer money collected—for over ten years without incident. And opponents would be remiss to not mention the U.S. insurance industry surplus, which has grown to almost $600 billion as of this writing—compared to only $290 billion at the time of the September 11, 2001 attacks. From this, they will argue that the insurance industry is sufficiently capitalized to absorb the losses from a catastrophic terrorist incident without government assistance.

This argument against a further TRIA extension is likely to fall on the receptive ears of an electorate (and many freshman lawmakers) that has been galvanized by recent federal involvement in the financial and automotive sectors. In order to successfully counter this narrative, the parties’ case must be reframed to include a discussion of the public benefits of terrorism insurance, of which there are many.

To quantify TRIA’s benefit, it is instructive to look to late 2002, when Moody’s downgraded more than $4 billion of mortgage securities due to the shortage of terrorism coverage.

Additionally, when the bill approached its first expiration in 2005, many property insurers inserted sunset clauses into their contracts, enabling them to alter or revoke terrorism cover in the event of a TRIA non-renewal.

The demand for financial protection against terrorism is as undeniable as the insurance industry’s reluctance to provide it.

The impact of a TRIA non-renewal would be felt the most by cities perceived to be appealing terrorist targets. The RMS® Probabilistic Terrorism Model classifies the most terrorist-prone cities as New York, Washington DC, Chicago, San Francisco, and Los Angeles.

Without TRIA, these cities can expect a shortage of terrorism insurance capacity and corresponding rate increases at the very least. At most, construction and lending activity will be compromised; and the economic consequences (lost jobs, stalled projects, missed opportunities) would surely follow.

TRIA must be viewed in the context of the government’s broader role in the insurance industry. In additional to terrorism insurance, the federal government provides billions of dollars annually in subsidized coverage for lines of business including flood, crop, mortgage, pension, and health— sometimes as a direct primary insurer, other times as a reinsurer.

Occasionally, as in the case of TRIA’s recoupment provision, the federal government’s role is similar to that of a bank, whereby losses are indemnified and then recovered, with interest, through future policy surcharges.

  • Is terrorism fundamentally different from other perils in regard to how the federal government should approach it?
  • What is public benefit of terrorism coverage, and can it be quantified?
  • Can the demand for coverage ever be met by private means alone?

These are critical questions, and they must be addressed directly and publicly by stakeholders in order to justify TRIA’s renewal.

See also ‘TRIPRA – Perspectives on the upcoming expiration & proposed renewal‘ from the RMS Terrorism Risk Briefing in May 2013.