Tag Archives: Risk Management

Shrugging Off a Hurricane: A Three Hundred Year Old Culture of Disaster Resilience

If a global prize was to be awarded to the city or country that achieves the peak of disaster resilience, Bermuda might be a fitting first winner.

This October’s Hurricane Nicole made direct landfall on the island. The eyewall tracked over Bermuda with maximum measured windspeeds close to 120 mph. Nonetheless there were there were no casualties. The damage tally was principally to fallen trees, roadway debris, some smashed boats and many downed utility poles. The airport opened in 24 hours, with the island’s ferries operating the following day.

Bermuda’s performance through Nicole was exemplary. What’s behind that?

Since its foundation in 1609 when 150 colonists and crew were shipwrecked on the island, Bermuda has got used to its situation at the heart of hurricane alley. Comprising 21 square miles of reef and lithified dunes, sitting out in the Atlantic 650 miles west of Cape Hatteras, a hurricane hits the island on average once every six or seven years. Mostly these are glancing blows, but once or twice a century Bermuda sustains direct hits at Category 3 or 4 intensity. Hurricane Fabian in 2003 was the worst of the recent storms, causing $300 million of damage (estimated to be worth $650 million, accounting for today’s higher prices and greater property exposure). The cost of the damage from Hurricane Gonzalo in 2014 was about half this amount.

How did Bermuda’s indigenous building style come to adopt such a high standard of wind resistance? It seems to go back to a run of four hurricanes at the beginning of the 18th Century. First, in September 1712 a hurricane persisted for eight hours destroying the majority of wooden buildings. Then twice in 1713 and again more strongly in 1715 the hurricane winds ruined the newly rebuilt churches. One hurricane can seem like an exception, four becomes a trend. In response, houses were constructed with walls of massive reef limestone blocks, covered by roofs tiled with thick slabs of coral stone: traditional house styles that have been sustained ever since.

The frequency of hurricanes has helped stress test the building stock, and ensure the traditional construction styles have been sustained. More recently there has been a robust and well-policed building code to ensure adequate wind resistance for all new construction on the island.

Yet resilience is more than strong buildings. It also requires hardened infrastructure, and that is where Bermuda has some room for improvement. Still dependent on overhead power lines, 90 percent of the island’s 27,000 houses lost power in Hurricane Nicole – although half of these had been reconnected by the following morning and the remainder through that day. Mobile phone and cable networks were also back in operation over a similar timescale. Experience of recent hurricanes has ensured an adequate stockpile of cable and poles.

Expert Eyes on the Island

It helps that there is an international reinsurance industry on the island, with many specialists in the science of hurricanes and the physics and engineering of building performance on hand to scrutinize the application of improved resilience. Almost every building is insured, giving underwriters oversight of building standards. Most importantly, the very functioning of global reinsurance depends on uninterrupted connection with the rest of the world, as well as ensuring that on-island staff are not distracted by having to attend to their family’s welfare.

Bermuda’s experience during Nicole would merit the platinum standard of resilience adopted by the best businesses: that all functions can be restored within 72 hours of a disaster. The Bermuda Business Development Agency and the Association of Bermuda Insurers and Reinsurers were fulsome in their praise for how the island had withstood the hurricane. The strong and widely-owned culture of preparedness, reflects the experience of recent storms like Gonzalo and Fabian.

Stephen Weinstein, general counsel at RenaissanceRe, commented “It’s remarkable that one day after a major hurricane strike, Bermuda is open for business, helping finance disaster risk worldwide, and poised to welcome back business visitors and vacationers alike.”

In early 2017, RMS will issue an update to Bermuda wind vulnerability in the version 17 software release as part of a broader update to the 33 islands and territories covered by the North Atlantic Hurricane Models. Updates to Bermuda vulnerability will consider past hurricane observations and the latest building code research.

How U.S. inland flood became a “peak” peril

This article by Jeff Waters, meteorologist and product manager at RMS, first appeared in Carrier Management.

As the journey towards a private flood insurance market progresses, (re)insurers can learn a lot from the recent U.S. flood events to help develop profitable flood risk management strategies.

Flood is the most pervasive and frequent peril in the U.S. Yet, despite having the world’s highest non-life premium volume and one of the highest insurance penetration rates, a significant protection gap still exists in the U.S. for this peril.

It is well-known that U.S. flood risk is primarily driven by tropical cyclone-related events, with storm surge being the main cause. In the last decade alone, flooding from tropical cyclones have caused more than $40 billion (2015 USD) in insured losses and contributed to today’s massive $23 billion National Flood Insurance Program (NFIP) deficit: 13 out of the top 15 flood events, determined by total NFIP payouts, were related to storm surge-driven coastal flooding from tropical cyclones.

Inland flooding, however, should not be overlooked. It too can contribute to a material portion of overall U.S. flood risk, as seen recently in the Southern Gulf, South Carolina, and in West Virginia, two areas impacted by major loss-causing events. These catastrophes caused billions in economic and insured losses while demonstrating the widespread impact caused by precipitation-driven fluvial (riverine) or pluvial (surface water) flooding. It is these types of flooding events that should be accounted for and well understood by (re)insurers looking to enter the private flood insurance market.

It hasn’t just rained; it has poured

In the past 15 months the U.S. has suffered several record-breaking or significant rainfall-induced inland flood events ….

To read the article in full, please click here.

Disasters Without Borders

On November 24 and 25, 2015 the first Scientific Symposium was held in London to discuss science for policy and operations for the new “Disaster Risk Management Knowledge Centre.” The Centre was launched by the European Commission in September this year to help member states respond to emergencies and to prevent and reduce the impact of disasters. The Centre will offer EU countries technical and scientific advice, provide an online repository of relevant research results, and create a network of crisis management laboratories. RMS was the only catastrophe modeler invited to present to the meeting.

Jointly organized by the UK Met Office and the European Commission, the symposium exposed some of the tensions between what countries can do on their own and where they require a supranational European institution. The British government contingents were particularly keen to show their leadership. The UK Cabinet Office co-ordinates inputs across government departments and agencies to manage a national risk register, identifying the likelihood and potential impact of a wide range of threats facing the country: from an Icelandic volcanic eruption to a storm surge flood to a terrorist incident. The office of the Chief Government Scientist then leads the response to the latest disaster, reporting directly to the Prime Minister.

These were not responsibilities the UK would ever consider transferring to a new European institution, because they go right to the heart of the function of a government—to protect the people and the national interest. However no single country can provide total management of events that run across borders, in particular when it is the country upstream that is controlling what heads your way, as with water storage dams. For this a Europe wide agency will be vital. The Centre will be most useful for the smaller European countries, unable to sustain research across the full range of hazards, or monitor activity around the clock. However do not expect the larger countries to share all their disaster intelligence.

Where does RMS fit into this picture? As described at the London symposium, probabilistic models will increasingly be key to making sense of potential disaster impacts and for ensuring organizations don’t become fixated on planning against a single historical scenario. RMS has more experience of probabilistic modeling than any other European science or government agency, in particular in areas such as the modeling of floods and flood defenses or for multi-hazard problems.

Two ideas with the potential for RMS leadership got picked up at the symposium. For an intervention such as a new flood defense, the results of the probabilistic model become used to define the “benefits”—the future losses that will not happen. A versatile model is required in which the user can explore the influence of a particular flood defense or even see the potential influence of climate change. Second we can expect to see a move towards the risk auditing of countries and cities, to show their progress in reducing disaster casualties and disaster impacts, in particular as part of their Sendai commitments. We know that risk cannot be defined based only on a few years of disaster data—the outcomes are far too volatile. Progress will need to be defined from consistent modeling. Catastrophe modeling will become a critical tool to facilitate “risk-based government”:  from measuring financial resilience to targeting investment in the most impactful risk reduction.

Learning More About Catastrophe Risk From History

In my invited presentation on October 22, 2015 at the UK Institute and Faculty of Actuaries GIRO conference in Liverpool, I discussed how modeling of extreme events can be smarter, from a counterfactual perspective.

A counterfactual perspective enables you to consider what has not yet happened, but could, would, or might have under differing circumstances. By adopting this approach, the risk community can reassess historical catastrophe events to glean insights into previously unanticipated future catastrophes, and so reduce catastrophe “surprises.”

The statistical foundation of typical disaster risk analysis is actual loss experience. The past cannot be changed and is therefore traditionally treated by insurers as fixed. The general consensus is why consider varying what happened in the past? From a scientific perspective, however, actual history is just one realization of what might have happened, given the randomness and chaotic dynamics of nature. The stochastic analysis of the past, used by catastrophe models, is an exploratory exercise in counterfactual history, considering alternative possible scenarios.

Using a stochastic approach to modeling can reveal major surprises that may be lurking in alternative realizations of historical experience. To quote Philip Roth, the eminent American writer: “History, harmless history, where everything unexpected in its own time is chronicled on the page as inevitable. The terror of the unforeseen is what the science of history hides.”  All manner of unforeseen surprising catastrophes have been close to occurring, but ultimately did not materialize, and hence are completely absent from the historical record.

Examples can be drawn from all natural and man-made hazards, covering insurance risks on land, sea, and air. A new domain of application is cyber risk: new surprise cyber attack scenarios can be envisaged with previous accidental causes of instrumentation failure being substituted by control system hacking.

The past cannot be changed—but I firmly believe that counterfactual disaster analysis can change the future and be a very useful analytical tool for underwriting management. I’d be interested to hear your thoughts on the subject.

Creating Risk Evangelists Through Risk Education

A recent New Yorker article caused quite a bit of discussion around risk, bringing wider attention to the Cascadia Subduction Zone off the northwestern coast of North America. The region is at risk of experiencing a M9.0+ earthquake and subsequent tsunami, yet mitigation efforts such as a fundraising proposal to relocate a K-12 school currently in the tsunami-inundation zone to a safer location, have failed to pass. A City Lab article explored reasons why people do not act, even when faced with the knowledge of possible natural disasters.

Photo credit: debaird

Could part of solution lie in risk education, better preparing future generations to assess, make decisions, and act when presented with risks that while they are low probability are also catastrophic?

The idea of risk is among the most powerful and influential in history. Risk liberated people from seeing every bad thing that happened as ordained by fate. At the same time risk was not simply random. The idea of risk opened up the concept of the limited company, encouraged the “try once and try again” mentality whether you are an inventor or an artist, and taught us how to manage a safety culture.

But how should we educate future generations to become well-versed in this most powerful and radical idea? Risk education can provide a foundation to enable everyone to function in the modern world. It also creates educational pathways for employment in one of the many activities that have risk at their core—whether drilling for oil, managing a railway, being an actuary, or designing risk software models.

A model for risk education

  • Risk education should start young, between the ages of 8 and 10 years old. Young children are deeply curious and ready to learn about the difference between a hazard and risk. Why wear a seatbelt? Children also learn about risk through board games, when good and bad outcomes become amplified, but are nonetheless determined by the throw of a die.
  • Official risk certifications could be incorporated into schooling during the teenage years—such as a GCSE qualification in risk, for example, in the United Kingdom. Currently the topic is scattered across subjects, around injury in physical education, around simple probabilities in mathematics, about natural hazards in geography. However, the 16 year old could be taught how to fit these perspectives together. How to calculate how much the casino expects to win and the punter expects to lose, on average. Imagine learning about the start of the First World War from the different risk perspectives of the belligerents or examining how people who climb Everest view the statistics of past mortality?
  • At a higher education level, a degree in risk management should cover mathematics and statistics as well as the collection and analysis of data by which to diagnose risk—including modules covering risk in medicine, engineering, finance and insurance, health and safety—in addition to environmental and disaster risk. Such a course could include learning how to develop a risk model, how to set up experiments to measure risk outcomes, how to best display risk information, and how to sample product quality in a production line. Imagine having to explain what makes for resilience or writing a dissertation on the 2007-2008 financial crisis in terms of actions that increased risk.

Why do we need improved risk education?

We need to become more risk literate in society. Not only because there are an increasing numbers of jobs in risk and risk management, for which we need candidates with a broad and scientific perspective, but because so much of the modern world can only be understood from a risk perspective.

Take the famous trial of the seismology experts in L’Aquila, Italy, who were found guilty of manslaughter, for what they said and did not say a few days before the destructive earthquake in their city in 2009. This was, in effect, a judgment on their inability to properly communicate risk.

There had been many minor shocks felt over several days and a committee was convened of scientists and local officials. However, only the local officials spoke at a press conference, saying there was nothing to worry about, and people should go home and open a bottle of wine. And a few days later, following a prominent foreshock, a significant earthquake caused many roofs to collapse and killed more than 300 people.

Had they been more educated in risk, the officials might have instead said, “these earthquakes are worrying; last time there was such a swarm there was a damaging earthquake. We cannot guarantee your safety in the town and you should take suitable precautions or leave.”

Sometimes better risk education can make the difference of life and death.

Risk, Models, and Innovations: It’s All Interconnected

A few themes came through loud and clear during this morning’s keynote sessions at Exceedance 2015.

RMS’ commitment to modeling innovation was unmistakable. As RMS co-founder and CEO Hemant Shah highlighted on stage, RMS worked hard and met our commitment to release RiskLink version 15 on March 31, taking extra measures to ensure the quality of the product.

Over the past five years, RMS has released 210 model upgrades and 35 new models. With a 30% increase in model development resources over the last two years and 10 HD models in various stages of research and development, RMS has the most robust model pipeline in its history.

As Paul Wilson explained, HD models are all about providing better clarity into the risk. They are a more precise representation of the way a physical damage results in a (re)insurance loss, with a more precise treatment of propagation of uncertainty through the model, designed to deal with losses as closely as possible as the way claims occur in real life.

HD models are the cornerstone of the work RMS is doing in model development right now. HD models represent the intersection of RMS research, science and technology. With HD models we are not limited by software – we can approach the challenge of modeling risk in exciting new ways.

And it’s more than just the models – RMS is committed to transparency, engagement, and collaboration.

RMS’ commitment to RMS(one) was also clear. Learning from the lessons of the past year, RMS developing an open platform that’s not just about enabling RMS to build its own models. It’s an exposure and risk management platform that’s about enabling clients and partners to build models. It’s about analytics, dynamic risk management and more.

RMS(one) will be released, judiciously and fully-matured, in stages over the next 15 months,starting with a model evaluation environment for our first HD Model, Europe Flood, in autumn 2015.

And, Hemant emphasized that starting later this calendar year, RMS will open the platform to its clients and partners with the Platform Development Kit (PDK).

In addition, RMS(one) pricing will be built around three core principles:

  • Simple, predictable packages
  • In most cases, no additional fees for clients who simply want continuity in their RMS modeling relationships
  • Clearly differentiated high-value packages at compelling prices for those who wish to benefit from RMS(one) beyond its replacement as a superior modeling utility to RiskLink

The overall goal of RMS’ commitment to modeling and technology innovation is to capitalize on a growing and ever-changing global (re)insurance market, ultimately building a more resilient global society. RMS is working with industry clients and partners to do so by understanding emerging risks, identifying new opportunities to insure more risk, developing new risk transfer products, and creating new ways of measuring risk.

As Ben Brookes said, we only have to look at the recent events in Nepal to understand that there are huge opportunities – and needs – to improve resilience and the management of risk. RMS’ work for Metrocat, a catastrophe bond designed specifically to protect the New York MTA’s infrastructure against storm surge, showed the huge potential for the developing alternate methods of risk transfer in order to improve resilience.

And during his session, Daniel Stander pointed out that only 1.9% of the global economy is insured. As the world’s means of production shifts from assets to systems, RMS is working to understand how to understand systems of risk, starting with marine, supply chain, and cyber risk, tackling tough questions such as:

  • What are the choke points in the global shipping network, and how do they respond under stress?
  • How various events create a ripple effect that impact the global supply chain – for example, why did the Tohoku earthquake and tsunami in Japan cause a shortage of iPads in Australia, halt production at BMW in Germany, and enable a booming manufacturing industry in Guangzhou?
  • How do we measure cyber risk when technology has become so critical that it is systemically important to the global economy?

global shipping

Leaving the keynotes, a clear theme rang true: as the world becomes more interconnected, it is the intersection of innovation in science and technology that will enable us to scale and solve global problems head on.

Exceedance 2015: Welcome to Miami!

We have arrived in the City Under the Sun – Miami, FL – for Exceedance 2015, where the oceanfront views are providing the perfect backdrop for a week of engaging sessions, invigorating discussion, and plenty of networking opportunities.

For those of you joining us here at the legendary Fontainebleau Hotel, meet us poolside tonight at 5:30 p.m. to kick things off at the welcome reception. For those of you who couldn’t make it this year, make sure to follow RMS on Twitter, LinkedIn and here on the blog for #Exceedance news, insights, and photos.

With more than 60 sessions across eight different tracks, there is no shortage of thought-provoking content and discussions to be had. Download the mobile app to help you manage your schedule and maximize your week.

Here are a few highlights as you plan out your week:

Keynote Speakers: The keynote sessions are definitely not to be missed. This year, our lineup of keynote speakers includes:

  • Hemant Shah, RMS co-founder and CEO
  • Dr. Robert Muir-Wood, RMS chief research officer
  • Laurence Golborne, former Chilean minister of mines and energy
  • Richard Knabb, director of the National Hurricane Center
  • Dr. Patricia Grossi, senior director of model product management, RMS
  • Ben Brookes, vice president of capital markets, RMS
  • Paul Wilson, vice president of model development, RMS
  • Daniel Stander, managing director, RMS

Interconnected Risks: Cyber, contingent business interruption, and pandemic risk have all made headlines in the past year. Check out interconnected risk sessions where we’ll share the latest research into the unique challenges of interconnected risks and discuss lessons learned from the events such as the Ebola pandemic, Superstorm Sandy, and cyber attacks.

High-Definition Modeling: Make sure to attend our HD modeling sessions, held throughout the week, to learn about the methodology behind our HD models and how greater precision with a simulation-based approach will give insurers greater insight into and management of their risk.

Risk Management and the Allure of Latin America: For the first time, we are hosting an entire track focused on Latin America. The rapid expansion of insurance in Latin America and the Caribbean is creating opportunities for both insurers and reinsurers. We’re looking forward to diving deeper into how risk modeling tools can unlock opportunities in the region.

The Lab: The Lab is the perfect place to swing by between sessions to meet RMS experts and learn about everything from version 15 models and software to RMS Hosting Plus to capital market solutions. And stop by the Mini Theater for a great lineup of speakers on everything from analytical services to philanthropic partnerships.

 “EP” – The Exceedance Party: As always, we’re celebrating a full week of activities with the “EP” on Wednesday night. This year we’ll be at the LIV Nightclub, where you can be sure to find good food, drinks, and lively conversation along with two-time Grammy-nominated Latin band, Palo!

We’re glad to have you and are looking forward to a great week ahead!

Germanwings 9525: Why didn’t this happen before?

On the tenth anniversary of 9/11, I attended a commemorative meeting at the British Academy in London. A professor of international relations recounted how he watched the horrific scenes of destruction of the World Trade Center in the company of his five year-old daughter. She posed this intriguing question: why didn’t this happen before?

Just a few years before she was born, in December 1994, Algerian terrorists attempted to fly a hijacked plane into the Eiffel Tower. Fortunately, French commandos terminated the hijacking when the plane stopped for refueling. This was a near-miss. The American writer of counterfactual fiction, Philip Roth, observed in his book The Plot Against America that: “the terror of the unforeseen is what the science of history hides.” The destruction of the Eiffel Tower is not an event in terrorism history—just one of numerous ambitious plots that were foiled.

With the current state of historical and scientific knowledge, there are very few unknown hazard events that should take catastrophe risk analysts by surprise. Almost all either did happen before in some guise, or, taking a counterfactual view, might well have happened before. Take for example the great Japanese tsunami and magnitude 9 earthquake of four years ago. It is doubtful that this was the strongest historical earthquake to have struck Japan. The Sanriku Earthquake of 869 may merit this status, based on archaeological evidence of widespread tsunami deposits.

Disasters are rare, and preparedness depends crucially on knowledge of the past. Aviation is the safest mode of travel; there are very few crashes. However there are numerous near-misses, where one or more of the key flight parameters is dangerously close to the disaster threshold. There is a valuable learning curve associated with the lessons gained from such operational experience.

The direct action of the co-pilot in the tragic crash of Germanwings Flight 9525 on March 24, 2015 raises again the question: why didn’t this happen before? As recently as November 29, 2013, it did. A Mozambique Airlines plane flying from the Mozambican capital Maputo to Luanda in Angola crashed, killing 27 passengers and its six crew. The pilot locked himself in the cockpit keeping out the co-pilot. He ignored alarm signals and manually changed altitude levels.

Quite apart from this and other historical precedents for fatal crashes caused by direct pilot action, there must be many more near-misses, where timely intervention has inhibited direct action by pilots suffering from some psychological disorder. The reporting of incidents is a crucial part of aviation safety culture, so is advancing the learning curve. Analysis of such data would contribute to accident risk assessment and subsequent risk mitigation measures.

Lessons Learned from Winter Windstorm Season in Europe

The 2013–2014 winter windstorm season in Europe will be remembered for being particularly active, bringing persistent unsettled weather to the region, and with it some exceptional meteorological features. The insurance industry will have much to learn from this winter.

Past extreme windstorms, such as Daria, Herta, Vivian, and Wiebke in 1990, each caused significant losses in Europe. In contrast, the individual storms of 2013–2014 caused relatively low levels of loss. While not extreme on a single-event basis, the accumulated activity and loss across the season was notable, primarily due to the specific characteristics of the jet stream.

A stronger-than-usual jet stream off the U.S. Eastern Seaboard was caused by very cold polar air over Canada and warmer-than-normal sea-surface temperatures in the sub-tropical West Atlantic and Caribbean Sea. Subsequently, this jet stream significantly weakened over the East Atlantic.

Therefore, the majority of systems were mature and wet when they reached Europe. These storms, while associated with steep pressure gradients, brought only moderate peak gust wind speeds onshore, mainly to the U.K. and Ireland. In contrast, the storms that hit Europe in 1990 were mostly still in their development phase under a strong jet stream as they passed over the continent.

The 2013––2014 storms were also very wet, and many parts of the U.K. experienced record-breaking rainfall resulting in significant inland flooding. Again, individual storms were not uniquely severe, but the impact was cumulative, especially as the soil progressively saturated.

Not all events this winter season weakened before impact. Windstorms Christian and Xaver were exceptions, only becoming mature storms after crossing the British Isles into the North Sea and were more damaging.

Christian impacted Germany, Denmark, and Sweden with strong winds. RMS engineers visited the region and observed that the majority of building damage was dominated by the usual tile uplift along the edges of the buildings. Fallen trees were observed, but in most cases, there was sufficient clearance to prevent them from causing building damage.

Xaver brought a significant storm surge to northern Europe, although coastal defenses mostly withstood the storm. Xaver, as well as some of this year’s other events, demonstrated the importance of understanding tides when assessing surge hazard as many events coincided with some of the highest tides of the year. The size of a storm-induced surge is much smaller than the local tidal range; consequently, if these events had occurred a few days earlier or later, the astronomical tide would have been reduced, significantly reducing the high water level.

Windstorm3

Wind, flood, and coastal surge are three components of this variable peril that can make the difference between unsettled and extreme weather. This highlights the importance of modeling the complete life cycle of windstorms, the background climate, and antecedent conditions to fully understand the potential hazard.

This season has also raised questions about the variability of windstorm activity in Europe, how much we understand this variability, and what we can do to better understand it in the future. While this winter season was active, we have been in a lull of storm activity for about 20 years.

Given the uncertainty that surrounds our ability to predict the future of this damaging peril, perhaps for now we are best positioned to learn lessons from the past. This past winter provided a unique opportunity, compared to the more extreme events that have dominated the recent historical record.

RMS has prepared a detailed report on the 2013–2014 Europe windstorm season, which analyzes the events that occurred and their insurance and modeling considerations. To access the full report, visit RMS publications.

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.