What is Terrorism Risk?

The threat of terrorist attacks around the world continues to pose a risk to the insurance industry. In a sector where financial stability is the hallmark of leading firms, the need for complete portfolio management for terrorism risk is evidenced by major attacks. The first attack on the World Trade Center in 1993, the 1995 Oklahoma City Bombing, and the catastrophic events of September 11, 2001 have shown that even the U.S. is not immune from the effects of terrorism. Along with countless other terrorist attacks throughout the world, these events serve as reminders to the insurance markets that man-made catastrophe risk should be proactively underwritten and managed. As the terrorism landscape continues to evolve, the insurance industry is seeking to quantify, underwrite, manage, and transfer risk from this less familiar and dynamic peril.

RMS has developed an extensive terrorism advisors network consisting of the world's leading authorities on terrorism risk for collaboration on the RMS terrorism model. Such expertise has allowed RMS to develop and offer terrorism modeling solutions to quantify and manage this risk globally. The RMS® Probabilistic Terrorism Model provides a comprehensive analysis of terrorism risk in the U.S. and key cities in Canada, Europe and Asia.It supports multi-line risk analysis for property loss, business interruption, and workers compensation claims.

The model quantifies the impact of a representative suite of potential terrorist attacks, ranging from various conventional weapons historically used by terrorists including chemical, biological, radiological, and nuclear (CBRN) weapons, also known as "weapons of mass destruction." Attacks are simulated using sophisticated models that analyze the impact of these weapons on property and people. Casualty estimates produced by the model can assist with risk assessment of other insurance lines including life, personal accident, and accidental death and dismemberment.

Attacks are modeled at potential terrorist targets implementing techniques for target prioritization that replicate the processes of target selection known to be employed by terrorist organizations. The numbers and types of attacks incorporated into the model include the potential for multiple synchronized attacks, a signature of Al Qaeda and its associated organizations around the globe.

Terrorism is a rapidly changing risk. RMS regularly assesses and reviews the risk environment, producing a periodic Terrorism Risk Briefing for clients and parameterizes the probabilistic model through the provision of Risk Outlooks. Clients are able to use alternative Risk Outlooks to perform sensitivity analyses against exposures and test risk management decisions under different assumptions for potential future developments.

RMS clients are actively using the model to perform a range of tasks including the following applications.

Manage Portfolio Risk

	Identify and quantify multi-line exposure concentrations
	Quantify the greatest potential losses to portfolios under a management selected benchmark attack scenario
	Respond to reporting requirements such as the A.M. Best Supplemental Rating Questionnaire and the Lloyd’s Realistic Disaster Scenarios
	Generate aggregate exceedance probability (AEP) loss distributions by line of business and in total
	Analyze key drivers of loss by account, location, target type, and city
	Quantify the risk of fire losses following terrorist attacks for policies without terrorism coverage

Examine 'What If?' Scenarios

	Consider alternative “Risk Outlooks” to understand sensitivity of results to different frequency and probability assumptions
	Evaluate alternative treaty reinsurance or securitization structures for risk transfer
	Analyze TRIPRA impact under various take-up rates Analyze reinsurance layers of the various terrorism pools
	Examine impact of exclusions (e.g., CBRN) on re/insurance offerings

Implement Underwriting Processes

	Develop loss costs by line of business
	Evaluate and price alternative layers for excess policies or reinsurance treaties
	Capture key parameters for risk scoring
	Design and implement underwriting guidelines to diversify portfolio risk
	Understand the relative risk across geographies, asset classes, and other characteristics of accounts and portfolios with global exposure

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