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”.

Chris Folkman is a senior director of product management at RMS, where he is responsible for specialty lines including terrorism, casualty, wildfire, marine cargo, industrial facilities, and builders' risk. He has extensive experience on both the broker and carrier sides of insurance, where he has led many aspects of property and casualty operations including underwriting, pricing, predictive analytics, regulatory affairs, and third-party commercial coverage and claims.

Prior to RMS, he was a managing director at CompWest Insurance Company, a workers’ compensation start-up that was acquired by Blue Cross Blue Shield of Michigan. Chris holds a bachelor's degree from Stanford University. He is a licensed insurance broker and a Chartered Property and Casualty Underwriter (CPCU).

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