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Insurance Solutions

Formerly Moody’s RMS

On the morning of July 7, 2005, I traveled by London Underground to the RMS offices near Monument Station. This was no ordinary day for London commuters. Three suicide bombs detonated in trains during the morning rush hour had shut down the Tube system. I returned home in the evening partly on foot, and partly by bus, mindful that a suicide bomb had been detonated on the upper deck of a London bus. Including the four suicide bombers, the death toll was 56. Another seven hundred were injured, and hundreds more were treated for shock and distress.

In catastrophe risk modeling, the occurrence of a major event provides an important opportunity for model validation, and so it was with 7/7. Terrorism modeling had only begun less than four years earlier, in the wake of the Al Qaeda multiple terrorist attacks on 9/11. This is now almost nineteen years ago, and younger insurance professionals may not have a direct sense of the turmoil and chaos prevailing at the time. President George W. Bush has recalled in his memoirs that he went to bed on September 12, 2001 thinking: “Another day with no attack. Thank God.” Insurers were desperately anxious over the uncertainty in the frequency of Al Qaeda terrorist attacks, and every other aspect of terrorist modus operandi.

Path of Least Resistance

The key principle underlying the RMS terrorism risk model which was launched in 2002 was given by Magnus Ranstorp, a leading international expert on Islamist militant groups. The universal principle is that terrorists follow the path of least resistance in their operations. In the strategic game between terrorists and the forces of counterterrorism, terrorists will avoid strength and strike weakness. This has been a cornerstone of The Art of War for 2,500 years, and also of terrorism campaigns.

On 7/7, rather than attempt to attack a well-defended high value target, such as a government building, the four terrorists targeted the London public transport system, which had minimal security. Switching targets according to security is called terrorist target substitution. In his martyrdom video, the 7/7 ringleader, Mohammad Sidique Khan, declared his grievance as being the war in Iraq. Because of rigorous US-VISIT border protection, it would have been foolhardy for British jihadis to attempt to attack targets within USA. It was much easier to attack targets in U.K., the main ally of USA.

Terrorists aim to maximize leverage gain, which is the ratio of the loss inflicted to the cost of a terrorist operation. The London transport attacks took place at the peak of the morning rush hour, when the passenger density was highest, and four backpack bombs were deployed. Far less explosive material, cost and effort are required to make backpack bombs compared with vehicle bombs, which have been called the terrorists’ air force. 

Implications for Terrorism Insurers

For terrorism insurers, a truck bomb deployed in a central business district is a typical major disaster scenario. Since 9/11, there has not been a successful terrorist vehicle bomb attack in U.K. or USA. The closest to success was Faisal Shahzad, who attempted to detonate an SUV bomb in Times Square on May 1, 2010. He was a lone actor, meaning that he was not part of an active terrorist cell who could assist with bomb-making, and other logistical challenges. Faisal Shahzad lacked the technical expertise to make a viable bomb, so his ambitious plot failed. However, he had at least succeeded in evading the broad counterterrorism surveillance net which seeks to find early warning of a terrorist plot, and to arrest the conspirators before they move towards their targets.

Three months before the Times Square plot, I had visited New York to present to the Board of the Reinsurance Association of America on social network constraints on terrorist plots. My key message is summarized in the mantra: ‘Too many terrorists spoil the plot.’ This is positive news for reinsurers: the ambitious terrorist plots that might cause substantial terrorism insurance losses are very likely to be interdicted. With the massive resources allocated to counterterrorism, and the extensive electronic surveillance of prospective terrorists, any plot involving more than a few operatives is most likely to end in arrest.

I relayed this message to the House Financial Services Committee in September 2013, when I testified to U.S. Congress on terrorism insurance modeling. I also conveyed the message that, with the Western Alliance focus on counterterrorism action to prevent attacks, terrorism insurance is effectively insurance against the failure of counterterrorism. If and when a spectacular terrorist attack occurs, as the whistleblower Edward Snowden informed the world, there must have been some lost opportunity for foiling the plot. 

Counterterrorism Investment

In U.K., counterterrorism was stepped up significantly after 7/7, and the bulk of the successful terrorist attacks in U.K. have involved individual operatives attacking on their own. The most notorious of these was the Manchester Arena attack on May 22, 2017, which cost the lives of 22 mainly young concertgoers, as well as the suicide bomber, Salman Abedi. As with the lone actor terrorist suspect in the Reading knife attack of June 20, 2020, he was a Libyan asylum seeker. The Manchester attack was described by the Prime Minister as the worst ever to strike the north of England, notwithstanding the IRA bombing of the Manchester Arndale Centre in June 1996, which caused an insurance loss of £400 million. All lives matter more than any property, whatever the insured value. 

Terrorists delight in schadenfreude: the worse the loss to society, the greater is their gain. The Ariana Grande concert at the Manchester Arena, so popular amongst the superstar’s teenage fans, was the optimal time and place for Salman Abedi’s backpack bomb attack. The optimality of this attack delivered another lesson for terrorism risk analysts: a suicide bomber can only die once. The martyr’s target has to be chosen to be the best possible. Having eluded the attention of MI5, Salman Abedi had numerous options for his attack.

With large scale terrorist attacks being increasingly hard to perpetrate due to the persistent pressure of counterterrorism surveillance, terrorists are more likely to be successful if they operate on their own, albeit with inspiration from online terrorist propaganda. Terrorism is the language of being noticed. Manifestos posted by right wing domestic terrorists have influenced copycat attacks around the world. Through his attack on two mosques in Christchurch, New Zealand, on March 15, 2019, Brenton Tarrant drew attention to his manifesto on the ‘Great Replacement.’ One reader, Patrick Crusius, cited this manifesto as an inspiration for his tirade against the perceived Spanish invasion of Texas, and his shooting attack on a Walmart store in El Paso on August 3, 2019.

The most crucial knowledge required for catastrophe risk modeling of any peril, natural or man-made, is an understanding of the fundamental principles governing the risk. These principles are established for natural hazards, and since 9/11 and 7/7, they have been firmly consolidated in RMS terrorism risk modeling. With threat modeling grounded by these principles, reliance on subjective opinions is no greater than for modeling natural hazards, and as shown by experience of model usage since 9/11, the risk results are robust for managing terrorism insurance risk.

Find out more about RMS Terrorism Risk Modeling.

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The Unrehabilitated Terrorist

A few hundred yards from where Stephen Hawking first explored black holes from his wheelchair, is the Institute of Criminology at the University of Cambridge. Hawking never shied away from really hard problems; nor do the Cambridge criminologists. There is no Nobel Prize for finding viable solutions to rehabilitating prisoners, but the Cambridge Learning Together program has forged new communal pathways for addressing this major societal challenge. The program seeks to bring together people in criminal justice and higher education institutions to study alongside each other in inclusive and transformative learning communities. The Learning Together program began at the University of Cambridge in 2014, in partnership with HMP Grendon, a small prison at a village named Grendon Underwood, outside London. This program recognizes that collaboration underpins the growth of opportunities for the learning progression of students in prison, and the development of pathways towards non-offending futures. Five years on, a celebration alumni event was organized for Black Friday, November 29. This took place in the City of London, at Fishmongers’ Hall, off London Bridge. This happens to be close to the Monument, where the RMS London office is situated. One of the attendees who described his own prison experience was a convicted terrorist, Usman Khan, who was released in December 2018, after serving half of his 16-year jail sentence for plotting to bomb the London Stock Exchange. At the time of his arrest, he had the private contact number of a notorious radical Islamist, Anjem Choudary. About a quarter of all U.K. Islamist terrorists have some link with Anjem Choudary, who was sentenced to five and a half years in September 2016. His early release in October 2018 has aroused fear that these links might be resumed. Creative writing is part of the constructive learning program for prisoners. Usman Khan’s language was violence. During the afternoon creative writing session, he lashed out with a pair of knives, killing two people, and seriously injuring another three. He was chased out of the building onto London Bridge, where a group of ex-offenders and others managed to apprehend him, before the police arrived and shot him dead, believing he was wearing an explosive belt. Prisons are known to be active breeding grounds for radicalization and Islamist extremism. So, the rehabilitation of Jihadi inmates is a tough task; one that has been made harder by the poster boy for terrorist rehabilitation. One of Usman Khan’s co-conspirators in the London Stock Exchange plot, Mohibur Rahman, was released in 2015, after which he plotted another terrorist attack together with two others he had met in jail. This plot was interdicted, and he was arrested and then jailed for life. But except for those who die in prison, everyone who goes to prison ultimately goes home. In the United States, around sixty with terrorism-related convictions will be released before 2024. Terrorist rehabilitation is a new frontier in counterterrorism. Unlike other areas of the world, the United States has not established a formal rehabilitation program for convicted terrorists, nor developed infrastructures to support individuals upon release. However, an experimental terrorist rehabilitation program has been developed in Minnesota, where ISIS gained support within the Somali community. The emergence of terrorist convicts onto urban streets poses a significant recidivism risk to U.S. homeland security. A nationwide rehabilitation program is needed. Ironically, an unrehabilitated U.K. terrorist may concentrate American minds on developing rehabilitation as an important terrorism risk mitigation measure.

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Gordan Woo pic
Gordon Woo
Catastrophist, Moody's RMS

Gordon is a catastrophe-risk expert, with 30 years’ experience in catastrophe science, covering both natural and man-made hazards. Gordon is the chief architect of Moody's RMS terrorism risk model, which he started work on a year after joining RMS in December 2000. For his thought leadership in terrorism risk modeling, he was named by Treasury & Risk magazine as one of the 100 most influential people in finance in 2004. He has since lectured on terrorism at the NATO Center of Excellence for the Defense against Terrorism and testified before the U.S. Congress on terrorism-risk modeling.

As an acknowledged, international expert on catastrophes, Gordon is the author of two acclaimed books: “The Mathematics of Natural Catastrophes” (1999) and “Calculating Catastrophe” (2011). Dr. Woo graduated as the best mathematician of his year at Cambridge University and he completed his doctorate at MIT as a Kennedy Scholar and was a member of the Harvard Society of Fellows. He also has a Master of Science in computer science from Cambridge University.

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