AIR explains terrorism risk assessment strategies

AIR Worldwide Corporation recently released a white paper ‘Terrorism Risk Assessment: Best Practices for Insurers and Reinsurers’ that reviews current methodologies that insurers and reinsurers use to aid in the assessment and management of terrorism risk.
The paper reviews three approaches for terrorism risk management and addresses the best practices for exposure data collection and risk control. The three major approaches for effectively managing terrorism risk include: risk within a defined geographic area, risk in relation to known landmarks or trophy targets, and probability distributions of loss that account for the likelihood of attack.
The first approach analyses of risk within a defined geographic area provides insurers with worst-case scenarios of a terrorist attack. These types of analyses can be run for individual buildings or for all buildings of interest within a defined geographic area.
The second approach risk analyzed in relation to known landmarks or trophy targets is based on the fact that exposure accumulations can be determined within a specified distance to a particular landmark or a set of landmarks such as transportation hubs. Catastrophe models can be used to simulate an attack on a particular target of interest. Estimates of the potential losses from property damage, injuries, and fatalities can be obtained for each location affected by the event.
The third approach probability distributions of loss that account for the estimated likelihood of various attacks can provide insurers with a comprehensive view of terrorism risk in terms of probabilities of various levels of loss. Results can be used to make underwriting decisions, perform portfolio optimization exercises, and negotiate reinsurance terms.
Techniques discussed in the white paper can also help insurers determine the impact on their portfolios of changes that may be made to TRIA by Congress.
“With the likely passage of a two-year TRIA extension, the private market for terrorism insurance should remain viable,” Jack Seaquist, a senior manager at AIR, says. “While the exact terms of the extension have not yet been determined, it is clear that the risk born by insurers will increase. Therefore it is more important than ever for insurers and reinsurers to re-evaluate their current terrorism risk assessment strategies with respect to industry best practices.”