Catastrophe risk modeling began in the late 1980s and has evolved over the years to provide accurate calculations for organizations to estimate losses against a weather event like hurricanes, tornadoes or severe thunderstorms. Over time, the thinking behind this type of modeling has grown to envelop other types of catastrophes posing the potential to present significant risk.
The global threat from groups like ISIS and al-Qaeda, as well as the dangers presented by domestic terrorists have paved the way for the field of terrorism risk modeling and terrorism insurance. The modeling type became a possible solution for customers after the tragic events of 9/11. According to risk and reinsurance company Guy Carpenter, AIR Worldwide and Risk Management Solutions, two of the biggest modeling companies in the world, released their first terrorism models in 2002.
When looking at terrorism risk modeling, the website Property Casualty 360 says there are two categories at use: “insurgency and terrorism zones and terror and insurgent attacks on certain types of property.” Of course, AIR and RMS take a deeper look at the peril associated with an act of terrorism.
Here’s a look at some of the considerations AIR and RMS put into their terrorism risk models:
According to its website, AIR Worldwide employs a three-pronged approach – much likes its catastrophe modeling – to measuring the risk an organization faces from terrorist attacks. The modeling is done with the help of experts and computer programs.
Hazard Component: This component asks questions surrounding the placement, size and frequency of future attacks. Using up-to-date knowledge, thousands of computer-related reports run for use with the model.
Engineering Component: Property is the concentration of this component, and equations known as damage functions are used to measure the destruction level expected to occur to buildings of different types of construction.
Financial Component: Estimates taken from the Hazard and Engineering components are broken down to reflect monetary loss of property. After the cash considerations are made, the insurance policies are gathered into the fold.
Risk Management Solutions (RMS)
Risk Management Solutions lays out its approach to its terrorism models on its website. RMS uses a four-step process and qualified advisors, computer programs and research to generate its terrorism risk models.
Step 1: The first considerations for RMS are potential targets and the type of attacks that may occur. RMS does consider that not all attacks are possible for every target.
Step 2 The likelihood of an attack is weighed as the second consideration. Locations possessing a lot of symbolism or economic importance pose higher risks.
Step 3: What are the chances of multiple attacks making up a single event? Because this kind of attack has been carried out by terrorist organizations before, it’s the third consideration.
Step 4: The final consideration combines the number of attempted attacks in a year, the success of those attacks and the response of the government to these attacks.
An Opportunity for Leveling-Up Protection
As the threat grows, more and more organizations are considering terrorism risk models and terrorism insurance as a solution in protecting property from possible attacks. If you’re responsible for buildings located in high risk areas or structures with symbolic meaning, it’s a worth evaluating the affect of terrorism insurance on your risk management and recovery plans.