Guy Carpenter, the reinsurance arm of Marsh, has underlined the important role technology and analytics play in addressing challenges across the terrorism risk landscape.
The reinsurance broker argues that terrorism, political violence and other malicious acts are both dynamic and adaptive, with human intent driving profitability while also willing the impacts to change.
The terror risk landscape is constantly evolving and while historical incidents show past trends, attackers often change their tactics in response to both past effectiveness and current circumstances, says Guy Carpenter.
Furthermore, and as highlighted by Guy Carpenter’s Head of Terrorism, Global Strategic Advisory, Stephen Hudson, the frequency of past successful attacks fails to highlight the entirety of the historic threat.
The reinsurance broker explains that there also exists challenges in relying on historical frequencies as a base for future probabilities. Short return period events can be very volatile, while long return period events have little to no data points to inform frequency.
The challenges with modelling and predicting terror events is extremely challenging, and Guy Carpenter highlights that there is somewhat of a defeatist attitude in the insurance industry that ultimately, the challenges are too difficult to overcome.
“Modules are required for hazard, exposure, vulnerability and damage and financial impact. The challenge in creating a terrorism risk model is achieving sufficient precision and refinement of each module to make the model credible – particularly the hazard module, because of the changeable and dynamic nature of the peril,” says Mark Weatherhead, Head of Model Development – International, Guy Carpenter.
Discussing the reinsurance broker’s own proprietary terrorism model, Sunstone, Hudson explains: “The model contains over one million global targets, impact curves for 40 attack types, probability matrices for eight different regions, and a stochastic model that integrates these elements. The University of Maryland’s Global Terrorism Database of historic incidents is also included.
“Unlike other models, Sunstone is truly global and reflects the full spectrum of attack types from large catastrophic events to lower level, more frequent events. As a result, Sunstone consistently provides a more credible model of potential losses. While Sunstone is an effective model, we are not standing still and are continually developing the model to better represent threat, vulnerability and impact.”
Weatherhead adds: “Vulnerability is the most absent element of terrorism risk modeling in the insurance sector, which in this context, is the structures, people and processes most vulnerable to attack – data that would ideally be provided by insureds alongside their schedule of values. If this does not occur, the alternative is for the insurance industry to research and inject the information. Clearly, the quantity of assets being managed highlights the scale of the challenge.”
The reinsurance broker also states that additional challenges with modelling terrorism risk arise in accurately assessing the impact of terrorist a political violence across large portfolios.
“Concentric ring modeling is a reasonable simplification of the effects of blast in a flat, open field-type location. But insurance exposures rarely exist as such, and most often occur in dense urban environments where an explosive blast may be confined by surrounding buildings, reflected off their surfaces and channelled down the man-made canyons of city blocks, shielded by intervening buildings,” says Hudson.
According to Guy Carpenter, it has responded to the challenge of blast impacts in dense urban environments, by developing 3D cityscape blast modelling.
Hudson explains that this capability offers a detailed representation of several square miles of central business districts.
“It is able to complete computational fluid dynamic (CFD) modeling and simplified ray-trace analysis, then accurately assess the engineering response of the affected buildings. Guy Carpenter offers market-leading visualization at unparalleled modeling speeds, using software validated by U.S. Government testing.
“This approach can calculate losses that may be 35 to 40 percent lower than the concentric ring technique, releasing significant capacity and more cost-effective reinsurance to our clients. The 3D cityscape also provides the environment for accurate modeling of crowd flows and chemical plumes,” says Hudson.
The broker states that is working to integrate a variable response approach to impact assessment by employing sophisticated CFD modelling at key areas of risk within a portfolio.
“This approach enables Guy Carpenter to deliver targeted, sophisticated and efficient exposure management to our clients. This variable resolution approach is also being applied to threat and vulnerability assessment, applying greater effort where market exposure is greatest, in order to achieve greater certainty and precision in these areas. Also, where it is not possible to measure factors directly, correlatory factors can indicate the trend,” says Weatherhead.