Terror Pricing Models EliminateGuesswork

By Gary S. Mogel

Calculating premiums for terrorism coverage, formerly an art ormere guesswork, is becoming more of a science, thanks to productsdeveloped by commercial risk modeling and rating services.

Fortress Global Investigations is a New York City-based securitysolutions firm created by a group of former FBI and CIA officials,security directors, and prosecutors. Fortress has developed theTerrorism Insurance Risk Profile, a product to help insurerscalculate premiums for terrorism coverage.

TIRP assesses the level of threat and vulnerability of entitiesto potential acts of terrorism and calculates the risk of loss fromthose acts.

Robert Seiden, president of Fortress, noted that insurancecompanies have been struggling with how to calculate terrorisminsurance premiums. The federal Terrorism Risk Insurance Actrequires insurers to offer the coverage, but provides no guidanceon the premiums to be charged.

“TIRP runs each entitys profile through a scoring system,” Mr.Seiden explained. “That profile is put together by former lawenforcement and security officials who personally visit and inspectthe site to be insured.”

According to Mr. Seiden, this objective rating method protectsinsureds from being overcharged and protects insurers from beingaccused of unlawful price gouging.

“You can't class-rate terrorism coverage,” Mr. Seiden added whenstressing the need that each risk be visited by an inspector. Hedescribed the three “levels” of properties Fortress inspects:

Level One consists of the small-to-medium commercial propertiesthat are inspected by former law enforcement officers. Fortressmaintains a network of hundreds of such officers throughout theUnited States.
Level Two is an intermediate level, which may be assigned totrained security experts.
Level Three properties have the highest exposure. Mr. Seidenmentioned the Statue of Liberty, the Empire State Building (whereFortress has its headquarters) and Yankee Stadium as examples ofsuch properties in the New York area.

Each client gets individualized attention and a thorough reviewof its operations. “A hot dog truck can be a greater risk than agasoline truck, if that hot dog truck is making a delivery to astadium,” Mr. Seiden said.

AIR Worldwide Corporation, an Insurance Services Office companybased in Boston, Mass., released its Terrorism Loss EstimationModel last September. That model attempts to assist insurers inmeeting their TRIA obligations by developing the loss costs used tocalculate premiums.

Jack Seaquist, AIR's project manager for terrorism modeling,said that the firm takes “a comprehensive look at the full range ofterrorist attacks that might occur, looks at areas that may betargeted, and determines the potential of being hit by conventionalweapons, weapons of mass destruction and other means.”

“AIR then models those possible events for frequency andseverity through an expert opinion approach that estimatesterrorist group intentions and preferences for various categoriesof targets,” Mr. Seaquist explained. The experts consist of ahighly-credentialed team with national and internationalcounter-terrorism experience.

“A database is maintained that includes elements from a widerange of data sources that affect terrorism risk,” Mr. Seaquistsaid. The database consists of over 300,000 potential targets,including commercial, educational, religious and governmentfacilities. There is also a subset of “trophy” targets, which havea higher probability for a major attack.

AIR uses “what if” scenarios and software that permits it tosimulate attacks involving chemicals, biological agents, radiationand other weapons.

Threats posed against properties and entities by domesticextremists, formal international and state-sponsored terroristorganizations, and loosely-affiliated extremist groups are takeninto account by the AIR model.

Not only does AIR look at the overall distribution of attacksthat may be directed at a property, it also considers exposuresfrom nearby properties, Mr. Seaquist added. “The model takes anengineering-based approach to estimating building damage fromweapons effects on both the target and surrounding buildings. Theseeffects can include pressure and shock waves, fire, and fallingdebris.”

AIR is in the process of partnering with a firm that will permitit to perform site-specific analyses in the near future, accordingto Mr. Seaquist.

Newark, Calif.-based Risk Management Solutions Inc. is also amajor force in terrorism modeling. RMS develops software thatallows insurers to calculate the probability of catastrophes,including terrorist events.

“Data was collected from terrorism experts, including those whohad personal contact with Al-Qaeda members, to create a probabilitymodel of potential terrorist attacks using mathematical formulas ofgame theory,” explained Peter Ulrich, the managing director ofenterprise risk management for RMS.

From a list of over 200,000 potential terrorist attack sites,RMS identified 2,400 “priority targets,” mostly in major U.S.cities. In the RMS model, the size, economic importance, symbolicvalue and name recognition of the city are considered indetermining their potential as locations for terrorism.

Selected targets within these cities are then prioritizedaccording to the “utility” an attack would have to variousterrorist organizations. “The terrorism exposure of any specificlocation is calculated based, among other things, on its proximityto one of these 2,400 targets,” Mr. Ulrich noted.

Understanding and analyzing terrorists' “motives and mindsets”are also part of the analysis, as are security, logistics, andtechnical data on toxic releases, how diseases can be spread, howfar a plume travels, and decontamination processes.

Scenarios involving 16 distinct “attack modes” were analyzedunder the RMS model, including those involving radiological,biological and chemical agents.

ABS Consulting, based in Houston, Tex., is among the firms inthe terrorism risk assessment field. The company's SafeStateservices include terrorist risk evaluation, emergency preparedness,employee training and business continuity planning.

Clients have included highly-vulnerable properties such as theFBI building in Washington, D.C., nuclear power plants, airports,stadiums and national monuments, noted Doug Konetzni, vicepresident of sales. “For the FBI building, one of the things we didis put up adhesive glass so people would not be injured by flyingglass in an explosion,” he pointed out.

Mr. Konetzni also described an engagement for a California powercompany, in which ABS engineers were called upon to determine whatwould happen if an airplane going 350 miles per hour crashed into anuclear power plant. “Our engineers concluded that it would notpenetrate the core.”

ABS uses risk and catastrophic loss modeling to estimateterrorism exposures. For instance, the company can model the plumeresulting from the explosion of a “dirty bomb” in a designatedarea. Other risk assessments, using scenario-based modeling andproprietary software and simulation tools, are available, Mr.Konetzni noted.

Reproduced from National Underwriter Edition, April 21, 2003.Copyright 2003 by The National Underwriter Company in the serialpublication. All rights reserved. Copyright in this article as anindependent work may be held by the author.