Terror Models Help You, AIR Exec Tells Actuaries

Catastrophe models greatly assist commercial insurance actuaries in establishing underwriting and pricing guidelines for terrorist attacks, a modeling firm executive told a recent industry conference.

The comments by David Lalonde, senior vice president at Boston-based AIR Worldwide Corporation, were reported by the Casualty Actuarial Society.

Mr. Lalonde, speaking last month at the CAS ratemaking seminar in Atlanta, said because terrorism events are among the more extreme events in an insurer's portfolio that contribute to the company's risk profile, understanding that risk can help in setting up underwriting guidelines that will avoid overaccumulations of exposure.

"Terrorism models also can help companies with understanding and pricing in the TRIA environment, pricing through ISO [Insurance Services Office] advisory loss cost filings, along with improving understanding of how much reinsurance is needed based on underlying exposures," said Mr. Lalonde, referring to the Terrorism Risk Insurance Act.

He said following the Sept. 11 attacks, AIR clients started requesting terror loss estimates.

"There were no credible commercially available terrorism loss assessment models at the time, but we quickly generated a set of scenarios and overlaid them onto the detailed industry exposure database we used for our natural peril models," Mr. Lalonde explained to seminar participants.

Companies were able to utilize the results of this analysis to set up reserves, he added.

AIR subsequently released the first commercially available probabilistic terrorism model in 2002, which consists of three major modules:

o Hazard--the type of weapons used in the attack, the potential targets and the estimated frequency of attacks.

o Engineering--the levels of property damage and injury.

o Loss estimates based on the type of coverage and policy conditions.

Mr. Lalonde said it's not possible to model every potential terrorist attack, but his company has tried to get a flavor of the types of attacks that could occur--from conventional attacks, such as bombs and airplane crashes, to those from chemical, nuclear, biological and radiological weapons. CNBR attacks are modeled using standards developed by the U.S. Department of Defense, he said.

The executive said his firm has practiced natural catastrophe modeling for 15 years. The company is a subsidiary of Jersey City, N.J.-based ISO.