AIR expands terrorism model globally, enhances it for ILS users

by Artemis on September 12, 2016

AIR Worldwide (AIR) has expanded its terrorism risk model to support scenario testing and analysis for the United States and 27 other countries, to help companies better manage terror risk and assess the impact of different attack scenarios on their insurance, reinsurance and ILS portfolios.

“The AIR Terrorism Model now supports deterministic modeling of conventional weapon attacks in countries across the globe,” commented Shane Latchman, assistant vice president at risk modeling firm AIR Worldwide. “In addition, in this latest release, estimates of the frequency of attacks in AIR’s probabilistic U.S. Terrorism Model have been updated to reflect the current threat. Together, the updated model provides a comprehensive view of the global terrorism risk landscape.”

The expansion of the terror risk model platform means terrorism loss modeling capabilities are now available for Australia, Belgium, Brazil, Canada, China, Colombia, France, Germany, Greece, India, Indonesia, Ireland, Israel, Italy, Japan, Kenya, Lebanon, Mexico, the Netherlands, the Philippines, Russia, Singapore, South Africa, Spain, Thailand, Turkey, and the United Kingdom, as well as the U.S.

AIR’s Touchstone® platform enables users to conduct deterministic loss analyses, a method of terrorism risk assessment that estimates losses to property and workers’ compensation insurance policies from defined attack scenarios. It can also be used to analyse the risk to reinsurance and insurance-linked securities (ILS) transactions covering terror risk.

Users can select a property from within their own portfolio, one of the targets in AIR’s U.S. landmark database, or any user-identified target and then select a weapon type, such as a truck bomb, to test
potential attack scenarios.

Robust damage functions will help re/insurers to understand the impact on their insured exposures given the size of the blast and urban density indices. The loss estimation functionality complements existing accumulations management capabilities within the Touchstone model platform, including dynamic ring analysis, for property and workers’ compensation exposures.

That sounds potentially useful for parametric terrorism risk transfer deals, an area of the terror market that ILS specialists may be interested to analyse. A number of ILS funds allocate some of their capital to terror reinsurance transactions, on a collateralised basis and advances in risk modelling are key to support this.

“Modeling this complex and dynamic global threat requires a comprehensive solution,” said Rob Newbold, executive vice president at AIR Worldwide. “A complete terrorism risk analysis must include three components: accumulations analysis, deterministic analysis, and probabilistic loss analysis. Touchstone offers all three.”

The model also enables estimation of attack frequencies, using newly updated and detailed operational threat assessments made by a team of counterterrorism experts with decades of experience working for the FBI, CIA, Department of Defense, and other government bodies, AIR said.

AIR has also updated its database of potential targets to include additional U.S. corporate headquarters, professional sports stadiums, prominent buildings, and hotels, again the type of targets that ILS and reinsurance specialists may be looking to provide a parametric terror cover to.

The database, containing over, 64,000 targets includes around 100 “trophy” targets associated with a higher probability of attack.

Terrorism risk index maps from AIR’s sister company Verisk Maplecroft have also been integrated as a hazard layer into Touchstone. The indices provide an assessment of terrorism risk at a subnational level based on incident and severity data during a specific reporting period. Again, these are potentially useful for a parametric trigger for terrorism risk transfer deals.

Newbold explained to Artemis, at the 2016 Monte Carlo Reinsurance Rendez-vous, what these model developments could mean for the ILS market.

“Structuring terrorism risk cat bonds can be a challenge due to the perceived difficulty in quantifying the risk of attack. The expanded and comprehensive components of our Terrorism Model allow us to ensure a complete distribution of loss is well represented for this highly dynamic peril,” he said

Continuing to explain how any ILS investors may elect to use the terror risk model; “The international deterministic capabilities allow investors to run realistic scenario analyses and dissect the insured financial impact such an event would cause to actual location-level policies, then stress the scenario in a number of dimensions (geographic extent of attack, type of attack (conventional or CBRN) to see if there are any tipping points that expose otherwise unforeseen financial risk.”

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