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Tuesday, 31 January 2017

How to Assess Terrorism Risk Quantitatively and Qualitatively

Article written by: Virág Fórizs, Analyst at Verisk Maplecroft & Jonny Green, Risk Consultant at AIR Worldwide

(AIR Worldwide is a Silver Sponsor of C4 2017)

With so many terrorist attacks around the globe there may be a perception that the risk of terrorism is increasing. Whether this is the case or not is a hotly debated topic, but as the Head of Global Crisis Management at Allianz Global Corporate & Specialty mentioned to the Wall Street Journal last year, the nature of terrorism insurance is changing, even if the threat isn’t.

These changes in perceived risk and associated loss can be difficult to account for when considering new business. A combination of qualitative reporting and quantitative analysis is needed to provide insight into the multi-faceted nature of terrorism risk.

Qualitative reporting can give a national level assessment of terrorism risk by monitoring three characteristics:

  • An overview of the intensity and threat of known terrorist groups
  • The impact of historical events, and
  • Counter-terrorism capabilities including security forces and policies

The overall view of risk can be enhanced through quantitative means by considering the current level of exposure in an area through accumulation analyses and a realistic view of losses via deterministic scenarios. This blog discusses both qualitative and quantitative means of terrorism risk management using solutions from Verisk Maplecroft and AIR Worldwide. 

Identifying and understanding terrorism risks

Databases containing details of historical terrorist incidents and risk indices derived from those incidents are vital to understanding the evolving nature of terrorism risk to insured assets. However, it is also crucial to have an assessment of the current level of terrorist threat and a view of security forces’ ability to conduct counterterrorism.

Verisk Maplecroft’s Terrorism Incident Database, combined with its suite of quarterly-updated terrorism indices, provides underwriters with analytics to understand the current threat to an insured asset and how that threat evolves over time.

The indices cover 198 countries worldwide at national and subnational levels. The Terrorism Database contains more than 130,000 incidents from 2004 to the present day. Each incident record contains a narrative alongside up to 20 individual data points, including weapon types, perpetrator groups, casualty profiles, details of damage to physical assets, and the most precise geo-tag possible.

The Terrorism Intensity Index has been calculated at the subnational level down to 1km2 resolution. Combining geo-tags for each terrorist incident with data from the Terrorism Intensity and History of Terrorism Indices, underwriters can instantly quantify terrorism intensity on a 0–10 scale for any location worldwide.

In addition, Verisk Maplecroft’s Access an Analyst service taps the combined knowledge political risk experts in more than 40 countries to offer qualitative assessments of the security risks posed to a particular region.

Terrorism Risk Management Solutions

Once an understanding of the terrorism situation has been gained, analyses using AIR's Touchstone® platform can be used to add a financial value. For risks located outside of the U.S three methods can be combined to give a comprehensive insight into terrorism risk; these can be done at the individual account or portfolio level. 

1) Ring based analyses - Identifying the point of Maximum Exposure

The point of maximum exposure within a portfolio can be identified using ring based analyses, and its exposed limit can be calculated for given radii. The Dynamic Ring Analysis functionality in Touchstone—as explained in this video—allows users to find the point at which a ring of a given size covers the maximum exposure concentration in their portfolios, pinpointing the area most vulnerable to a single terrorism event. Locations with high exposure concentrations can be cross-referenced with the risk profile developed by Verisk Maplecroft to ensure that a portfolio is not overly-exposed to high risk sections of a country.

2) Accumulation using Verisk Maplecroft’s Terrorism Intensity Index

These metrics can be used to compare the relative terrorism risk between accounts/portfolios. A real strength of Verisk Maplecroft is the risk indices across different themes. When considering the threat of terrorism these indices are developed further to produce a subnational Terrorism risk map that details the risk index to 1km2 resolution (Figure 1).

Figure 1: The Subnational Terrorism Intensity Index map displayed using Maplecroft’s Global Alerts Dashboard. Individual events are also recorded and displayed here.
AIR has taken this subnational map and created a hazard layer for use within the Geospatial Module of Touchstone. This allows a user to analyse their exposure and identify exposed limits by risk band, enabling portfolios or accounts to be managed so terrorism risk is spread to prevent a concentration of exposure in a high risk area or inform a risk-based selection of contracts.

Another accumulation method, little used due to lack of available data, can still give insights into what would happen if historic attacks occurred today. Instead of being ring based this method uses accumulation of exposure within historical blast footprints, such as the 1993 Bishopsgate bombing in London. With improved data processing technology, historical images can be geo-tagged and used to create footprints on which to accumulate; such work has been done by some organisations where information is available (Figure 2).

Figure 2: Shapefile produced of documented damage from the 1993 Bishopsgate bombing and imported into Touchstone® for use in accumulating exposure. (Source: AIR and IMSL)
3) Deterministic Loss Analysis

The third method is to calculate the potential loss if an attack were to actually occur. With Touchstone 4.0 (released June 2016) AIR provided the opportunity to run deterministic loss analyses for terrorism in 27 countries across the globe (Figure 3). Deterministic analysis estimates losses (not exposed limits) from a blast of a defined tonnage of TNT centred at a specified location. These analyses use continuous, physics-based blast attenuation functions and engineering expertise to estimate damage and loss within physically realistic footprints. Three primary pieces of information are used in the deterministic analysis: the urban density of the region where the blast is simulated, the tonnage of the weapon being used, and the vulnerability of the structure to overpressure.
Figure 3: The user interface for creating terrorism events in 27 countries worldwide is intuitive with point and click functionality. The image shows approximately 4,000 events already created with the option to manually import a conventional or CBRN event in the U.S. (Source: AIR)
Using an Urban Density Index for these 27 countries, the severity of damage to a property from a variety of different devices ranging from a portable rucksack bomb to a large truck bomb similar to that used in the Bishopsgate bombing can be simulated. The functions defining the vulnerability of structures to a blast have been developed in the same way that vulnerability functions exist for other hazards. They have been tuned using historical data and incorporate research by organisations such as the Department of Defence.

The reports and focussed insights provided by Verisk Maplecroft allow risk professionals to understand the terrorism threat to their exposure on a regional and sub-regional basis. These insights can then be enhanced using Touchstone to consider the potential financial exposure within a threat band and to identify the point of maximum exposure within a ring. This financial view of the risk can be refined by using AIR’s Terrorism Model to consider estimated losses if a potential attack were to occur. Using a combination of the insights obtained through Verisk Maplecroft and Touchstone a comprehensive view of the risk of terrorism can be quickly and easily achieved.

This blog post has been supplied by AIR Worldwide. 

Charlene Chia, Senior Risk Consultant, AIR Worldwide is a panelist at CatIQ’s Canadian Catastrophe Conference (C4 2017) on the Terrorism Risk session during the conference.