TERRORISM MODELING AND

RISK MANAGEMENT
February 11, 2014
Chris Folkman
Director, Model Product Management
Terrorism Modeling Overview

Event frequency in probabilistic terrorism
modeling
Modeling Framework
! Exposure
! Hazard
! Vulnerability
! Probabilistic Framework

TRIA implications in terrorism risk
management
OUTLINE
TERRORISM
MODEL
BACKGROUND
September 11
th
, 2001 attacks: $40 billion insured
loss. WTC attack footprint: 16 acres.
Models created in 2002-2003 in response to market
demand for terrorism solutions.
Terrorism modeling data has improved over the past
decade.
" More data on plot frequency
" More data on attack suppression / success rates
" More insight into countersecurity
" Better calibration of hazard and vulnerability
EXPOSURE MANAGEMENT
! Monitor exposure
concentrations around high risk
targets.

! Identify building level
accumulations.

! Identify exposure Hot Spots
within given radius.

TERRORISM RISK MANAGEMENT A THREE PRONGED
APPROACH
SCENARIO LOSS MODELING
! Quantify loss for one attack
scenario.

! Manage losses of benchmark
scenarios to acceptable levels.

! Submitted to rating agencies
(i.e. Best SRQ).
PROBABILISTIC LOSS MODELING
! Identify most critical attack
scenarios for a portfolio
! Determine relative likelihood
of attack scenarios

! Calculate impact of multiple
attacks as part of a single
event (multiplicity).

Probabilistic terrorism modeling delivers deep insight into
key drivers of loss on a portfolio
" Analysis of comprehensive event catalog (90,000+ attacks).
" Key losses by account, location, target type, city, and line of
business
" Assist underwriters in risk selection
" Design and implement underwriting guidelines
" Capacity allocation
" Evaluate reinsurance needs and options

PROBABILISTIC
MODELING OF
TERRORISM
Theres not enough data to create
meaningful rates
RMS rates are based on empirical data, not judgment.
RMS frequency is calibrated against hundreds of plots from open
source intelligence - known, intercepted, and/or resulting in court
convictions to set the baseline threat level for each country.
Event rates are scaled with data based on:
Attack mode
Target category
City
As the threat landscape changes, so does frequency.
TERRORISM
FREQUENCY:
COMMON
MISPERCEPTIONS
You cant model human behavior
RMS does not model human behavior.

Terrorism modeled as a control process: terrorists actions are
constrained by countersecurity measures.
Terrorists are rational actors. Targeting strategy is based on
maximizing attack leverage.
Suppression and interdiction rates based on data from open
source intelligence, court convictions, DHS disbursements.
Range of outcomes from conventional terrorism is narrow:
" Multiple successive terrorist events: not plausible due to
suppressive law enforcement action following the first
event.
" Multiple hurricanes making landfall (i.e. 2004, Florida):
plausible.
TERRORISM
FREQUENCY:
COMMON
MISPERCEPTIONS
All carriers writing terrorism cover are
making assumptions about frequency.

These assumptions should be informed by data, not guesswork.
RMS model incorporates dozens of data sources in frequency
calibration:

PROBABILISTIC
TERRORISM
MODELING
Terrorism Plots
Strength of
Countersecurity
Environment
Target Selection
# Terrorism court convictions
# Intercepted plots
# Open source intelligence
# DHS disbursements
# Municipal anti-terror resources
# Gross municipal product of city
# City name recognition in middle east
# Symbolic value of target
# Building level security perimeters
EXPOSURE AT RISK
FRAMEWORK FOR TERRORISM MODELING
QUANTIFY HAZARD ASSESS VULNERABILITY PROBABILISTIC ANALYSIS
Exposure at
Risk
Quantify
Hazard
Assess
Vulnerability
Probabilistic
Analysis
Concentrated nature of terrorism risk demands
accurate and high resolution exposure data

All addresses geocoded to lat-long before modeling
Post code centroid is insufficient
Large variations of risk exist within a single post code
Hazard and vulnerability not averaged across a larger area
Data quality is paramount
IMPORTANCE OF
ADDRESS
RESOLUTION
ZIP Code Centroid
10017
United
Nations
ATTACK MODES
MODELED
Exposure at
Risk
Quantify
Hazard
Assess
Vulnerability
Probabilistic
Analysis
600 lb Car Bomb
1 ton Minivan Bomb
5 ton Truck Bomb
10 ton Trailer Bomb
2 ton Box Van Bomb
Aircraft Impact Attack
Tanker Conflagration Attack
Nuclear Weapon
Biological Agent Attack
Radiological Attack
Chemical Agent Attack
Sabotage Attacks
Various wind speeds, isotopes, and indoor/outdoor options
apply
HAZARD BY
ATTACK TYPE
Exposure at
Risk
Quantify
Hazard
Assess
Vulnerability
Probabilistic
Analysis
ATTACK MODES HAZARD DESCRIPTION
Conventional Bomb Attacks Blast pressure (PSI)
Hazardous Transportation Sabotage,
Industrial Sabotage - Toxic Release
Particulate
contamination
Aircraft Impact Distance from target
Biological / Chemical Attack (Outdoor)
Dosage / deposition
of contaminant
Conflagration Fire ignitions
Dirty Bomb, Nuclear Plant Sabotage Radiation level
SIMPLE
DAMAGE
FOOTPRINT
Bomb blast in
downtown Manhattan
0 250 500 125
Meters
Exposure
Highest
Lowest
Accum. Center
NY Accumulation Centroid
Hazard rings represent blast
pressure dissipating as it
moves away from the centroid
Exposure at
Risk
Quantify
Hazard
Assess
Vulnerability
Probabilistic
Analysis
HIGH
RESOLUTION
FOOTPRINT
Large Anthrax
release in downtown
Chicago
Better reflects local
environment and
orientation of footprint
Downtown Chicago
Anthrax
Contamination
Highest
Lowest
0 5 10 15 20 2.5
Miles
Exposure at
Risk
Quantify
Hazard
Assess
Vulnerability
Probabilistic
Analysis
Exposure at
Risk
Quantify
Hazard
Assess
Vulnerability
Probabilistic
Analysis
Represent the relationship between level of hazard
and damage
! Effects on property, disruption of services, injury, and
loss of life
! Expressed as mean damage ratio (MDR) or mean
casualty rate (MCR)
! Vulnerability functions by building construction and
height.
VULNERABILITY
OF TERRORIST
ATTACKS
MEAN DAMAGE
RATIO BY
DISTANCE TO
TARGET
Exposure at
Risk
Quantify
Hazard
Assess
Vulnerability
Probabilistic
Analysis
Vulnerability varies
by building
characteristics.

73 100 130 230 400
M
e
a
n

D
a
m
a
g
e

k
a
n
o

(

)

D|stance to Auack Centro|d (meters)
unknown ConsLrucuon / PelghL
8elnforced Masonry - Plgh (8-14)
SLeel SLrucLure - v 1all
unknown ConsLrucuon - 1all
2 1on 8omb Scenarlo
Exposure at
Risk
Quantify
Hazard
Assess
Vulnerability
Probabilistic
Analysis
Standard Fire Policy (SFP): In U.S., many states
require that fire following terrorism be included in
property coverage.

Explicit quantification of fire-related damages is critical
for selected attack modes:
! Bombs
! Aircraft Impact
! Conflagration
! Industrial Sabotage
! Nuclear
FIRE
LOSSES
Mitsubishi Steel and Armament Works
~ 700 meters from hypocenter, Nagasaki
From: www.hiroshima-remembered.com
Terrorist target selection based on maximizing attack
leverage.

Criteria for targets based on:
! Economic Impact
! Symbolic Value / Publicity Value
! Casualties
! Debriefings of Operatives
! Historical Attack Patterns
! Known Planned Attacks
! Intelligence Reports and Expert Opinions
TERRORIST
TARGET
DEVELOPMENT
Exposure at
Risk
Quantify
Hazard
Assess
Vulnerability
Probabilistic
Analysis
Exposure at
Risk
Quantify
Hazard
Assess
Vulnerability
Probabilistic
Analysis
Attack Frequency
" Country Specific
" Plots $ Attacks
" Recalibrated frequently

Conditional Probability. Given that an attack
occurs, what is its likelihood by:
" Type of attack
" Type of target
" City
Attack Multiplicity
" Multiple attacks = One Event


COMPONENTS OF
TERRORISM RATES
TRIA
STRUCTURE
From the Congressional Research Service, April 2013:

TRIA RENEWAL
EFFORTS
Political Challenges
House financial committee
has 46% new membership
since last TRIA renewal.
Aversion to perceived bail
out legislation persists.
TRIA backstop provided
without charge, premium
collected without incident.
Key Support
Strong, united lobby from
banking, insurance, and
construction industries to
promote TRIA renewal.
Renewal proposed 3 times
in congress in 2013, by
members of both parties.
Non-renewal impacts
Moodys downgrades in
2002.
Sunset clauses in 2005:
delayed / halted lending and
construction.
Capacity shortage, large
rate increases.
RMS top five cities for
terrorism risk: New York,
Washington, Chicago, San
Francisco, Los Angeles.
The terrorism threat
gradient is steep: 75%
of AAL is in five metro
areas.
TRIA
CONSIDERATIONS
Los Angeles
San lranclsco
WashlngLon
uC
Chlcago
new ?ork
8esL of u.S.
ropornon of Average Annua| 1error|sm Loss
by Metropo||tan area
0
100,000
200,000
300,000
400,000
300,000
600,000
Winterstorm Terrorism Earthquake
+ Fire
Hurricane Convective
Storm
$

M
i
l
l
i
o
n
s

250 Year
1,000 Year
5,000 Year
Terrorism risk is
comparable
with nat cat risk.
TRIA
CONSIDERATIONS
RMS U.S. Industry Loss Curves by Peril
TRIA
CONSIDERATIONS
Lvent Descr|pnon
1ota| Loss
(58||||ons)
roperty Damage
Loss (58||||ons)
Workers' Comp
Loss (58||||ons)
Iata||nes
Nuc|ear Detonanon,
S k||oton y|e|d, Ch|cago
$330 $323 $207 300,000
Nuc|ear Detonanon ,
1 k||oton y|e|d, Los Ange|es
$230 $163 $67 110,000
Anthrax auack, 7S kg anthrax
s|urry, h||adeph|a
$216 $123 $91 60,000
Nuc|ear ower |ant Sabotage,
I|||no|s
$148 $146 $2 lew
D|rty 8omb, 1S,000 cur|es
ces|um-137, New ork
$127 $127 $0.1 lew
Anthrax auack, 1 kg anthrax
s|urry, h||adeph|a
$44 $26 $18 10,000
Sar|n Gas Auack, 1,000 kg
re|ease, New ork
$17 $12 $3 2,000
NBCR severity makes it difficult to insure
Market Capacity
" Evan Greenberg, CEO ACE Ltd: I wouldnt make
[terrorism cover] available, nor would any other company
that I know of.
Workers Compensation
" Terrorism cannot be excluded
" Residual markets can be >50% more expensive than
private carriers
Commercial Development
" Loan Covenants require terrorism cover
" Moodys: $4.5 billion in mortgage securities downgraded
(2002) due to lack of terrorism insurance.

TRIA RENEWAL:
WHATS AT STAKE
All terrorism writers make assumptions on event frequency.
Assumptions should be based on data.
Probabilistic terrorism modeling allows most comprehensive
view of risk.

Terrorists are rational actors whose targeting selections align with
principals maximizing attack leverage
Best practice: Use multiple approaches to best triangulate terrorism risk
Exposure management
Deterministic scenarios
Probabilistic modeling
Location-level data quality is important due to small event footprints
Terrorism risk is comparable with nat cat risk.
Terrorism risk can be successfully modeled. Insuring it remains difficult.
TAKE AWAYS