How 9/11 changed the industry’s view of terrorism risk: RMS

Since the 9/11 attacks in 2001, a lot has changed for the insurance industry in terms of how the threat landscape is perceived, how the industry has become more resilient to terrorism risk, and how modelling has come to the forefront of terrorism risk management.

Shruti Deshmukh, product manager of global terrorism and human casualty models at RMS, is the author of a blog post which addresses the changing risk landscape and modelling, and accompanies the RMS whitepaper “ The Lasting Impacts of 9/11 on the Insurance Industry”.

Speaking to the Re/insurance Lounge, Intelligent Insurer’s digital hub for interviews, debates and panel discussions, Deshmukh said that prior to 9/11, terrorism risk coverage was available to anybody but, at the same time, it was inadequately priced.

“The industry witnessed catastrophic losses due to these attacks and that led many insurance companies to actively start excluding terrorism. While that was happening on the supply side, many businesses on the demand side realised they needed terrorism coverage. Overall, there was instability in the industry.”

The US government intervened by creating the Terrorism Risk Insurance Act, a federal backstop for terrorism-related losses.

“This was a great step for insurance companies, but at the same time it wasn’t enough to quantify terrorism risk or manage that risk. People knew that another terrorist attack would not be the same as 9/11. There were also questions regarding the likelihood of another attack, and how severe it would be,” said Deshmukh.

With 9/11 placing terrorism risk at the forefront, regulatory agencies began looking at the risk with greater intensity, and many countries established (or significantly revised) their terrorism risk-sharing mechanisms.

“There was a lot of emphasis on understanding that the industry should have sufficient capital in place when insuring things such as terrorism—or have better mechanisms to diversify that risk,” she added.

Western countries made significant investments in counter-terrorism forces following the attacks, with the aim of making sure that another terrorist event like 9/11 didn’t happen.

But smaller-scale attacks began to replace these larger events. Instead of accumulating a lot of explosives and being under surveillance, terrorists were putting bombs in vehicles and causing loss of life.

“The threat is very much still there, it’s just that the nature of the weapons is now different,” she said, adding that the face of the terrorism risk landscape has changed.

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Best practices

Deshmukh explained that there are multiple ways to manage terrorism, but it’s best to use a combination of mechanisms. The first and most basic step is to “look at the exposure you have in your book” and manage that exposure.

“You try to see where the risk is most accumulated. Is it close to a high-profile building? When it comes to large-scale attacks, terrorists want to make sure they get maximum value from the event, so they tend to focus on targets that will give them name recognition and cause maximum damage,” she explained.

Second, you can use deterministic modelling or scenario modelling. An attack can happen anywhere.

“If you were to assess the situation where a two-tonne bomb attack takes place, which may or may not be near a target, it’s important to judge the severity of the attack on your book—whether you have enough capital in place to withstand it,” she said.

The most interesting and advanced way of modelling, according to Deshmukh, is the probabilistic approach. Here, you consider not only the severity of attacks but also their likelihood.

“While attacks are possible anywhere, not all targets are equally likely to be impacted, and not all attacks are equally likely to happen. A large-scale attack is more likely in a city which is at the forefront of economic activities, rather than in a suburban area or the outskirts where you don’t have a lot of people or damageable components,” she said.

Deshmukh added that the output of these modelled attacks is very similar to those of typical natural catastrophe models, so you obtain “metrics to determine whether you have enough capital in place or whether you need some kind of reinsurance”.

RMS has built its terrorism model on principles such as the idea that not every attack will be like 9/11, and the fact that terrorists will always look for ways to cause maximum damage.

It constantly monitors the threat landscape as it sees it in the world today, so that it can tweak the models and make updates. Constant surveillance is key. For example, while the focus post-9/11 was squarely on the “foreign threat”, more domestic threats were occurring.

“One needs to maintain a balance between foreign and domestic terrorism, and that relationship changes dynamically every year,” Deshmukh said.

On the resurgence of the Taliban in Afghanistan, she noted that this has again put foreign terrorism at the forefront and increased the threat outlook for many countries.

“It shows how dynamic this peril is, and how you have to constantly monitor it to stay ahead in the game, while making sure you’re modelling it correctly.”

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