Given the robust counter-terrorism efforts in the West, RMS says the annual volatility in terrorism losses involving conventional weapons “is actually lower than for natural hazards.”

RMS explains the probability of multiple severe nat cat events occurring in a single year is “highly uncertain,” whereas “the possibility of a wave of successful terrorist attacks against the U.S. homeland in a single year is extremely remote” due to the counter-terrorism response that would follow any successful attack.

The white paper frequently compares and contrasts terrorism risk and natural catastrophes. On one hand, RMS says the financial risk of terrorism is comparable to that of nat cats, noting that return periods commonly used in the reinsurance industry for severe winter storms and convective storms, such as 1-in100, 250 and 500 years, can also apply to terrorism. “At longer return periods, financial impacts can be comparable with earthquakes and hurricanes,” RMS explains.

But the terrorism and nat cats differ when looking at a given level of risk with respect to rare events with extremely high severity. “Many natural catastrophes occur with relatively high frequency, the range of possible damages are better understood and insurance companies can more accurately underwrite their loss potential,” RMS says. “Successful large-scale terrorist attacks, however, are events that may only occur once a generation or less.”

The most severe attacks, involving nuclear, chemical biological or radiological attacks (NCBR), “may cause hundreds of billions of dollars of damage, but have an extremely low frequency attached.

Additionally, RMS notes that a nat cat will occur over a widespread area. During Hurricane Katrina, for example, every county in Mississippi and Louisiana, 22 counties in Alabama and 11 in Florida were declared federal disaster areas. During a terrorist attack, the damage is concentrated and may be measured in square yards.

Chris Folkman, terrorism risk expert at RMS, tells PC360 that, because it can be modeled, terrorism can, in fact, be effectively priced, and he says a number of carriers are effectively modeling and profitably insuring terrorism risk today.

Still, though, he says, “There is a high uncertainty regarding certain types of terrorist attacks,” and he mentions NCBR attacks as an example.

Regarding conventional attacks—bomb attacks—Folkman says the range of damage is much better understood, and RMS has been able to validate its models against historical explosions.

On the larger TRIA debate, Folkman says RMS' role is to “quantify risk as best as we can. We don't hold opinion for or against” an extension.

He notes though that many industry members have stated they would be hesitant to offer terrorism coverage without the backstop.

Models give insurers a good understanding of the risk he says, but some insurers feel the magnitude of some types of attacks could bankrupt the industry.