Applications are available that enable insurers to examine portfolio locations in relation to potential terrorist targets and perform analyses ranging from single building exposure accumulations to portfolio-level probabilistic loss analyses.

These tools and techniques can be used to create a clear picture of a company's overall exposure to risk across their portfolio and are an essential component of a company's overall risk assessment strategy.

To begin, terrorism risk assessment techniques fall into three broad categories:

o Risk within a defined geography.

o Risk in relation to known landmarks or trophy targets.

o Probability distributions of losses that account for the likelihood of attack.

Since most insurers are familiar with geography-based accumulation methods, this article will discuss the benefits of landmark-based and probabilistic analyses.

Terrorists choose attack locations to further their objectives, which can include maximizing economic disruption, causing mass casualties, and disrupting transport of resources or individuals. One of the critical components of effective terrorism risk management, therefore, is knowing the locations of your exposures with respect to potential terrorist targets.

In August 2004, the CIA received intelligence pointing to a strong likelihood of attack on five buildings in the New York City and Washington, D.C. areas, prompting the government to declare a Code Red terror alert for those locations. While many insurers had a difficult time identifying their exposures in relation to these potential targets, those companies that had already captured and analyzed their exposure in relation to a comprehensive list of landmarks were well prepared.

Catastrophe models can help insurers perform these kinds of analyses. AIR Worldwide's terrorism Landmark Database, for example, includes more than 300,000 potential targets. It distinguishes a subset of more than 25,000 targets with a higher than average probability of attack, plus a smaller list of “trophy targets.”

The database corresponds closely to critical infrastructure. Key assets identified by the Department of Homeland Security comprise more than 25 categories of targets, including prominent office buildings, transportation hubs, tourist attractions, energy facilities, and many more. To identify and quantify exposure based on potential targets, insurers should undertake these three analyses:

o Landmark Exposure Analysis:

A landmark exposure analysis identifies insured exposure at properties tagged as potential terrorist targets. The results of this type of analysis provide a ranked list that identifies the landmarks with the highest exposure, representing the worst-case scenarios for possible targets.

This analysis can be performed for specific landmark categories–such as prominent buildings or subway stations–or across multiple landmark categories.

o Landmark Ring Concentration:

Since exposures in close proximity to the landmark will likely be impacted by an attack, the accumulation of exposure in rings around the landmark is a useful measure of maximum potential loss. This measure is limited in that it considers all exposures within the specified ring at their full exposure amount even though buildings (and occupants) at some distance might only be minimally affected, while ignoring all exposures outside the ring.

o Landmark-based Deterministic Scenarios:

A more precise measure of risk can be obtained by estimating the loss from a defined scenario, such as a truck bomb detonated at a particular location. Using a physical damage and injury model, property damage as well as injuries and fatalities can be estimated at each location affected.

The resulting losses account for weapon characteristics, as well as the construction type and distance of each exposure from the event location. The estimate also includes the costs of all injury classes, from minor to fatality, and is not constrained to a single dollar value per exposed life. Deterministic loss analyses can be performed for conventional as well as chemical, biological, radiological and nuclear attacks.

Deterministic scenarios should be analyzed for all landmarks in proximity to the exposures in the portfolio using various weapons types.

In addition to measuring terrorism risk in relation to landmarks, another important terrorism risk management metric is probabilistic loss analysis. This is the standard risk management approach for natural disaster modeling, which considers both the frequency and severity of events.

For terrorism, event frequencies are determined through detailed analyses of the favored methods and known objectives of terrorist organizations. Based on a comprehensive set of possible events, the analysis results provide an indication of loss potential at various levels of probability.

In a probabilistic model, as in deterministic event scenarios, the model should calculate–for each defined event–damage to all affected properties and injuries to the insured individuals, and the costs of each after application of policy conditions. Probabilistic models simulate the occurrence of events over thousands of simulated years, providing thousands of versions of what might happen next year.

While the government has provided insurers with an additional two years of protection under the TRIA extension, the risk for insurers will increase each year. Therefore, it is essential that insurers begin to reevaluate their own terrorism risk assessment strategies with respect to industry best practices.