Up until September 10, 2001, standalone terrorism insurance didn’t really exist. But after those horrific events, a new market emerged.
Chris Folkman, RMS senior director of product management, whose company creates risk models for terrorism, among other modelling, said the insurance industry was never the same after the September 11 terrorist attacks on US soil.
It’s a market that evolved rapidly after the Twin Towers fell – a moment that instantly changed Western terrorism risk.
“Terrorism was not excluded from commercial property coverage before [9/11],” Folkman explained. “It was just this silent coverage. All policies included. It wasn’t that big of a deal, it didn’t keep underwriters up at night. But after 2001, everything changed.
“In very short order, insurers said it [terrorism] is now excluded from our property insurance coverage. That’s what gave rise to this standalone market for terrorism insurance.”
There is about $4 billion worth of capacity in the standalone market in the United States, per potential event, Folkman said, and around the globe there are about 40 writers.
“So it’s a pretty active market where the capacity is adequate – unlike 2001, where there was this enormous shortfall of capacity willing to write terrorism risk, and that’s where the US Government – and many other governments, the UK and France, and others – had to actually step in with backstops. Today there’s a lot more capital in the market,” he said.
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So, who is using terrorism models today? Folkman said it’s insurers, reinsurers, financial institutions, government agencies, non-profits – “all of the stakeholders in the terrorism insurance market.”
“In the US, around 60% of business owners buy terrorism insurance, so there’s a fairly robust market for it,” he said.
“[They] use our models in a couple of different ways. At the end of the day what they’re trying to do is quantify the risk of loss. On a probabilistic basis, they’re looking for ‘return period loss’ … that’s how people manage their loss reserves and determine pricing, stuff like that. The next way they use our models is by measuring accumulations of risk: how much risk do I have accumulated within a 400-metre radius in urban areas of high terrorism risk? And that was something insurers were mot ‘minding the house’ about as much as they could have been, at the time of the September 11 attacks, particularly with regards to human exposure.”
The policies cover events “characterized as low frequency but very, very high severity,” Folkman said.
“What we model are very large scale attacks of terrorism: from car bombs to chemical or biological types of attacks – the types of terrorism that can materially affect the balance sheets of insurers and reinsurers,” he explained. “The smaller attacks, like the small-arms attacks and stabbings, a lot of the stuff we hear about every day, certainly cause human loss of life, but in terms of insurance loss, it’s not always material.
“We’re certainly not in the business of predicting catastrophic acts. We’re simulating physical phenomenon.”
The modelling will pinpoint a GPS location of a building, for example, and then simulate a variety of attacks on potential high-risk locations nearby to determine a client’s risk.
“From bombings and aircraft impact … to radiological and nuclear attacks: it’s modelling thousands and thousands of different types of attacks,” Folkman said.
From there, it’s the insurer’s task to qualify that risk into a policy.
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