Reducing the Risk of Terrorism Insurance

December 10, 2007 By: Cyrena Respini-Irwin

During the past few months, the House, Senate, and Bush administration have been wrangling over how to address an inanimate casualty of terrorism: insurance. At the end of the year — which is approaching rapidly — the previously extended Terrorism Risk Insurance Act will expire.

Enacted after the September 11 attacks, which made property insurers leery of another big hit, the act redistributed the financial burden of terrorism damage to insured properties. Spreading losses among the insurance industry, property owners, and the federal government gave insurers a source of financial backup and renewed confidence.

Whether or not a compromise can be reached by December 31, ensuring the continuation of support by the government, the insurance industry certainly wants to prevent another mega-payout. That means employing every tool available to predict what will happen, where it will take place, and how big an impact it will have.

TerrorRisk, developed by Pitney Bowes MapInfo and Exclusive Analysis, is a risk-assessment model and dataset that provides analysts with location-specific forecasts. TerrorRisk uses metrics to rate the likelihood and severity of violent and political risks for thousands of points of interest, thereby informing underwriting and coverage decisions.

Mike Bookman, practice lead for financial services and investment at Exclusive Analysis, defined TerrorRisk as an intelligence layer that can be placed on different maps on a building-by-building basis. An underwriter can then pull up those maps, he explained, and understand the likely severity of attack on any one of thousands of given targets.

Targets are classified by name, address, and target class, so in addition to individual buildings, users can also assess risk across target types or geographical areas. To determine a score for likely terror targets, Exclusive Analysis draws on patterns of previous attacks, analysis of terror groups' capabilities and activities, and the value of particular buildings.

"It's not just big shiny buildings that are targets of the attack," said Bookman, referring to high-profile sites; unrelated buildings nearby may also be at risk, depending on the type of attack. After learning of an unremarkable site's proximity to a high-risk site, for example, an insurer might choose not to underwrite that risk.

Whether surrounding properties are affected by an attack depends on the size and type of the event, of course. Proprietary modeling predicts the likely severity of an event; even small-scale attacks, on the order of Molotov cocktails and pipe bombs, are taken into account. By the same token, Bookman explained, the actions of domestic organizations — such as radical environmentalist, animal-rights, and anti-abortion groups — are monitored just as those of their larger, international kin are.

At the moment, TerrorRisk is updated quarterly, but it may become a real-time product if customers demand that, said Bookman. Exclusive Analysis already gathers intelligence on a continuous basis from people around the globe, who sort through some 15,000 open sources of information while keeping an eye on local indicators of possible activity.

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