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Estimating Terrorism Risk is a Hard Nut to Crack

Evaluating terrorism risk for insurance underwriting sounds like a mission impossible. In 2017 alone, the world has recorded several mind-blowing terrorist attacks. While terrorism is becoming a recurring threat, historical experience is highly essential in the assessment of terrorism risk for property insurance—this poses a critical challenge to having an accurate estimate of the anticipated loss. This is because most terrorists are more concerned about causing major causalities than property damage; since the former gives them the media attention which they crave at all cost. This accounts for few terrorist attacks with severe property damages.
Earlier in May this year, RMS featured a Terrorism Risk workshop in New York; an event which lasted for over half day. RMS had a robust program which featured both external and internal resource persons. The seminar has six different sessions; most important of which was terrorism risk modeling. Terrorism risks, unlike its natural counterparts, are inspired by humans and not science-based. Modeling terrorism deals particularly with attempting to foretell human behavior. In 2002, RMS launched their first terrorism concept. Gordon Woo, The brain behind the model, gave a lecture about the philosophies backing the predictable terrorism modeling.
Apparently, because they crave media attention, the terrorists strike at renowned world locations where they will record the highest possible casualties. Dr. Woo strongly argues against the "Heartland Model" which postulates that terrorist can strike at any place—small town, and anywhere—making people conscious of the fact that an attack can happen anywhere. In modeling terrorism, however, terrorism risks are allocated based on the population and popularity of the location.
Following the September 11 (9/11) attack, the “Five Eyes;” an alliance comprising the United States’ Government and four allies have, so far, spent billions of dollars annually in counter-terrorism. While a defined estimate may be difficult to arrive at, some experts reveal that the US spends an estimated $100 billion annually on the fight against terrorism. After the famous 9/11 attack, there have been successful attacks executed by either a single wolf or a pair. Examples of such attacks are 2016 Nice cargo truck attack carried out by a lone driver, and the 2013 marathon bombing in Boston by two brothers. When more people are involved in terrorism plot, the chances of being discovered increases through communication surveillance; hence organized small-scale plots are more likely to be successful.
Terrorism insurance offers protection against the inefficiency of counter-terrorism. Due to the significant increase in counter-terrorism after 9/11 attack, the rate of reoccurrence and severity of loss recorded from terrorist attacks have dwindled remarkably.
Since terrorism is a premeditated act influenced by humans, the threats are dynamic and based on the sociopolitical environment. Underwriters, therefore, employ historical experience to assess probable losses. However, because of the non-static nature of the terrorism landscape, we cannot simply predict the future from past indicators. It is imperative to brainstorm on how these terrorists will act in the future, and the counter-terrorism measures countries across the globe will put in place to predict likely locations and severity of future losses.