Magazine article Risk Management

Improving Terrorism Damage Modeling

Magazine article Risk Management

Improving Terrorism Damage Modeling

Article excerpt

With an average take-up rate of more than 60% across sectors like travel, finance, education, construction, real estate and manufacturing, the availability of affordable terrorism insurance has a significant effect on business. For example, according to Manhattan-based developer Douglas Durst, "The building I'm in right now, 1 Bryant Park, would never have been built without TRIA. Private insurers might have provided some terrorism coverage for top dollar, but not nearly enough to ensure the financing of a $2.5 billion building."

As with any insurance product, better information leads to more precise rate calculations. Where a large catalog of empirical claims data exists, such as with commercial fire or wind policies, uncertainties can be minimized and rates established with reliability and greater confidence. But where minimal empirical data is available, as with terrorism, rate-setting is much more uncertain and policies often become unaffordable without a loss-capping mechanism such as TRIA.

When it comes to blast threats, portfolio explosion modeling products currently used by insurers are often based on mean damage functions that only approximate the impacts on average building classes--they do not account for the specific characteristics of threat placement and building construction. For many years, however, specialty structural and physical security engineering firms have been developing and implementing sophisticated tools for modeling building damage caused by threats such as personnel- and vehicle-borne improvised explosive devices (IEDs). These tools often employ complex finite element and computational fluid dynamics mathematics to calculate pressures on facades and structural elements of a building. The U.S. Department of State, the Department of Defense and the FBI are just some of the agencies that employ these experts to help design their facilities.

These firms are now developing models that provide property owners, brokers and underwriters with better information for making actuarially sound decisions on terrorism insurance pricing and purchasing. These products provide a high-level estimate of building damage caused by accidental or terrorism-related explosions, and can be a starting point for a more detailed evaluation of threats, exposure and vulnerability.

Designed to function much like the products developed by catastrophe modelers to calculate earthquake or hurricane risk, explosion damage models can pair the primary characteristics of a building--dimensions, age, occupancy, construction and height--with an estimate of the size and location of different explosive threats to develop building damage functions. …

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