New Report Addresses Challenge of Modeling Terrorism Risk

March 26, 2002

To address the insurance industry’s growing need to model the risk of terrorism, Guy Carpenter & Company, Inc., has published a research paper entitled “Advanced Techniques for Modeling Terrorism Risk.”

The new study explores the use of game theory in modeling terror risk, a complex process that has some of the same characteristics as the modeling of natural perils like earthquakes and hurricanes, but it is complicated by one critical difference—the human element. Originally presented at a conference on terror sponsored by the National Bureau of Economic Research in Cambridge, Massachusetts earlier this year, the paper is available on the Guy Carpenter Web site at www.guycarp.com or by e-mailing marketing@guycarp.com.

“Storms will not change course after you build a seawall to protect residences on the coast,” John A. Major, ASA, MAAA Senior Vice President at Guy Carpenter and the paper’s author, said. “But a terrorist will change strategies, techniques, and targets, given the defenses put in place by a country. Consequently, terror risk must be modeled using tools that account for both the behavior of terrorists and governments.”

In his research, Major applies some of the tools of game theory, the mathematics of strategy and conflict invented by John Von Neumann and further developed by Nobel Prize winner John Nash, to the analysis of the potential for terrorist attacks.

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