RMS Unveils Game Theory-Based Terrorism Risk Model

September 19, 2002

Risk Management Solutions (RMS), has launched its U.S. Terrorism Risk model, a model designed to assist property, workers’ compensation, and life insurers and reinsurers in quantifying the risk from catastrophic terrorist attacks.

The model was developed with input from and in collaboration with, experts in terrorism, weapons systems, and security from the U.S. and around the world. Advisors included representatives from the Centre for the Study of Terrorism and Political Violence (CSTPV), University of St. Andrews; Jane’s, a provider of information and consulting services on defense, intelligence and security issues; and RAND Public Safety and Justice. An expert-elicitation with senior U.S. government officials from the CIA-sponsored Homeland Security Forum was also instrumental in development of the model.

RMS announced the launch of the model at a seminar entitled “Understanding and Managing Terrorism Risk” in New York City. During the seminar, moderated by Hemant Shah, president and CEO of RMS, senior members of the development team, including key external advisors, presented the methodology behind the Terrorism Risk model to approximately 250 of RMS’ insurance and reinsurance clients.

At the heart of the model is the application of Game Theory, an approach that suggests that the likelihood, and targets, of a future al-Qaeda attack can be modeled by understanding the operational and behavioral characteristics of the terrorists’ organization.

Dr. Gordon Woo, the RMS mathematician who was the architect of the RMS model, indicated “in a similar way to the flow of water, which seeks the path of least resistance, the flow of al-Qaeda activity is towards weapons and targets that present the lowest technical, logistical, and security barriers to mission success.”

At the same time, “one can safely predict that al-Qaeda will continue to stage spectacular land, sea, and air attacks in the future, especially against symbolic or high-profile targets,” said Dr. Rohan Gunaratna, a Research Fellow at St. Andrews CSTPV and author of “Inside Al Qaeda,” who served as a key advisor to the RMS development effort.

“Game Theory helps us model the implications of the complex dynamics between these conflicting factors,” explained Dr. Woo. “On one hand, we have al-Qaeda’s desire to maximize the Utility of their attacks, and on the other hand, we have to consider their rational response to stepped-up security and counter-intelligence efforts, and the constraints of their technological and logistical capacities. A traditional probabilistic approach, such as used for modeling natural catastrophes, is simply not up to the challenge.”

By modeling these dynamics, RMS is able to recommend that insurers prioritize their risk management initiatives around approximately 1,500 credible targets of a macro-terrorist attack across the United States. These targets represent a mix of specifically identified high-profile structures, facilities and landmarks, and central-business districts of significant cities across the country.

The RMS model considers 16 attack modes on each of the targets, ranging from conventional explosives and “improvised” weapons, to a plausible range of chemical, biological, radiological, and nuclear scenarios. The possibility of swarm attacks, where certain attack modes are launched simultaneously to overwhelm a certain type of target before security has a chance to harden, is but one example of the types of outputs that are generated. In addition to the probability of various attacks, the model estimates the insured losses stemming from property damage, business interruption, and human casualties. It models, at very high resolution, all the principal agents of damage and loss, including blast pressure, airborne and ground based contaminants, and the impact of exclusion zones, for each attack mode.

RMS is advising its clients to use the model as part of a holistic risk management strategy.

“First and foremost, we recommend that our clients build their risk management infrastructure on a foundation of data, data, and more data. Insurers should track their exposures, across all lines of business, location-by-location, and understand and mitigate undue concentration of risk,” said Shah. “In addition, our new terrorism model can add significant value by helping to clarify and quantify the key drivers of risk, and in doing so, guide a variety of underwriting, accumulation management, and risk transfer decisions.”

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