RMS Model Shows Increased Risk of Extreme U.S. Terrorism Losses

September 22, 2005

According to Risk Management Solutions’ fourth annual U.S. Terrorism Risk Model, the risk of extreme terrorism-related events over the next five years, including terrorist attacks using chemical, biological, radiological, and nuclear (CBRN) weapons, has increased. The model, which incorporates the latest and most comprehensive expert views of terrorism risk, shows that while the risk of terrorist activity continues to increase globally, the risk of attack by terrorists on U.S. soil has slightly decreased due to improvements in counter-terrorism security measures.

Of most concern is the possibility of terrorists obtaining and using weapons of mass destruction, such as CBRN weapons. RMS has analyzed the risk of CBRN attacks using new techniques and specialist data. The new model suggests that although the probability of a CBRN attack remains small, biological attacks make up an increasing share of the CBRN risk, likely resulting in more deadly attacks.

RMS’ updated terrorism threat level analysis was developed using an exhaustive study of recent and historical events, along with input from specialists in counter-terrorism intelligence, Jane’s Information Group, and world-leading experts from RAND Corporation, the Centre for the Study of Terrorism and Political Violence at St. Andrew’s University in Scotland, and the International Centre for Political Violence and Terrorism Research in Singapore.

“The improvements in U.S. security are making it harder to carry out big attacks, but as we’ve seen in the attacks in London and Madrid, the terrorists are now using smaller-scale attacks on soft targets to cause civilian casualties,” said Dr. Andrew Coburn, director of terrorism research at RMS. “The threat of a mass-casualty attack by a determined group remains a real possibility.”

The latest view of terrorism risk was presented at an RMS seminar, ‘Terrorism Risk: The Five Year Outlook,’ for 200 insurance industry clients in New York City. In addition to presentations by RMS experts, the agenda featured several guest speakers including Maurice R. Greenberg, chairman & CEO of C.V. Starr & Company, Dr. Bruce Hoffman of RAND, and Gayle Nix, lead partner at Accenture. In his opening remarks, Greenberg called for the federal government to extend TRIA, and proposed a temporary tax holiday on insurance reserves to enable the industry to build the capacity required to provide some terrorism coverage without a government backstop. However, Greenberg said the government must always be the insurer of last resort in the event of a chemical or biological attack.

RMS has released a position paper, “A Risk-Based Rationale for Extending the Terrorism Risk Insurance Act,” which applies analysis using the RMS terrorism model to the debate on extending TRIA. RMS concludes that TRIA offers protection in the case of extreme losses that could threaten the solvency of the industry. It provides the insurance industry with solvency, not subsidy, and in doing so enables the conduct of a viable market for the provision of terrorism insurance.

“RMS has contributed to the TRIA debate from its inception, and was a co-founder of the RAND Center for Terrorism Risk Management Policy, which has produced research reports on the issues,” commented Hemant Shah, CEO and president of RMS. “Our modeling shows that terrorism risk continues to pose a set of unique challenges to the U.S. insurance industry, making it highly likely that a large majority of insurers will quit the market for terrorism insurance without TRIA in place. TRIA has achieved many of its objectives, but its expiration on December 31 will not lead to sustainable private market sector for terrorism insurance. We have set out a risk-based rationale for its extension.”

The RMS publication ‘A Risk-Based Rationale for Extending the Terrorism Risk Insurance Act’ is available on www.rms.com.

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