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.
More than 13 years after the Terrorist Attacks of September 11, 2001, resulted in the loss of almost 3,000 lives and approximately $44 billion in insured losses (in 2014 dollars), the Terrorism Risk Insurance Act (TRIA) was reauthorized this year for a third time. Despite an initial delay by Congress, this latest reauthorization underlines the continued need for the federal backstop, and the structural changes made to the program as a result of the Terrorism Risk Insurance Program Reauthorization Act of 2015 must be considered as risk managers look to secure terrorism coverage going forward. Read more in “How TRIA’s Reauthorization Impacts Terrorism Coverage,” also from the June 2015 issue of Risk Management.
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 façades 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. The models can be expanded to provide more detailed risk estimates with additional information on the building construction and valuation. If combined with an actuarial estimation of the likelihood of various threats, this methodology can be used to create an exceedance probability curve for loss estimation and rate-setting. This is useful for owners seeking custom information on explosion-related threats and for underwriters developing private insurance placements.
The process begins with a site review to identify standoff distances from the building perimeter based on the possible threat size presented by a variety of improvised explosive device delivery methods, as recommended by the Department of Homeland Security. These range from small pipe bombs to explosive-laden cars, vans or semi-trailer trucks.
This information can then determine the appropriate exclusion zones (areas where personnel and vehicles should not be permitted) and, once the site and threat characteristics are estimated, the building’s geometry can be modeled with 3D programs such as Google Earth, Revit or Sketchup. Given primary characteristics such as age, height, structural system and façade type, damage to the building can then be estimated as a function of threat size.
Using standard industry methodologies, experts can develop estimates of building repair costs. The models calculate damage based on the threat type, and calculate thresholds at which the façade, roof or entire building will be considered a total loss requiring complete replacement. Such damage functions provide key information for underwriters and brokers when pricing policies for individual buildings or portfolios. They can also be extended to estimate workers compensation, fatality and disability risks with more accuracy.
For building owners, this information can then be used to enhance risk management even beyond the purchase of terrorism insurance, allowing them to carefully consider the risks of explosion and other intentional hazards in their site, design, operations and emergency management plans. County, state and infrastructure risk managers can also use these models and technologies to develop more resilient courthouses, airports, bridges and other key structures to protect people, property and businesses from terrorist threats.