Aon Benfield, the global reinsurance intermediary and capital advisor of Aon Corporation (NYSE:AON), has updated its UK terrorism catastrophe model. The model estimates the financial loss to life insurers from potential terrorist events and helps to satisfy the requirements of the proposed European Union Solvency II regulation, which requires insurers to gain a better understanding of their exposures and consequently their reinsurance buying strategy.
The model simulates attacks on more than 2,000 potential UK targets, including places of worship, financial centres, infrastructure, government and military locations. For each simulated event, it forecasts the consequent impact on an insurer’s exposures which can be used to assess potential financial losses from injuries and deaths.
The model has been developed through a unique collaboration of Impact Forecasting – Aon Benfield’s catastrophe model development centre of excellence – and counter-terrorism experts from Aon Risk Solution’s Crisis Management team, who have provided input on event frequency, credible attack types and damage profiles for various scenarios. The model’s real-world approach highlights:
• The likelihood and probable impact of unconventional attack types – such as chemical, biological and nuclear terrorism – accounts for 2% of modelled scenarios, consistent with the historical record, both globally and in the UK
• Damage impact is calculated by modelling dispersion of chemical and radioactive particles, amongst other effects, in addition to blast and thermal impacts
• An innovative approach assesses the expected effect of state mitigation on frequency in the aftermath of a major attack, in addition to accounting for the dynamic interaction between terrorist groups and prevention agencies.
Adam Podlaha, international head of Impact Forecasting, commented: “Working with ex-military and security professionals with real-life experience of the impact of terror attacks means we have been able to build a model based on a set of practical and realistic scenarios. For example, we have incorporated expert knowledge about the technical complexity of mounting material non-conventional attacks and the relative probability of such events.”
Andy Cox, Group Protection Actuary from Legal and General, added: “We required a model that provided a more experience-based view of UK terrorism risk and would enable us to gain an even better understanding of our Group Life and Income Protection exposures. The advent of Solvency II means this is more important than ever, as we work to embed the modelling process into our firm and make important business decisions based on the results. As we grow our Group Protection business by working in partnership with Aon Benfield, we have been able to access expert opinion and create a model that meets the needs of the industry as a whole.”
Scott Reid, Life Actuary and reinsurance broker at Aon Benfield, said: “Closer examination of terrorism risk is being driven by upcoming European Union regulatory changes. Solvency II has been the catalyst to the further development of our terrorism loss model. Using expert judgment, we help insurers understand their exposures and optimise the transfer of their risks to the reinsurance market.”
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