The September 11, 2001 attack on the World Trade Center in New York revealed that insurance companies are heavily exposed to potential catastrophic losses from man-made perils, as well as from natural ones. With combined losses estimated between $30 and $50 billion, the attack also showed that large losses could be simultaneously sustained across multiple lines of business, including commercial property, workers compensation, life, health, disability, aircraft hull, and general liability.
Catastrophe modelers are well equipped to generate stochastic catalogs of potential future natural catastrophes, such as earthquakes, hurricanes or tornadoes. The relative abundance of historical data allows modelers to estimate, with a considerable degree of confidence, the frequency, spatial distribution and likely severity of future events.
Historical data on terrorist attacks, however, is significantly more limited due to the fortunate rarity of such events—and what data do exist may not be representative of the current threat. Furthermore, unlike earthquakes and other natural disasters, whose occurrence has a physical basis that can be understood by the scientists who study them, terrorist attacks are a function of the malicious intent of groups of individuals of varying size and with varying agendas. The uncertainty surrounding the frequency, location and severity of future terrorist activity is therefore much higher than for natural catastrophes.
There are several aspects to estimating event frequency and intensity: the number of attacks per year, the target type, the weapon/attack type, and the specific target of each potential attack. Each of these issues depends in part on the nature of the group originating the attack. Critical to the frequency and severity estimates is an understanding of the likely terrorist group actions in the context of the current state of security countermeasures.
The AIR terrorism model employs the Delphi Method, a structured process to capture and statistically combine the opinions of a team of terrorism experts with operational experience in counterterrorism at the highest levels, and familiar with both the historical data and with current trends.