Copyright © 2017 Risk Management Solutions, Inc. All Rights Reserved. August 1, 2017 1

INSURANCE LINKED SECURITIES 

FOR TERRORISM:

A RISK MODELING PERSPECTIVE 

Maria Paul

Director, Product Management

Risk Management Solutions, Inc

maria.paul@rms.com

A presentation to:

Advisory Committee on Risk-Sharing Mechanisms

July 28, 2017
Copyright © 2017 Risk Management Solutions, Inc. All Rights Reserved. August 1, 2017 2

DISCUSSION TOPICS

 Key Principles of Terrorism Risk Modeling – Insights into Frequency of 

Successful Attacks

 Terrorism Risk Transfer to the Capital Markets - Industry Challenges and 

Opportunities
Copyright © 2017 Risk Management Solutions, Inc. All Rights Reserved. August 1, 2017 3

TERRORISM INSURANCE IS EFFECTIVELY INSURANCE 

AGAINST THE FAILURE OF COUNTER-TERRORISM

The Five Eyes Alliance (USA, UK, Canada, Australia & New Zealand) has 

an annual intelligence budget of $100 billion

The unfunded cost of the U.S. West Coast earthquake early warning system 

is ~$15 million

To justify this huge intelligence budget, major terrorist plots need to be 

interdicted

Since 9/11, ALL major terrorist plots against the Five Eyes Alliance that 

might have caused catastrophic loss have been interdicted
Copyright © 2017 Risk Management Solutions, Inc. All Rights Reserved. August 1, 2017 4

RMS Modeled Frequency considers:

 Number of Plots/Year

 Likelihood of Evading Interdiction

 Likelihood of Avoiding Technical Difficulty

COUNTERFACTUAL ANALYSIS MATTERS

In countries with effective counter-terrorism efforts, terrorist can not attack at will, and 

this explains why there have been so few terrorist plots that have evaded interdiction in 

the western alliance since 9/11 

A counterfactual analysis of plots in the 15 year post-9/11 shows that the 

counterfactual frequency has been close to the RMS modeled frequency of 

about one-half
Copyright © 2017 Risk Management Solutions, Inc. All Rights Reserved. August 1, 2017 5

TOO MANY TERRORISTS SPOIL THE PLOT

Cell Size 1 2 3 4 5 6 7 8 9 10

Plot

Interdiction

Probability

0.26 0.46 0.60 0.70 0.78 0.84 0.88 0.91 0.93 0.95

‘For a large operation against the US, pick a number of brothers not 

to exceed ten...’

Osama bin Laden

Abottabad Pakistan
Copyright © 2017 Risk Management Solutions, Inc. All Rights Reserved. August 1, 2017 6

TERRORISTS FOLLOW THE PATH OF LEAST RESISTANCE 

IN WEAPONRY 

Since 9/11, all the successful terrorist attacks against 

the Western Alliance have involved improvised or light 

military weapons. 

Nice

July 14, 2016

Manchester

May 22, 2017

Paris

January 7, 2015
Copyright © 2017 Risk Management Solutions, Inc. All Rights Reserved. August 1, 2017 7

TERRORISM IS THE LANGUAGE OF BEING NOTICED 

Madrid 2004 London 2005 Boston 2013

Paris 2015 Nice 2015 Berlin 2016 London 2017

Each of these 

successful

attacks achieved

very high leverage

= impact / input
Copyright © 2017 Risk Management Solutions, Inc. All Rights Reserved. August 1, 2017 8

A SUICIDE BOMBER CAN ONLY DIE ONCE

Terrorist targeting is selected to be optimal based on:

 Ease of execution, given prevailing security 

measures

 Alignment with Jihadi objectives

 Impact (loss, media publicity, etc)

Salman 

Abedi

Died at the Manchester Arena 

on May 22, 2017 
Copyright © 2016 Risk Management Solutions, Inc. All Rights Reserved. Copyright © 2017 Risk Management Solutions, Inc. All Rights Reserved. Copyright © 2017 Risk Management Solutions, Inc. All Rights Reserved. August 1, 2017 9

GIVEN THE INCREASED 

CONFIDENCE IN ASSESSING 

TERRORISM RISK, WHY HAVE 

WE NOT SEEN MORE CAPITAL 

MARKET TRANSACTIONS?
Copyright © 2017 Risk Management Solutions, Inc. All Rights Reserved. August 1, 2017 10

CHALLENGES OF TERRORISM ILS RISK TRANSFER

 Current State of the Market

– Increase in stand-alone coverage driven by affordable pricing and flexible 

coverage (40+ major insurers providing $3-4B in capacity)

– Cost of ILS expensive relative to traditional re(insurance)

– Trend toward casualty and liability losses from recent global events

– Impact of TRIPRA

 Market apprehension and concern about the future prospect for catastrophic 

terrorist attacks and government involvement
Copyright © 2017 Risk Management Solutions, Inc. All Rights Reserved. August 1, 2017 11

RMS TERRORISM RISK ANALYSIS TO SUPPORT ILS

 RMS undertook the risk analysis for the first and only stand-alone terrorism 

catastrophe bond: Golden Goal Finance Ltd. (FIFA) in 2003

 Terrorism exposed catastrophe bonds and collateralized reinsurance

 Excess Mortality catastrophe bonds with terrorism risk exposure

Year Sponsor (deal name) Coverage Rating

2015 Swiss Re (Vita Capital VI) Australia, Canada, UK Rated by S&P

2015 AXA Global Life (Benu Capital Limited) US, France, Japan Rated by S&P

2013 SCOR Global Life (Atlas IX Capital) US Rated by S&P

2012 Swiss Re (Mythen Re Series II) UK Rated by S&P

2012 Swiss Re (Vita Capital V Series I) Australia, Canada, US Rated by S&P

2011 Swiss Re (Vita Capital IV Series V & VI) Canada, Germany, UK, US Rated by S&P

2010 Swiss Re (Vita Capital IV Series III & IV) Canada, Germany, Japan, US Rated by S&P

2009/10 Swiss Re (Vita Capital IV Series I & II) UK, US Rated by S&P
Copyright © 2017 Risk Management Solutions, Inc. All Rights Reserved. August 1, 2017 12

PROSPECT OF TERRORISM ILS RISK TRANSFER

 15 years of experience gives confidence in the ability to understand and model 

terrorism risk and account for the effectiveness of counter-terrorism efforts

 Increased demand for products such as CBRN coverage and extended business 

interruption loss (e.g. loss of attraction) 

 Future of TRIPRA – restructure could cause a reduction in market capacity which 

would increase price and make ILS more attractive

 Possible triggering events include

• Large conventional terrorist attacks (excluding CBRN)

• Complex terrorist attacks involving many active operatives

• Attacks that cause hundreds of fatalities

• Attacks that cause catastrophic levels of business interruption

• Certain buildings in high risk areas like NYC
Copyright © 2017 Risk Management Solutions, Inc. All Rights Reserved. August 1, 2017 13

CONCLUSIONS

 The availability of data on terrorist attacks, plots, and threat groups has led to 

increased confidence in using risk models to assess the potential loss and 

frequency associated with catastrophic terrorism attacks, and companies charge 

premiums to cover the expected loss

 Continued proficiency of counter-terrorism action provides a solid security 

platform for future development of the terrorism insurance market and ILS 

transactions

 RMS’ view that ILS provides a good opportunity to increase private market 

participation, fill the coverage gap, and potentially play a role in reshaping 

government participation 

 RMS has seen an interest from ILS in understanding the dimensions of terrorism 

risk and leveraging that into opportunities
Copyright © 2016 Risk Management Solutions, Inc. All Rights Reserved. Copyright © 2017 Risk Management Solutions, Inc. All Rights Reserved. Copyright © 2017 Risk Management Solutions, Inc. All Rights Reserved. August 1, 2017 14

THANK YOU