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The Actuary The magazine of the Institute & Faculty of Actuaries

AonBenfield refines UK terrorism model for Solvency II usage

The firm says the model estimates the financial loss to life insurers from potential terrorist events and helps insurers to gain a better understanding of their exposures, which in turn informs 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 in collaboration with Impact Forecasting - Aon Benfield's catastrophe model development centre - and counter-terrorism specialists from Aon Risk Solution's Crisis Management team.

The model's real-world approach looks at:
• The likelihood and probable impact of unconventional attack types - such as chemical, biological and nuclear terrorism
• Damage impact calculated by modelling dispersion of chemical and radioactive particles, amongst other effects, in addition to blast and thermal impacts
• 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.

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."

Andy Cox, group protection actuary from Legal and General, said: "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."