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Volume 27, Issue 1

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October 24, 2013

Difficulty in Modeling for Terrorism

The following is an excerpt from the RIMS executive report “Terrorism Risk Insurance Act: The Commercial Consumer’s Perspective.” The report is available for download here.

For any insurer to operate successfully and avoid going out of business, it must be able to accurately estimate the probability of its losses, the severity of those losses, and then determine the amount of premium that must be charged to cover those losses should they occur. Historical data from past events is used to predict the losses from future events and pric­ing is set accordingly. Even extraordinary events like Hurricane Sandy or the recent tornadoes in Oklahoma, while harder to accurately estimate, can be predicted to a certain degree based on historical data and experi­ence. Terrorism risk, however, differs substantially from these other risks in several different ways.

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http://www.riskmanagementmonitor.com/difficulty-in-modeling-for-terrorism

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