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Game Theory and Terrorism Risk
The following article, written for Lloyd's by Dr. Gordon Woo,
catastrophe research consultant for RMS,
was first published in July 2002.
'It is a feature of a democracy that a security service will
follow a new security threat than foreseeing
it'. This candid declaration appears in the autobiography of
Stella Rimington, former director-general
of the British Intelligence Service MI5. In 1969, the first year
of her career at MI5, she admits there
was very little intelligence, and practically no sources of
information about the resurgence of the IRA.
In 1996, the last year of her career at MI5, Afghan waiters in
London were openly soliciting American
signatories for flight training in USA. With counter-terrorism
intelligence services in western
democracies struggling to identify new security threats, how can
insurers come to terms with
terrorism risk?
Insurers are accustomed to covering earthquake risks, even if
some seismic threats remain to be
identified.
Just as with natural perils, the objectives of civic authorities
and insurers differ in respect of riskassessment. Being responsible
primarily for public safety, civic authorities endeavour to warn
against
specific imminent hazard events. Insurers, on the other hand,
seek to quantify the risk not over days,
but over a number of months. Suppose that the time and location
of a major al-Qaeda attack were
decided randomly, such as by the throw of dice. This knowledge
would be very instructive for insurers,
even though the lack of predictive power on timing would
frustrate the deployment of security forces.
In fact, it is known that there is a significant random, partly
serendipitous, element in an al-Qaeda
attack; not without some reason can the outcome be declared an
act of God.
From the mathematical perspective of game theory, popularized in
the Oscar-winning movie A
Beautiful Mind, the incorporation of a purely chance component
into operational decision-making is a
virtue: randomizing the choice between alternative strategies
helps throw your opponent off balance.If Osama bin Laden tossed a
coin in a cave to decide on which of two cities to target, no
amount of
satellite intelligence would clarify the choice. The larger the
random component the bigger the task
for the over-stretched security forces. However, for insurers
with well-diversified books of terrorism
business, this aleatory component in terrorism risk would lend
support to the optimistic view that,
with a sufficient measure of skill and expertise, this is a
class of risk that can be successfully
underwritten.
Given the importance of geographical diversification, it is
essential for underwriters to track excessive
concentrations of urban exposure. Databases of potential
commercial, industrial, military, government
and diplomatic targets are being assembled allowing underwriters
to map their terrorism exposures
using geographical information systems.Even with well separated
urban exposures, the prospect of synchronized al-Qaeda attacks
across a
continent encourages prudence in PML assignments. The launching
of synchronized attacks is an al-
Qaeda hallmark; one designed to maximize the impact of new modes
of terrorism. Recognizing that
the level of defence against a new attack mode would inevitably
rise after the first such attack, the
maximum blow would be struck by aiming for a number of targets
at about the same time.
Sensitivity to target hardness is reflected more broadly in the
choice of specific al-Qaeda targets.
Diligence and patience in target selection greatly improves the
likelihood of mission success. With
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equal purposefulness, the virtues of diligence and patience
might usefully be exercised by
underwriters in selecting the more secure targets. Security is
to terrorism what vulnerability is to
earthquakes. If two parts of a building are constructed to
different seismic standards, the lower
standard construction is more likely to be damaged in an
earthquake. Similarly, if two gates to a
building have different levels of security protection, the gate
with lower security is more likely to be
infiltrated by terrorists.
'It is the duty of Muslims to prepare as much force as possible
to attack the enemies of God.' Through
stark statements such as this, Osama bin Laden gave public
notice that, once al-Qaeda had access to
weapons of mass destruction, it would not hesitate to use them.
With any complex weapon system,
there is a cost/effectiveness curve to climb before any attack
in earnest can be made with a realistic
prospect of success.
