Looming Expiration of TRIEA Raises Concerns

Following the terrorist attacks of 9/11, in which hijackers destroyed prime office space in the World Trade Center in New York, putting other high-profile properties on an at-risk list, the availability of insurance for commercial real estate properties became an issue. Insurance against terrorist acts, which used to be part of all-risk insurance, became available on a standalone basis at a much higher cost as insurers adapted to the new environment. Servicers had to resort to force-placing the terrorism insurance in a few cases, as borrowers balked at getting the insurance.

Against this backdrop, the government enacted the Terrorism Risk Insurance Act of 2002 which provided for a government backstop after the insurance industry covered a part of the loss from any terrorist attack. This gave insurers a framework for pricing the insurance - since they had a better idea about their potential liabilities in the event of an attack - and made the insurance more widely available. TRIA was initially slated to expire in 2005 and was at that time extended for another two years as TRIEA. The extended form of the act is slated to expire this year.

According to witnesses at a recent government hearing on the subject in Downtown New York - the site of the 9/11 attacks - there is a need to extend TRIEA and also to add coverage for nuclear, biological, chemical and radiological exposures. The government is committed to extending the federal terrorism insurance backstop this year, with some specific reforms, Deborah Pryce, a Republican member on the House Financial Services Committee said (the hearing was convened by the House Financial Services Subcommittee on Capital Markets).

This is an issue, not only for New York but for the whole country, noted Sen. Charles Schumer, D-N.Y., asking for the backstop to be extended for at least 15 years, if not permanently. "We still live in the shadow of 9/11 and it is natural for insurance companies to measure risk and decide how much insurance to provide," he said. He recommended that the government "bite the bullet" and make an extension for the long-term that includes provisions for nuclear, biological, chemical and radiological attacks. As well, there should be a provision that ensures that there is sufficient insurance for "dense areas" that need a lot of coverage, such as New York.

New York Mayor Michael Bloomberg said that even though a lot of people predicted the worst for the city after 9/11, the city is facing its future with confidence and is now experiencing one of the biggest construction booms since the end of World War II. The government backstop provided by TRIA has also helped. If insurers can't price the risk, they won't provide insurance or only provide it at high costs, he stressed.

And he wants the extension to address two issues. It needs to eliminate the distinction between domestic and international terrorism, which is difficult to make in today's global economy, and it should incorporate coverage for nuclear and other forms of attacks.

Roger Ferguson, chairman, Swiss Re America, said that terrorism risk is "largely uninsurable" and that absent a backstop terrorism insurance may become unavailable in large urban areas with the greatest need, due to adverse selection.

Donald Bailey, CEO of insurance broker Willis, noted that the possibility of another terrorism attack is a matter of when and not if. Calling the TRIA program an "unqualified success in stabilizing markets," he added that there is not enough capacity in the private market to cover such risks. He concluded that TRIA is "not about protecting the balance sheets of insurers and brokers," but a matter of national economic security.

Stephen Green, CEO, SL Green Realty Corp., noted that terrorism continues to be an unpredictable risk and that the threat will remain for years to come. In some markets, borrowers still can't get the levels of insurance required by their mortgages, according to him.

Noting that five-and-a-half years after 9/11, terrorism reinsurance availability remains an issue, Warren Heck, president and CEO, Greater New York Mutual Insurance Co., added that terrorism is "a classic uninsurable risk." He believes that in the absence of a federal backstop, the commercial real estate industry could find itself in a post-9/11 situation again.

Steven K. Graves, COO, Principal REI, believes that a lack of available and affordable terrorism insurance will not only impact commercial real estate finance but will also have a ripple effect through the economy considering that there is over $2.8 trillion in commercial mortgages outstanding. (c) 2007 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com