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Marketplace Cost and Acceptance of Terror Insurance Still Uncertain

A Feb. 26 deadline for insurers to offer terrorism insurance coverage, on insurance policies in effect before the Terrorism Risk Insurance Act was passed last November, has gone by without much change in the status quo. A clear pricing strategy has not emerged from insurers. And mortgage servicers and lenders are still largely in the dark about the response of borrowers, who have a 30-day time period to respond to insurers about whether they are going to accept or decline the coverage. And if borrowers choose to decline the coverage, the issue of force placed terrorism insurance might not die out.

Providing further interpretation of the TRIA, the Department of the Treasury has issued an interim final rule and has set up a March 31 deadline for interested parties to comment on the rule. The Mortgage Bankers Association is meeting with Peter Fisher, the undersecretary of the Treasury, to discuss some issues relating to the modified rule. Gail Davis Cardwell, the MBA's senior vice president, commercial/multifamily, said that a primary concern for the trade association remains a lack of notification to lenders and servicers when insurers price and offer the terrorism coverage to borrowers. Ms. Cardwell said, "What has transpired given the lack of notification is that servicers of loans that are currently on the books, where the borrowers are receiving the quotes, have had to contact the borrowers to get what the rate quotes are on each of the individual loans." Also, the Treasury has to submit a study on June 30, 2005 about the effect of the TRIA legislation and its impact in meeting the needs of the industry. If mortgage lenders received the notification, she said, they could help provide the economic data to the Treasury.

Another issue for the MBA relates to expedited decision-making by the Treasury as to what constitutes a domestic act of terrorism, which is not covered under the TRIA vs. a foreign act. Ms. Cardwell said, "Our concern is that, in the meantime, the loan has to be paid. And what is the course of action of the servicer? Do they then have to advance principal and interest payments in the meantime of that determination." This is something else that will be brought up at the MBA's meeting with the Treasury.

And insurers' pricing strategy on terrorism insurance is still not clear, although some guidelines have been proposed. For instance, the American Association of Insurance Services has recommended that the charge for the coverage average 2% of the annual premium, according to Ms. Cardwell, with variations from state to state. The pricing recommendation ranges from 1.25% for Iowa, to 3% for the District of Columbia. Lynda Nordling, director, product development, Dearborn Financial Services, said that the District of Columbia has agreed to cap some terrorism coverage premiums. They have divided the area into three risk categories, according to Ms. Nordling, with a recommended price of 3 cents per 100 in the downtown area, which is deemed to be at highest risk. In the next highest ring, the insurance is priced at 1.08 cents per 100, and in the less risky ZIP codes bordering Maryland, the pricing is 1 cent per 100. She expects that this sort of strategy to be repeated in many other areas.

The interim Treasury rule also states that an act is not certifiable under the TRIA if it is committed "as part of a course of war declared by Congress, except with respect to workers compensation coverage." Lenders and servicers might be interested in knowing, considering that the country is on the brink of war, that damages to U.S. property incurred under a congressionally declared war are likely to be compensated by the U.S. government. A precedent has been set, with the government stepping in to provide compensation for damage inflicted on American property during the course of war in the past, according to Leanne Tobias of the MBA's Insurance Task Force.

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