Sept. 11 taught us that the world is an uncertain and risky place. It also served as a rallying cry to Washington to put aside the fractiousness of the 1990s and espouse a new spirit of bipartisanship. One of the places where Congress can marshal its new solidarity is in support of the Senate bill on terrorism risk insurance, now the subject of a hot dispute.
Terrorism risk insurance is essential. A property owner cannot buy, sell or finance a commercial property unless it is covered by adequate insurance. Since Sept. 11, the insurance industry has warned it cannot offer adequate levels of terrorism coverage because it is unable to quantify its risks. The entire nation simply does not know the outlook for the future terrorist events, and the insurance industry is no exception. Without adequate insurance, it will be difficult, if not impossible, to operate or acquire properties, refinance loans, and to sell commercial mortgage backed securities (CMBS).
Without a federal terrorism insurance solution in place, many policyholders are now either completely uninsured for this risk or underinsured due to skyrocketing premiums. The real risk of not having a federal "backstop" solution in place is severe economic dislocation across a broad range of industries — including commercial real estate.
Insurance is the lifeblood of the commercial real estate industry. Lenders require full insurance on any property in order to provide financing, as well as to refinance continuing operations. When insurance disappears, so will new commercial construction. A lack of terrorism insurance may spell the demise of many deals for existing projects, and may cause some to go into default. At a time when the economy is already suffering, the fallout could be dramatic. Choking off new construction and devaluing existing properties could cause billions of dollars in declines in GDP and stunt the growth of the economy. Some experts estimate the damage as large as $30 to $40 billion in 2002 alone.
All of this is avoidable if we can use the power of legislation to stave off the attempts of these terrorists to disrupt our economy. Nobody wants a new Federal bureaucracy, but a few limited, temporary and focused measures could provide a bridge to the future for the insurance industry. The government can define an act of terrorism, so the market knows exactly what it has to cover. And it can share losses in the short-term, so that insurance companies are not desperate to increase premiums in self-defense. But most importantly, it can provide a guarantee against catastrophic losses from terrorists. The possibility of an essentially unlimited loss will drive everyone out of the business of terrorism risk insurance.
It is vital that the Senate moves with decisiveness and pass terrorism insurance legislation immediately. The White House has pushed for a federal backstop since September, and the House passed a bill in November. Yet, despite a bipartisan compromise on a Senate bill in October, the Senate failed to act last year. At a time when President Bush has urged us to go back to our lives, it is incumbent that a sense of economic normalcy be underpinned by measures that protect and prepare us for the challenges ahead.
Michael J. Alter is president of The Alter Group, a Skokie, Ill.-based commercial real estate developer.