The clock is ticking on government-backed terrorism insurance. With only six months left before its expiration date, real estate trade groups are pushing Congress to extend the Terrorism Risk Insurance Act of 2002 (TRIA). These groups fear that without the Federal backstop, insurers would either drop coverage or raise premiums to astronomical levels. And that déjà vu scenario, they claim, could have a destabilizing effect on the commercial real estate market.
Last Thursday’s 142-page study on the effectiveness of TRIA left plenty of room for interpretation. The detailed report simultaneously applauded TRIA for opening up the market for terror insurance by reducing premiums while it also highlighted the risks of letting this legislation expire. The study didn’t by any means rule out an extension, but the overall message was that TRIA had met it’s stated goals. Industry groups, for their part, interpreted the study as setting the stage for the government to let TRIA expire at midnight on Dec. 31.
“The Treasury study released [on June 30] on terrorism insurance is flawed. It does not present an accurate picture of the current terrorism insurance marketplace and fails to acknowledge that the risk of terrorism is unknowable,” says Martin DePoy, a vice president at the Washington, D.C.-based National Association of Real Estate Investment Trusts (NAREIT), an industry trade group.
“Only in acknowledging that the immediate effect of TRIA’s expiration is likely to be ‘less terrorism insurance written by insurers, higher prices and lower policyholder take-up’ does the study reflect the realities of the marketplace and thereby confirm the need for a federal role beyond December 31st,” says DePoy.
The more telling document may be a June 30 letter to House and Senate leaders from Treasury Secretary John Snow. In the letter—which accompanied the study--Snow wrote that a private market for terror insurance would only develop if the government let TRIA expire. He also wrote that a TRIA extension “would have little impact on the economy, given its current strength.”
That’s not a view embraced by Leigh Ann Pusey, senior vice president of government affairs at the Washington, D.C.-based American Insurance Association. Pusey credits TRIA for making terror insurance available to the many business that need it. But, in her view, the high risk of a repeat attack makes it necessary to extend TRIA into 2006.
“TRIA has provided the U.S. economy with the ability to recover from financial devastation in the event of catastrophic terrorist attacks on U.S. soil. Our economy must be protected against the very real, long-term threat of a catastrophic terrorist attack on our shores,” says Pusey.
Pusey adds that the private capital markets have failed to underwrite terrorism risk over the past two years. What’s more, says Pusey, insurers paid more than $32 billion in claims from the 9/11 attack, and two-thirds of that total came from reinsurance. Adds Pusey: “That private market backstop is not available today. The legislative clock cannot be allowed to run out on this vital national security issue.”
The full report can be accessed at: http://www.treas.gov/press/releases/reports/063005%20tria%20study.pdf