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Clock Ticking On Terror Insurance

When the bombs exploded in London, the reverberations reached the U.S. Congress, where leaders have been debating whether or not to extend 2002's Terrorism Risk Insurance Act (TRIA). Earlier this year, it seemed the federal guarantee — without which insurers are loath to provide coverage — would end. Without action in the fall, the backstop will expire at the end of the year. Now, the real estate industry is confident that the act will be extended and many opponents have quieted their criticism.

“The odds of an extension are much greater now than they were in June,” says Robert Hartwig, senior vice president and chief economist of the Insurance Information Institute. “I think that those who were holding out in Congress against an extension have now withdrawn their opposition.”

But the fact that Congress has yet to approve any kind of extension, is already being felt by owners of commercial real estate, including mall owners. If the extension doesn't come through before the end of the year, it could only get worse. According to testimony that past-ICSC Chairman James Maurin delivered to Congress in late July, owners are already seeing “sunset clauses” in policies running through Dec. 31.

“These exclusions are in anticipation of a possible disappearance of the TRIA backstop,” Maurin said. “Worse, these exclusions take effect even if TRIA is renewed or replaced, but the changes to it reduce the backstop protection to insurers. These gaps, or potential gaps, in coverage will begin to have an effect on construction lending and debt ratings the later in the year that we go without a replacement program being in place.”

TRIA established a three-year Federal Terrorism Risk Insurance Program that provides for a system of shared public and private compensation for insurance losses resulting from acts of terrorism. The White House is not officially opposed to the idea of the backstop, but it has said it won't simply stand for an extension and wants some sort of changes to the legislation.

The government is now obligated to reimburse companies for most of their insured losses, up to $100 billion in a year. The amount that insurance companies are directly responsible for has risen each year. Today it is $30 billion. The government then will cover 90 percent of losses beyond that.

According to the current law, a terrorist attack causing as little as $5 million in damage could trigger the backstop under certain conditions. The Treasury Department wants that raised to at least $500 million. The government has lobbied to raise the amount the insurance industry is responsible for and to lower the percentage it will pay out after the minimum level is met — although it has not offered specific proposals.

Recently, an insurance industry-funded study from the University of Pennsylvania's Wharton Risk Management and Decision Processes Center concluded that the insurance industry hasn't yet created the market that was deemed necessary when TRIA passed. The study recommends that Congress should extend TRIA temporarily and set up a commission to study the feasibility of establishing a long-term, private-public partnership.

The study also recommended that Congress drop the distinction between domestic and foreign acts of terrorism. (As it stands now, terrorism by U.S. citizens is excluded from TRIA coverage.)

A Mortgage Bankers Association study on TRIA showed that terrorism coverage remains both widely required and widely available. MBA surveyed loan administrators who serviced more than $656 billion of the then-about $2 trillion in commercial real estate debt outstanding. The survey revealed that 94 percent required terrorism insurance. It also found that 84 percent had terrorism insurance in place. Moreover, the 10 percent that lacked terrorism insurance, the servicer and borrower were working to place coverage.

Hartwig says, howver, that in many parts of the country, terrorism coverage is lacking. “Take-up rates have been higher in areas like New York, Washington, Boston or Chicago, whereas it is far more likely that a mall in Des Moines is not insured,” he says.

Meanwhile, terrorism insurance is becoming more expensive. Premiums have risen annually to now account for 1.8 percent of premiums paid by commercial real estate owners, according to Moody's Investors Service. Since September 11, all insurance on commercial property, including retail real estate, rose. For the first 14 months — before TRIA was passed — insurance costs rose 25 to 30 percent, according to Hartwig. After TRIA was signed in late 2002, those increases lessened to the 15 percent range. In 2003 rates flattened and in 2004 they even fell. But if TRIA is not extended, owners could see another spike in costs.

Looking at other countries would seem to indicate that some sort of federal assistance will always be necessary, even if the insurance industry finds itself better equipped to deal with covering terrorist attacks. In England, for example, several incidents in the early 1990s led to insurance companies dropping coverage, similar to what happened in the U.S. after September 11.

Since then, the British government has run an insurance program. Pool Re was formed as a mutual company consisting of an amalgam of other British insurers. Each company agreed to abide by the rules of the system and not to compete against it by providing terrorism coverage elsewhere. The pool is reinsured by the government, which caps the insurers' liability. The program has not been a total success, however, and each company has had to pay increasing premiums.

Britain is not alone. Spain, South Africa, Israel, France and Germany all have state-backed terrorism insurance programs.

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