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Prospects Grow Brighter For Renewed Terror Insurance Bill

Ripple effects from the July 7 bombings in London can only help bolster the case for renewing government-backed terrorism insurance in the United States, sources tell NREI. Momentum to renew TRIA (short for the Terrorism Risk Insurance Act) has been building in recent months since the legislation enacted by the federal government in 2002 expires at the end of this year. The decision to renew TRIA is now in the hands of the Treasury Department.

Bob Hartwig, chief economist at the Insurance Information Institute, says that the terror attacks on London’s transportation system combined with steady pressure from business groups may have led the Treasury Department to rethink its approach to a TRIA expiration. Under TRIA, the federal government covers 90% of insurers’ losses from an attack by foreign terrorists, provided that the losses range from $10 billion to $100 billion.

“It’s become far more likely that TRIA will be renewed. The dynamic of this issue has changed markedly over the past few weeks based on these events,” declares Hartwig, whose group represents the interests of major U.S. insurers.

“It was Madrid in 2004, London in 2005, so who will it be in 2006? It’s not that farfetched to believe that something happens again in the U.S?” asks Hartwig.

The past few weeks have taken proponents of government-backed terrorism insurance on a wild ride. Initial jitters set in June 30 after the Treasury Department unveiled a report applauding 2002’s Terrorism Risk Insurance Act (TRIA) for a job well done. No sweat there, as most people agree that TRIA has accomplished its mission. The problem, which business groups capitalized on, was that the study was more of a grateful send-off than an affirmation of TRIA’s importance. It also suggested that private insurers rather than the government should be saddled with the cost of future terror attacks.

While difficult to say whether lobbying efforts or the London attacks — or both —were responsible, Treasury Secretary John Snow recently backpedaled from his anti-extension stance, saying publicly that renewing TRIA is not only possible, but also likely, to be granted.

The fear is that private insurers would either drop terror coverage or raise premiums to astronomical levels without TRIA’s support. That could, in turn, destabilize the commercial real estate market by halting major developments and deals in which lenders require terror coverage.

Surveys of both insurers and policyholders find that TRIA has met many of its goals. Between 2002 and 2003, for example, the Treasury Department reports that the take-up rate for terrorism insurance increased from 27% to 39.5% of all policyholders. By 2004, 54% of policyholders reported having terrorism insurance coverage.

Not only have policyholders increasingly adopted terror coverage, but more insurers also have offered it. Whereas only 73% of insurers wrote terror coverage in 2002 (the year that TRIA was enacted), a full 91% of insurers surveyed wrote such coverage in 2003.

The cost of terror insurance premiums also dropped as a result of TRIA, reports the Treasury study. Among policyholders who paid for terror coverage, the average cost fell from 4% of their total property & casualty premium in 2002 to 2.7% of the premium in 2004.

Like most professionals working in commercial real estate finance, loan servicer Bob Vestewig is pushing hard for TRIA’s renewal. Vestewig, COO at Houston-based GEMSA Loan Services, also believes that the Treasury Department will renew TRIA for some period of time under slightly different terms.

He admits that the potential effects of a 2006 TRIA expiration are hard to gauge. Yet he recalls how chaotic it was in 2002, before TRIA was passed. “We were pulling our hair out back then. The lenders were demanding the coverage but many borrowers either couldn’t afford it or just didn’t want to buy it,” says Vestewig.

The simple solution was TRIA, says Vestewig, which enabled borrowers to buy terror coverage at reasonable rates. To that extent, he believes that TRIA’s so-called “make available” clause has had the greatest impact since it forces all insurers offering property & casualty policies to also offer terror coverage. That, in turn, has helped the average premium cost drop significantly.

As loan servicers, GEMSA enforces the loan documents—and that often means playing the bad cop when a borrower runs afoul of the contract. Vestewig is hopeful that he won’t be back in that position in 2006 with regard to terror coverage, but he doesn’t rule it out either. GEMSA is a big player in this multi-trillion dollar business, servicing $65 billion in commercial real estate loans for 90 different life insurance companies last year.

“We just don’t know the answer to the question of TRIA going away. But I’d like to think that this renewal fight is a wake-up call,” he says. “We just can’t afford to get complacent on this issue.”

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