Expiration of Federal Terrorism Insurance Law Sparks Fears
With the expiration of the federal Terrorism Risk Insurance Program Reauthorization Act on the horizon at the end of the year, industry reports point to liquidity risks. In the event the legislation is scaled back or even eliminated, commercial real estate costs would likely soar, the reports say.
“Demand for terrorism insurance remains strong and the existence of TRIPRA plays a key role in making coverage available and affordable,” said a report issued last month from Marsh & McLennan, a risk management firm. The report says that fears over TRIPRA’s expiration have already made terrorism insurance scarce, as insurers flee the sector thinking that the economics won’t make sense without the government’s involvement.
The legislation, originally signed in 2002, created a government-backed reinsurance facility for insurers who suffer losses after a terrorism event. The law has been extended twice so far, once in 2005 and once in 2007.
Fears are that the next renewal will scale back coverage, adding to commercial real estate owner and tenant costs, especially in higher risk markets, such as New York City and Boston.
If TRIPRA is scaled back, insurance costs will rise, as the number of insurers offering terrorism insurance is likely to plummet still further, according to a report from ratings firm S&P, also issued last month. That could cause a “negative credit event,” as net operating income supporting CMBS trusts declines.
Another fear is that if and when premiums rise and some owners opt not to retain terrorism insurance, some master servicers will “force-place” insurance that is required under CMBS contracts on borrowers. This could potentially incur legal costs, further reducing the distributable interest in CMBS trusts, the report says. Borrowers might also let their loans be transferred to special servicing in hopes that the servicer would exempt them from a terrorism insurance requirement if they can show the costs have become burdensome.
Following the terrorist attacks of 9/11, CMBS issuance dropped 25 percent, the report says. The next year, following the enactment of TRIPRA’s predecessor, the Terrorism Risk Insurance Act, it sprung up 50 percent.
The demand for terrorism insurance and the cost have remained steady in recent years, according to the Marsh report. The median rates for companies with total insured value of less than $100 million were $51 per million in 2013, while median rates for companies with values of more than $1 billion were $18 per million.
Construction companies had the highest terrorism insurance costs last year, at a median of $66 per million total insured value, the data show. Medical facilities had the lowest cost, at $14 per million total insured value.