GlobeSt.com UPDATE: Treasury Comes Out Against Terrorism Insurance Legislation Extension

WASHINGTON, DC-The US Department of the Treasury has issued its report, “Assessment: The Terrorism Risk Insurance Act of 2002,” to much controversy. As per the study, the Treasury finds no legitimate reason to extend the legislation beyond its scheduled expiration date of December 31, 2005.

Passed in response to the effects the September 11 terrorists attack had on the insurance industry and insurance policyholders such as real estate owners, TRIA established a backstop measure in which the government would cover payouts exceeding $100 billion of insurers’ annual liability in the event of another terrorist attack. According to a November 2004 study by the RAND Institute for Civil Justice, the attacks resulted in $38.1 billion in insured losses–to persons and businesses–with insurers making $19.6 billion of those payments.

“Overall we find that TRIA was effective in terms of the purposes it was designed to achieve,” Treasury officials note in the document. “TRIA provided a transitional period during which insurers had enhanced financial capacity to write terrorism risk insurance coverage. While we don’t ascribe a causal effect, during this period insurers began pricing for terrorism coverage and insurer financial strength improved.” Treasury officials continued saying TRIA provided “an adjustment period” for both insurers and policyholders. “TRIA’s effectiveness for these purposes does not imply continuation of the program.”

But many organizations and industry leaders beg to differ with Treasury’s assessment of TRIA, among them, the Coalition to Insure Against Terrorism, which had been ardently campaigning Congress to extend the legislation. “The study’s assertion that the now partial presence by reinsurers will somehow grow stronger in the absence of a federal backstop defies logic,” says Martin L DePoy, CIAT spokesperson and National Association of Real Estate Investment Trusts vice president for government relations; CIAT is a member organization representing businesses and associations ranging from the real estate sector to entertainment industry. “The study also ignores TRIA’s value as a mechanism to help the economy rebound quickly in the event of another catastrophic attack.”

“The Treasury study on terrorism insurance is seriously flawed,” says Clifton E. Rodgers Jr., senior vice president for the Real Estate Roundtable. “It does not present an accurate picture of the current terrorism insurance marketplace and fails to acknowledge that American businesses and property owners are already being told by insurers that they face the prospect of either going without terrorism coverage, or with severely reduced limits, by year-end.”

He notes that the risk of catastrophic terrorism is not quantifiable, adding that the study’s assertion that the “now anemic reinsurance market will somehow grow more robust in the absence of a federal backstop is absurd. There is no evidence that a sustainable, private marketplace for terrorism insurance will exist.”

Rodgers says the Roundtable remains “convinced that a federal terrorism insurance program of some kind must be in place next year to help protect the US economy and American jobs. The Roundtable’s goal is to enact a backstop that ensures there is an adequate supply of terrorism insurance while, at the same time, addressing gaps in current coverage and creating a system that maximizes the development of private risk capacity.”

For the most part, supporters of a TRIA extension acknowledge that the legislation is only a temporary solution, but contend that more time is needed to craft a long-term alternative to handling the corresponding issues. “We concur with the Treasury report’s statement that challenges remain in predicting terrorism risk and the corresponding loss probability,” says Mortgage Bankers Association’s Gail Davis Cardwell, who is senior vice president for the organization’s commercial/multifamily group. “Given these continuing uncertainties, the failure to extend TRIA in the short term to permit a thoughtful solution, will result in the commercial real estate investment markets becoming more dysfunctional as time progresses, rating agencies placing loans on watch lists, potential ratings downgrades, increased costs, drags on productivity and lower yields to investors, who include those on fixed incomes.” TRIA legislation–HR 1153 and S 467–is pending in both the US House of Representatives and the Senate.