There’s a sense of optimism among CRE professionals, cautious though it may be, that Congress may soon pass another extension of the Terrorism Risk Insurance Act (TRIA). Originally passed in 2002 to provide a federal reinsurance backstop enabling insurers to provide terrorism risk insurance at affordable rates to property owners, TRIA and the subsequent 2005 two-year extension act (TRIEA) have been vital to not only the financial health of individual properties and companies, but to the US economy as a whole.

Right now we’re holding our breath to see what happens in Congress, but the first hurdles were passed recently when legislation to extend TRIA for an additional 15 years was approved by the House Committee of Financial Services Committee, Subcommittee on Capital Markets in late July followed by the full committee approval on Aug. 1. This new bill, H.R. 2761, the Terrorism Risk Insurance Revision and Extension Act (TRIREA), includes additional changes to the program that would benefit commercial real estate even more by giving businesses a new option to purchase insurance for catastrophic non-conventional terrorism risks–nuclear, biological, chemical and radiological attacks–as well as eliminate the distinction between foreign and domestic acts of terrorism.

With the 2005 TRIA extension ending at the end of this year, how Congress acts this fall could have implications that reach beyond our industry. In a news conference held last September, representatives from the Coalition to Insure Against Terrorism (CIAT), the Real Estate Roundtable, and the US Chamber of Commerce, among other groups, underscored that “an effective homeland security program must include provisions to ensure the long-term availability of affordable terrorism risk insurance to safeguard the assets of the businesses that fuel the nation’s economy.” Research indicates that proactively reducing the financial impact of a future terrorist attack can actually reduce the likelihood of the attack. The 2006 Marsh MarketWatch Report on Terrorism Insurance analyzes the terrorism risk management impact of TRIA stating “a primary security goal of any potential terrorist target is to deter an attack by aggressively influencing the terrorists’ target research and risk/reward assessment.”

The fact is, without a permanent solution insurance companies will be hard pressed to meet demand. The Marsh Report concluded that if TRIA is not renewed, or if no permanent solution is found, the stand-alone insurance market is unlikely to have sufficient capacity to meet demand. The trickle-down effect of higher insurance premiums often touches workers compensation policies as well. The Marsh report also found that the stand-alone market for casualty terrorism insurance, absent TRIA, is virtually nonexistent and that even with the 2005 TRIA extension, some insurers declined to renew certain workers compensation policies because of a lack of reinsurance capacity.

But the trickle down doesn’t stop there, it’s predicted that the implications would be felt throughout the US economy. In a speech given before the Real Estate Roundtable in June 2006, Joe Plumeri, chairman and CEO of Willis Group Holdings, explained the “domino-effect” that could take place if TRIA is not renewed, stating that “failure to renew TRIA past the end of 2007 could actually reduce GDP by 0.4%.” Brian Ruane, CPU, senior vice president and director of real estate and hotel practice group with Willis Group explains that the biggest economic blow could come in financing because lenders will feel uncomfortable loaning money to builders if they are not properly insured. “If TRIA is not passed, development projects could cease to happen in cities like New York and Washington, and even in other Tier 1 cities, such as Chicago and Los Angeles,” says Ruane. “Insurance will be available, but it will be very expensive.”

Some argue that we shouldn’t rely on the federal government to always provide the safety net, and that any permanent solution should be a collective plan that requires a commitment by all concerned parties, including state governments, the insurance industry and policy holders. There’s no question that a coordinated plan to deal with terrorism insurance, as well as insurance for other catastrophic events such as flooding and earthquakes, is needed, but the world has changed and the federal government should continue to be a strong participant in any future program. Pool Re, a mutual reinsurance company instituted by the insurance industry in the United Kingdom in 1993, was successful in part because it was instituted with the support of the UK government.

Passage of the latest TRIA extension legislation is vital because it has both short- and long-term implications. Short term, we need the backstop in place because a sudden lifting of terrorism reinsurance coverage at the end of this year could further weaken an economy that is already on wobbly ground thanks in part to an increase in defaults on mortgage loans. Long term, the 15-year extension gives all parties a reasonable time frame to come together to develop a collective, national program that offers a level of permanent protection against catastrophes, both natural and manmade.

James A. Peck RPA, FMA, is vice chairman of the Building Owners and Managers Association International and senior director in CB Richard Ellis’ Albuquerque office.

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