Business Leaders Warn of ‘Rolling Crisis’ As Federal Terror Insurance Program Nears Expiration

March 18, 2005

U.S. business leaders came out in force this week to urge renewal of the federal Terrorism Risk Insurance Act and warn that market restrictions on terror insurance coverage are already beginning to be felt in the marketplace, 10 months before the federal backstop for the coverage is to expire.

“Companies are already having trouble getting coverage,” Tom Donohue, president and chief executive officer, U.S. Chamber of Commerce, told a gathering of insurance, mortgage lending, construction, commercial real estate and political leaders.

The U.S. Chamber organized the meeting of supporters of renewal of TRIA, which has given insurers some protection in the event of losses from terrorism. The law expires at the end of the year after a three year run. The speakers at the conference held at the chamber’s headquarters in Washington, D.C. called on Congress to act sooner rather than later to extend TRIA past its expiration deadline.

“The reasons that TRIA was passed have not changed and until they do the government needs to be involved,” said Jeffrey DeBoer, president of the Real Estate Round Table. “We are highly concerned that we will return to that period after 9/11. We’re already hearing it in construction.”

The business leaders recalled economic conditions following the Sept. 11 terrorist attacks when the market for terrorism insurance evaporated. The insurance withdrawal caused some $15 billion in real estate transactions to be put on hold and led to a slowdown in commercial construction, according to various business surveys. According to the White House, more than 300,000 jobs in construction were lost. Bond rating agencies downgraded $12.5 billion worth of commercial mortgage-backed securities because of the lack of terrorism coverage.

DeBoer said he fears there will be a “rolling crisis” that gathers momentum the closer the expiration date of Dec. 31, 2005 gets. He said that the reaction of insurance companies following Sept. 11 was “predictable and rational” and that it would be “irrational” to expect them to cover the risk of terrorism without a government program.

The Mortgage Bankers Association cited results of a 2004 study indicating that 94 percent of commercial/multi-family loans required terrorism insurance and that insurance specialists surveyed said that without an effective TRIA, terrorism endorsements now in place would be canceled. The group said the results are “indicative” of what would happen should TRIA not be renewed. “As time moves on without the extension of TRIA, the number of transactions occurring within the commercial real estate finance industry is expected to decrease due to the lack of availability of terrorism insurance,” the MBA said.

Most commercial lenders would continue to insist upon insurance for loan projects, according to Kieran P. Quinn, chief executive officer of Column Financial Inc., a Credit Suisse First Boston division in the commercial mortgage backed securities business. “We will not waive that requirement,” he insisted.

Quinn said that the number of policies with terrorism exclusions effective after Dec. 31 grows with every month. He said that July 1 would be a “big date” due to annual renewals.

“It’s not a New York City or a Washington, D.C. issue, it’s everywhere. We need insurance everywhere,” Quinn added.

Agreeing that insurance is needed in the heartland as well as in metropolitan areas, Bradley Wood, senior vice president of risk management for the giant hospitality company Marriott International Inc., observed that businesses across the country are already competing for what limited insurance there may be available in the private market. “Insurers will quickly fill up their capacity in anticipation that TRIA will not continue,” he warned.

“The insurance industry needs TRIA,” said Ramani Ayer, chairman of The Hartford Financial Services Group, who argued along with others that insurers cannot price terrorism coverage because the frequency and severity of attacks are unknown, unlike with natural catastrophes where the industry has history and experience to draw upon.

“Absent TRIA, we are challenging our economy in ways that we shouldn’t,” The Hartford executive maintained.

Ayer also noted that even if they enforce terrorism exclusions, insurance companies are still on the hook for certain workers’ compensation and fire losses following a terror attack under many states’ regulations.

Ayer said that while The Hartford is not yet pulling back on writing because of uncertainty over a terrorism program, his company would have to consider doing that if TRIA isn’t resolved soon. “We are actively addressing how we should address it,” Ayer said.

The White House and Republican leaders have indicated they want any TRIA extension to include a long-term strategy for dealing with the issue and that they prefer to encourage private market involvement. They have also indicated they are awaiting a report from the Treasury Department on possible options before proceeding. That report is due June 30.

Democrats speaking at the conference maintained that their party supports a TRIA extension and is ready to vote now, while looking into a more permanent solution later.

“The Democratic side is all taken care of but we can’t get it to a committee vote or onto the floor,” said Rep. Paul Kanjorski (D-Pa.), a ranking minority member on a key subcommittee. He indicated that if a vote were permitted today, the TRIA extension would pass, but maintained that some Republicans were delaying a vote.

Senate Minority Leader Harry Reid (D-Nev.) and Sen. Jack Reed (D-R.I.) said there is no reason for Congress to wait for a June report from the Treasury Department before acting to renew TRIA. “That’s too late and waiting until summer to make a decision creates too much uncertainty for the real estate, construction and insurance businesses,” Reid said.

But Rep. Eric Cantor (R-Va.), chief deputy majority whip and a key Republican on TRIA, said that “reports that the Republican leadership opposes TRIA aren’t accurate. We just want a long-term solution.”

Cantor said Congress should “extend and build upon” TRIA with some form of permanent private-public partnership. “Almost no one believes that a purely private market is possible,” Cantor said.

Rep. Pete Sessions (R-Texas), a member of the House Rules Committee, suggested that any final answer on TRIA will be one that is “negotiated” among Treasury, Congress and business interests, including insurers and insurance buyers.

The man within the Treasury who oversees the terrorism insurance program, Gregory Zerzan, acting assistant secretary for financial institutions, assured the gathering that the much-anticipated report is an attempt to “fully consider all options.” Zerzan said that the Bush Administration favors a free market approach to providing terrorism insurance coverage while also acknowledging that given regulatory environments the insurance industry is not an entirely an unfettered market.

Asked whether the Treasury report might be ready before June 30, Zerzan offered no assurance.

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