TRIA: The Ultimate Public/Private Partnership

The need for TRIA was compelling in 2001. Clearly, as evidenced by the recent bombings in London, it is compelling today, even as the program’s Dec. 31, 2005 expiration date approaches. Terrorism insurance is a necessary component in today’s society since terrorism threats continue to mount and all-risk insurance continues as a requirement for commercial real estate transactions. TRIA represents a public/private partnership to share the cost and administrative requirements of insuring American commercial and multifamily real estate against foreign terrorist attack. A federal role in TRIA is appropriate because the private market has not evolved sufficiently to assume this burden in its entirety.

On June 30, as mandated by Congress, the Treasury Department released its study of TRIA. The Treasury was required to assess the program’s efficacy, the availability and affordability of such insurance for various policyholders and the likely capacity of the insurance industry to offer insurance for terrorism risk after the scheduled expiration of the program. We at MBA agree with the Treasury’s finding that TRIA has been effective. We concur with the report’s statement that challenges remain in predicting terrorism risk and the corresponding loss probability, both of which are necessary components of any effective private market for insurance. Without a federal reinsurance backstop, the private market is currently unprepared to make available an adequate supply of terrorism insurance. Given these continuing uncertainties, the failure to extend TRIA in the short term and permit time to craft a thoughtful solution will result in the commercial real estate investment markets becoming more dysfunctional as time progresses, rating agencies placing loans on watchlists, potential ratings downgrades, increased costs, drags on productivity and lower yields to investors, who include those on fixed incomes.

Furthermore, other studies on this issue have fueled the debate. A Rand Corp. study, Trends in Terrorism: Threats to the United States and the Future of the Terrorism Risk Insurance Act, released June 20, indicated that a strong TRIA program is necessary for homeland-security reasons as well as economic security. In the long-term, according to this study, a market without TRIA is one in which terrorism-insurance coverage is likely to be available sporadically, and the government, rather than insurance carriers, is expected to pick up the economic pieces after a terrorist attack.

In the spring of 2004, we released our own study on TRIA, which demonstrated that terrorism coverage is both widely required and, thanks to TRIA, widely available. MBA surveyed loan administrators who serviced more than $656 billion of the then-approximately $2 trillion in commercial real estate debt outstanding. The survey showed that 94% of that $656 billion required terrorism insurance. It also found that 84% had terrorism insurance in place. The 10% of commercial/multifamily debt for which terrorism insurance is required, but was not in place, included properties for which the servicer and borrower were working to place coverage and properties for which the requirements have been waived. Also included are properties that may have “all-risk” coverage that includes terrorism but for which an explicit statement of terrorism coverage does not exist.

The study also revealed that servicers estimated that, if insurance companies were not mandated to provide terrorism insurance, approximately 80% of that $656 billion in debt would not have it. The average loan size in the survey was just over $5 million, and there did not appear to be any relationship between the average loan size of the servicer and the percentage of that servicer’s portfolio with terrorism-insurance coverage. This counters the popular belief that terrorism coverage is required only for trophies. Thus, the lack of available terrorism-insurance coverage in a post-TRIA environment could involve a wide range of properties. With outstanding commercial real estate debt increasing to $2.35 trillion in the first quarter of this year, the demand for terrorism insurance will not subside, especially as insurance policies on these properties come up for renewal. These factors, coupled with the current terrorist threats, have resulted in a greater need to renew TRIA.

TRIA must be extended. The failure to do so in the short term, to permit more time for the development of a thoughtful long-term solution, could result in significant breakdowns in the commercial real estate finance industry and other markets. When commercial insurance carriers excluded terrorism insurance coverage prior to TRIA’s enactment, the risk of a catastrophic terrorism loss shifted from the commercial insurance industry to the commercial real estate finance industry. For this reason, lenders and loan servicers who bear a fiduciary responsibility have significant standing in assuring broad availability and affordability of terrorism insurance. Servicing firms are likely to experience operational quagmires with regard to their existing portfolios if TRIA is not extended.

MBA supports legislation to extend TRIA until a long term solution is developed. Both the House and the Senate held hearings in mid-July to explore the issue. These hearings indicate that both the House and Senate are moving forward to advance legislation. (See companion column.)In order to avoid market disruptions, Congress should continue–and quickly–toward providing certainty that terrorism insurance will be available into next year. Terrorism insurance is essential to defending America against the physical and economic consequences of an attack, and TRIA or a similar program is necessary to keep coverage available and affordable.

Gail Davis Cardwell is senior vice president of the Mortgage Bankers Association’s commercial/multifamily group. She is based in Washington, DC. Views expressed here are the author’s solely..