Bush Signs Terrorism Insurance Legislation as Implementation Procedures Begin
November 27, 2002
President Bush signed the Terrorism Risk Insurance Act into law yesterday to create a $100 billion federal backstop on insurance coverage related to terrorist activity. The President's signature ends more than a year of efforts from the Mortgage Bankers Association of America (MBA) and commercial real estate industry organizations to pass a law that would "reinsure" insurance companies, lenders and building owners on a certain percentage of coverage based on acts of terrorism.
The law is effective immediately, but analysts said implementation procedures would require a new set of efforts.
Before signing the bill, Bush noted that $15 billion in real estate transactions had been canceled or put on hold because owners and investors could not obtain the insurance protection. He said that commercial construction is at a six-year low and thousands of construction workers have been kept from their jobs.
"Commercial mortgage-backed securities [CMBS] have seen their bond ratings lowered, hurting many Americans invested in the bond market, including teachers and police officers and firefighters, who have lost money in their pension plans," Bush said. "By helping to ensure that terrorism insurance is affordable and available, the Terrorism Risk Insurance Act will permit many construction projects to move forward and to help this economy grow. Billions of dollars in investments will be more secure."
At the signing, Treasury Secretary Paul O'Neill touted the legislation as "a critical element" for the country's economic recovery, reducing economic risks and consequences from the threat of future terrorist attacks.
"It will help restore insurance capacity to the marketplace, which will promote new construction and spur economic activity," O'Neill said.
The Treasury Department plans to work closely with the National Association of Insurance Commissioners (NAIC) to implement the program that requires insurance companies to make terrorism insurance available to policyholders.
According to some analysts, the legislation will have an immediate impact on the commercial real estate industry. But sources close to the insurance industry say that premiums would not plummet overnight and that expectations should remain low for the short term.
Bernie Brown, president, Insurance Advisors, LLC, Greenwich, Conn. said that premiums for the trophy properties might lower in cost based on the legislation, but mainstream properties with current exclusions could see an increase in premium costs.
"For the mainstream, commercial and multifamily properties, the only way the premiums are going to go is up," Brown said.
Brown said he believed that fairly significant premiums would remain, because many insurance companies that had the exclusion do not want to underwrite terrorism activity. He estimated costs at more than 5 percent of the premium amount.
"Right now, the insurance companies are going through a scrambling act," Brown said. "Rates might vary [based on properties]."
Insurance industry analysts said that the cost of terrorism insurance premiums remains a discussion issue for some insurance companies and could be determined on a company-by-company basis. But the new law requires insurance companies to provide "clear and conspicuous" disclosure of the premiums charged for terrorism risk insurance and the Federal compensation provided under the law, according to the Treasury Department.
However, the Treasury Department said that the law allows insurers to reinstate existing terrorism exclusions if certain disclosures are made to policyholders.
At the same time, CMBS special servicers must work with borrowers and insurance companies to iron out specific language and prices for new policies to cover terrorism risk
Moody's Investor Services, New York, the ratings agency that took the most aggressive action on some CMBS loans without terrorism insurance coverage, said it would continue to monitor the progress of the act.
"To the extent that the legislation is effective and the insurers act accordingly, and the property owners go and buy the hopefully more plentiful and cheaper insurance, that will set the stage for us to take another look at the rating actions that we took," said Tad Philipp, managing director at Moody's.
Meanwhile, some insurance industry participants have alluded to a possible return of reinsurance companies providing a small window of more terrorism coverage relief for insurance companies, but Brown said that reinsurance companies would most likely not return into the fold since they will not be backed up by the legislation.
Reinsurance companies refusing to provide backup coverage to insurance companies for terrorism activity after September 11, 2001 had been the catalyst that set off a chain reaction for the increase in premium costs, the lack of availability and the past year's efforts for the federal backstop legislation.
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