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Impending Expiration of TRIA – A Race to the Finish Line?

Posted by Surabhi Sheth, Real Estate research leader, Deloitte Services LP, on September 03, 2013

Twelve years ago, the U.S. real estate sector nearly came to a grinding halt, a major piece of the economic fallout from the September 11, 2001 terrorist attacks. As the world reeled, banks across America were hesitant to finance high-profile real estate projects without terrorism insurance coverage, which at that time was next to impossible to find or afford. Moreover, rating agencies refused to rate commercial mortgage backed securities (CMBS) that lacked adequate terrorism insurance.

As a result, several projects were delayed or shelved due to lender concerns. A reasonable response, if I may say so.

The industry needed a “white knight” and thankfully one came in the form of the Terrorism Risk Insurance Act (TRIA). What TRIA accomplished cannot be overstated: without it, the U.S. commercial real estate market may never have recovered following 9/11.

Here’s a quick recap of what TRIA entails.

  • Unveiled in 2002 and extended in 2007, TRIA provides a federal backstop to insurers for terrorism coverage of commercial real estate properties. It thus encourages insurers to underwrite terrorism risk for commercial real estate buildings, given the government’s share of potential losses arising from any terrorism act. Limiting the exposure facing private carriers also helps lower premiums, making coverage more affordable.
  • Better yet, TRIA also helps in financing by giving lenders confidence to provide funding for construction. The popularity of TRIA is visible from the uptick in adoption rate for all terrorism coverage – approximately 62 percent currently compared to 27 percent in 2003. More specifically, the current take-up rate for financial institutions and real estate players is close to 80 percent.1

Here’s the bad news. TRIA is scheduled to expire by the end of 2014, but the impact of the pending expiration would be felt much sooner by commercial real estate developers. This means that effective January 1, 2014, the market for terrorism coverage will likely begin to dry up, if not evaporate entirely. Policies that are up for renewal early next year aren’t likely to be renewed. Projects in the planning stages may not get off the drawing board. Those already in progress may be left high and dry.

Ever since its introduction, government support has been one of the key drivers for insurance companies to underwrite this type of risk, with experts reporting TRIA has provided an estimated $7 billion in free reinsurance between 2002 and 2012.2 But the government’s return on investment has likewise been great, in terms of reviving the post-9/11 real estate market since not one claim has been paid by the program since its inception.

With the possible non-renewal of TRIA, insurers may be reluctant to continue writing this type of risk as the reinsurance market still finds such risk difficult to price, or simply shuns the massive exposure at any price.

In such a scenario, insurers that do carry this burden may not only lower their exposure to such risks but may also increase rates substantially. Consequently, many commercial real estate properties may choose not to carry any insurance coverage against potential terrorist attacks. 

What will be the consequences?

Among other things, existing loans may run into a technical default. This is likely to be a double whammy for the commercial real estate industry as not only might coverage become expensive and/or scarce, but financing could also be hard to come by. An important question may be: how will this translate into property values?

Further, what does the non-renewal of TRIA mean for the U.S. economy in general? In the absence of a successful terrorist attack in the U.S. over the long term, the non-renewal is probably sustainable. However, if there is another attack, the government would still likely have to provide disaster funds for uninsured businesses. In the interim, the market might again face a severe disruption, thus undermining the country’s economic recovery.

In the past, Congress has played a wait-and-see approach on TRIA and extended it at the last minute. However, given that the commercial real estate industry is still only gradually recovering from the 2008 financial crisis and the effects of a looming expiration would be felt long before TRIA’s actual demise, can the industry withstand another period of uncertainty about the fate of its “white knight”?

1 TRIA at Ten Years: The Future of the Terrorism Risk Insurance Program by Erwann O. MICHEL-KERJAN; The Wharton School, University of Pennsylvania, September 2012. 
2 TRIA Debate Heats Up With Charge, Insurance Journal, May 9, 2013.


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