Organizations representing the insurance and real estate industries are making a case for a federal backstop in response to a request for public comments by US Treasury Department. The plans to send a report on the long term availability of terrorism risk to Congress by September 30.
"The same hurdles that have made it difficult for insurance industry to accurately model this risk has also prevented them from coming up with private sector solution to this problem," says Martin L DePoy, steering committee coordinator for the Coalition to Insure Against Terrorism Risk. "I think Congress is hopeful that a private sector solution could come to fruition. But given the risks that are involved and potential for catastrophic loss [a private sector solution] doesn't seem to be viable at least for short term."
The Secretary of the Treasury chairs the President's Working Group on Financial Markets. This panel--which also includes the chairs of the Federal Reserve Board, Securities and Exchange Commission and the Commodity Futures Trading Commission--has been mandated to develop a long-term private sector solution to terrorism risk insurance. That answer would include group life coverage and coverage for chemical, nuclear, biological and radiological events. These risks were specifically excluded from TRIA. Insurers and real estate industry representatives are now including these possible scenarios in their loss modeling.
The American Academy of Actuaries, for instance, recently reported that a truck bomb attack here could cost $5.5 billion, a "medium" CNBR event could cost $106.2 billion and a "large" CNBR event could cost $196.8 billion. In New York City, a large terrorist attack could result in $778 billion in insured losses, a truck bomb attack could cost $11.8 billion and a medium CNBR terrorist attack could cost $446.5 billion.
With the potential losses so high, says Deborah McKinnon, vice president, MBA, commercial/multifamily, the uncertainty of long standing insurance coverage across all these perils invites disruption in the real estate investment markets.The comments submitted over the 45-day period have focused on these issues, particularly the necessity of ongoing government support.
The CIAT requested that the PWG "analyze how a combination of private insurance industry capacity, private sector financing and federal participation can be used to facilitate a speedy economic recovery in the wake of terrorism losses. Specifically, the PWG should examine long-term solutions whereby private insurance industry capacity and private sector financing increase over time while the federal backstop decreases."
The Real Estate Roundtable pushed for better coverage of CNBR terrorist attacks. "All available evidence suggests CNBR risk is largely uninsurable in private markets. From our perspective, it is absolutely critical that we have a national strategy for dealing with the economic losses from an attack involving CNBR. The Working Group should address CNBR and make appropriate recommendations to Congress."
"No consensus has yet been reached on a long term solution and the extension is already several months away from expiring," says Clifton Rodgers, senior vice president at the Real Estate Roundtable. "So we are trying to work constructively with policy markets to develop a long-term solution that will ensure that policy holders can get coverage they need. We think it is vital that nation is protected and we feel that the government should play a role in the development of long term solution." He adds that federal participation could gradually be reduced or phased out.
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Erika Morphy
Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.
