Real Estate Roundtable senior vice president Clifton E. Rodgers Jr. tells GlobeSt.com that it's clear that all attending the sessions understood the urgency of developing a solution. The testimony was taken last week by subcommittees on capital markets, insurance and government-sponsored enterprises and oversight and investigations of the House committee on financial services."I think everyone is in general agreement that something has to be in place by year end 2007," Rodgers says.
Roundtable's answer to this difficult issue is to create a layer of private capital between primary insurers and the federal government so the marketplace can maintain continuity. "Policy holders can get the coverage they need. At the same time, the role of the federal government in the terrorism insurance market will be minimized," Rodgers explains.
The federal government's role has been a key issue of debate in Congress. Some congressional leaders hold the view that the marketplace should be able to develop solutions to provide coverage for terrorism insurance. It was this stance that held up the extension of TRIA until the end of last year.
Bethesda-based Host Hotels and Resorts Inc. CEO Christopher Nassetta testified on behalf of the Coalition to Insure Against Terrorism [CIAT], the lobbying group that steered last year's extension through Congress. He hammered home the view--overwhelmingly held by the insurance industry and more recently, a new report by GAO--that terrorism risk is too unpredictable to quantify and thus insure against. He testified that the reinsurance industry right now estimates there is only about $6 billion to $8 billion in global terrorism reinsurance capacity available--and only $1 billion to $2 billion in capacity on hand for nuclear, biological, chemical and radiological coverage.
"Current capacity is nowhere near the level needed to provide protection to our economy without the TRIA backstop," Nassetta testified. "Even with the TRIA backstop, reinsurers are not meeting the capacity demand of primary insurers for their deductible and coinsurance layers. This suggests that private reinsurers simply want very little exposure to terrorism risk and refutes the notion that the federal backstop is crowding out the private market."
Nassetta's views on the issue are formed in part based on his personal experience with 9/11. The company owned the World Trade Center Marriott, which was destroyed by the collapses of the World Trade Center towers. "We lost not only property, but valued personnel," he told the subcommittees.
Nassetta said CIAT has not endorsed one particular approach. The Real Estate Roundtable's "interesting proposal," he said would create a new mutual reinsurer to go between primary insurers and the federal government. It also would over time, he added, shift the federal backstop from primary insurers to mutual, only be activated if the terrorism losses exceeded a certain level.
The American Insurance Association's proposal calls for a long-term TRIA-like backstop to be in place for conventional terrorism while the federal government would assume financial responsibility for all nuclear and bio attacks. It embeds the ability to recoup up to $10 billion through a policyholder assessment.
"What we like about them is that they involve a public-private partnership that recognizes the federal government's responsibility to assist markets to function appropriately," Nassetta said, "and to retain a federal backstop for only the most catastrophic losses that the insurance industry and the economy simply cannot absorb."
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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.
