Guest Column: A Bid for TRIA

Commercial real estate industry executives are watching Congress closely as it considers whether to extend the Terrorism Risk Insurance Act, a backstop for private insurance companies so they can offer terrorism insurance.
Walt Mercer

Commercial real estate industry executives are watching Congress closely as it considers whether to extend the Terrorism Risk Insurance Act, a backstop for private insurance companies so they can offer terrorism insurance. TRIA, which must periodically be extended by Congress, was originally enacted after many insurers stopped providing the coverage following the Sept. 11, 2001, attacks on the World Trade Center. It is currently set to expire at the end of this year.

After the literal dust settled and insurance companies tallied up their losses from 9/11, the final bill came to a staggering $36 billion, setting off the large-scale withdrawal from terrorism insurance. The ensuing damage to the economy was substantial. According to the Real Estate Roundtable, which represents top publicly held and privately owned real estate firms as well as numerous industry trade groups, the absence of terrorism insurance likely resulted in $15 billion or more in cancelled real estate-related transactions. TRIA’s enactment in November 2002 helped get the real estate industry back on track and the economy growing again.

Although some people argue that TRIA is no longer needed because the private sector can step in to supply the market, many experts and real estate industry executives are skeptical. An April 2013 report by Marsh, a leading insurance broker and risk advisory company, stated, “In the absence of the TRIA backstop, the needs of policyholders are not expected to be met with regards to terrorism insurance.” The potential loss from a single terrorist event – as 9/11 so vividly illustrated – can be catastrophic, scaring many would-be insurers away.

Economic Impact

The period between 9/11 and the original enactment of TRIA provides a glimpse of what could happen again if terrorism insurance is not available beginning in 2015. The White House Council of Economic Advisors estimated that 300,000 jobs were lost due to delayed construction projects during this period, and Moody’s Investors Service downgraded $4.5 billion in commercial mortgage-backed securities (CMBS).

Understanding how a dearth of terrorism insurance could result in substantial economic harm is crucial to grasping its importance. Many lenders require companies to obtain terrorism insurance whether or not TRIA is extended. As a result, if the act expires and the private sector cannot deliver terrorism insurance, companies could find themselves in technical default of their loan agreements.  Not only would that be troublesome for both borrowers and lenders, it could change the focus from financing of new livable communities and apartments to needless time and money spent on legal arguments.

The impact on new construction could be even more tangible, since many developers need the insurance in order to finance and break ground. Without insurance, the industry could experience a repeat of 2001-2002, when hundreds of thousands of jobs were lost. At a time when the construction industry is helping to lead the economic recovery, jeopardizing the availability of terrorism insurance is a big risk to take.

Fitch Ratings has stated that it could decline to rate certain CMBS transactions if a property were to lack terrorism insurance. And some developments in high-risk locations would almost certainly be uninsurable, which would impact the liquidity of developers and investors.

Transcending Regions, Traversing Industries

While certain cities and facilities are arguably at greater risk from terrorism, it is a mistake to view terrorism insurance too narrowly – either as something only skyscrapers in New York need or something that benefits the real estate industry exclusively. Recent terrorist attacks have occurred in such unexpected places as the finish line of the Boston Marathon and a Columbus, Ohio, shopping mall. Terrorism by its nature is a surprise attack, which means terrorists will always be looking for an unexpected target. That is what makes it so hard to insure against.

Moreover, while the real estate sector in particular needs reliable terrorism insurance, the industry is inextricably tied to the broader economy. If a company is relocating its headquarters to a new city and wants to invest in a new building, all the related industries involved will be harmed if construction is delayed or stopped altogether – from bricklayers to plumbers, architects to security guards. A ready supply of terrorism insurance helps the real estate sector to function as a driver of economic growth.

Let us partner as an industry on a strategy that protects terrorism insurance. While some policymakers may disagree about whether TRIA is necessary and the private market is ready to step up and provide sufficient terrorism insurance, there is no doubt that the coverage itself is needed to keep the U.S. economy growing and operating efficiently – and that any interruption could be very harmful to our nascent economic recovery.

Walt Mercer is executive vice president & head of commercial real estate for SunTrust Bank.