Vijay Yadlapati, NATIONAL ASSOCIATION OF REALTORS® Associate
Commercial Policy Representative
Importance of Terrorism
Following the horrific 9/11 terrorist attacks, terrorism insurance
coverage was virtually non-existent for commercial property owners. Only when Congress enacted the Terrorism Risk Insurance Act
(TRIA) in 2002 did coverage for terrorist attacks resume. TRIA
established a public-private risk-sharing partnership that allows the
federal government and private insurance companies to share losses
in the event of a major terrorist attack. Originally enacted as a three-year program, TRIA has been reauthorized by Congress twice. In
2005, Congress passed the Terrorism Risk Insurance Extension Act
(TRIEA). The most recent extension – the Terrorism Risk Insurance
Reauthorization Act of 2007 (TRIPRA) – extended the program
through December 31, 2014.
Today, there is concern that the uncertain future of TRIA may
cause insurance prices to fluctuate. Further, this uncertainty may
prompt insurers to drop terrorism coverage if a reauthorization of
the program is not in place by the end of 2014. This became evident
in 2005 when private insurers became more reluctant to offer terrorism coverage due to uncertainty regarding the program’s extension.
Ultimately, the uncertainty of insurance pricing impacts property
owners’ net operating income, and the value of their properties.
The potential unavailability of this coverage at the end of 2014 will
impact financing agreements and potentially hurt the fragile commercial real estate market.
Affordable and available terrorism insurance is a vital component of most commercial real estate transactions. It is estimated that
84 percent of outstanding commercial mortgage balances require
terrorism insurance. Thus, if TRIA were to expire, and insurers
subsequently dropped terrorism coverage, those loans would be in
technical default. While the commercial real estate finance market
is starting to show signs of life, any disruption in the availability of
terrorism insurance in this sector would have serious consequences
on its fragile road to recovery.
Necessity of the Terrorism Risk Insurance Program
The passage of TRIA in 2002 helped stabilize commercial real
estate markets following the disruptions of the 9/11 terrorist
attacks by making terrorism coverage available and, over time,
more affordable. According to a 2010 President’s Working Group
on Capital Markets (PWG) and 2008 Government Accountability
Office (GAO) study, TRIA and its subsequent extensions have gen-
erally kept terrorism insurance affordable and available nationwide.
Improved access and lower premiums are due in part to the contin-
ued improvement in an insurer’s ability to model and measure their
aggregate loss exposure, and thereby manage terrorism risk.
Quite simply, an effective homeland security strategy is central to
the nation’s economic security. American businesses must have
adequate terrorism risk coverage. Without terrorism insurance, the
nation’s economic infrastructure is totally exposed to large-scale
business disruptions after an attack. Specifically, accessible and reasonably priced terrorism insurance is an integral part of the health
of the commercial real estate markets. Given that the reinsurance
industry has not yet been able to develop a long-term solution that
would eliminate the need for some form of federal assistance, NAR
is concerned that the potential sunset of TRIA will result in a spike
in terrorism coverage premiums, and cause coverage to become
unavailable in numerous markets.
NAR believes the TRIA program has been a success because it
provides for the sharing of risk between government, private insurers, and policyholders. Ultimately, it is critical for the U.S. economy
that commercial policyholders be able to obtain coverage for terrorism risk. Therefore, TRIA must be extended beyond its current