2014 seems like a long ways away but in Washington there are already concerns that a critically important program to the commercial real estate industry could end that year, which would make it hard for buyers and owners long before 2014 rolls around to get financing for their projects.
The program is called TRIA, the Terrorism Risk Insurance Act, and it was passed in 2002, not quite a year after the September 11 attacks, and its intent was to stabilize the availability of terrorism insurance so buyers and owners could get commercial property loans. In the wake of the attacks, insurers had started pulling out of the market because they couldn’t quantify the risk terrorism posed to their business.
It’s not hard to see why, because it’s the nature of terrorism to be unquantifiable—when and where, and even if—an attack occurs is unknowable, and the best actuary in the country can’t price risk that’s 100-percent unknowable.
TRIA was effective in stabilizing the insurance market and after it had been in place for a year or so the cost of insurance moderated. Then, in 2005, the authority was set to expire and the market started destabilizing again as Congress considered whether to extend it. The program was eventually extended before it expired, and now here we are in 2012 and the authority is once again facing expiration, although not until 2014. Yet the time for Congress to start looking into program extension is now, because as we saw in 2005, if reauthorization is delayed until the last minute, insurance costs can get volatile and some providers could leave the market.
If the insurance does go away, borrowers could actually find themselves in technical default on their mortgage, because the typical commercial mortgage agreement stipulates that borrowers carry terrorism insurance on the property. Today, 85 percent of commercial mortgages carry the coverage.
Against this backdrop, Linda St. Peter, the operations manager of Prudential Connecticut Realty in Wallingford, Conn., and vice-chair of NAR’s commercial committee, testified before a House Financial Services subcommittee earlier this week recommending lawmakers extend the program before the market becomes nervous about the program’s continued authorization.
“There’s a concern that the uncertain future of of TRIA may cause the prices to fluctuate,” she said at the hearing, “and this uncertainty may prompt insurers to drop terrorism coverage if a reauthorization is not in place by 2014.”
The conversation about program reauthorization must take place against the tough choices Congress faces on the federal budget, so St. Peter and the other witnesses at the hearing made a strong case for lawmakers to start the conversation sooner rather than later.
In the one-minute video above, St. Peter lays out the real estate industry’s concerns over the continuation of federal terrorism insurance.