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Fitch: Higher Premiums if Terror Insurance Act Not Renewed

Posted on 07 May 2013 by Neilson

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TerrorismFailure to renew the Terrorism Risk Insurance Act (TRIA) could induce commercial insurers to retreat from larger metropolitan areas, reducing availability of coverage and raising premium rates. Lack of terrorism reinsurance coverage would leave individual insurers in the short term with commercial property and workers compensation exposure from a potential event above prior risk tolerance levels.

TRIA is set to expire on Dec. 31, 2014, but legislation that would extend protection through 2019 is in the U.S. House of Representatives. We believe this is likely the opening act of a tough legislative battle that will directly influence the future cost and availability of insurance coverage, particularly in large urban areas. It will also have broader economic implications outside of the insurance industry.

If Congress fails to extend TRIA legislation, the impact would be felt in industries such as banking, commercial real estate, and construction. The U.S. banking and real estate sectors were active participants in past lobbying efforts to pass TRIA legislation, as commercial real estate loans are required to have terrorism insurance coverage. A lack of available insurance coverage can create secondary economic repercussions that affect property values, construction activity, and employment.

Insurers' sophistication regarding terrorism risk has evolved significantly since 2001, with a heightened focus on managing risk aggregations in larger metropolitan areas. Still, the industry remains in a challenging position in terms of modeling and underwriting terrorism-related risk.

TRIA was first introduced in November 2002 as a federal backstop for insurance claims relating to terrorism losses. The initial program was set to expire in December 2005 as the insurance industry researched ways to price and account for terrorism risk. Congress passed the Terrorism Risk Insurance Extension Act of 2005, which extended TRIA until December 2007 and slightly altered the federal government involvement. In December 2007, the Terrorism Risk Insurance Program Reauthorization Act of was signed into law.

A study published by the Real Estate Roundtable points out that in the 14 months between the Sept. 11, 2001 terrorist attacks and the enactment of TRIA, over $15 billion in real estate-related transaction were either stalled or canceled because of lack of terrorism insurance. Furthermore, the White House Council of Economic Advisors stated that 300,000 jobs were affected during that time frame due to deferred construction.