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Jittery Industry Pushes for Renewal of Terrorism Insurance Law
By Terry Pristin - The New York Times
May 12, 2004 - Uncertainty over whether the federal government will renew a law providing a backstop to insurance companies in the event of a terrorist attack is causing widespread concern in the commercial real estate industry, particularly among those who do business in areas that are considered potential targets.
Proponents of extending the 2002 Terrorism Risk Insurance Act - which is due to expire at the end of 2005 - say that it is needed to prevent a return of conditions after the attacks of Sept. 11, 2001, when many lenders refused to cover terrorist acts or charged prohibitively high rates for the coverage.
Ending the federal program, said Douglas Durst, the New York developer who has two projects under construction in Manhattan, including the 51-story Bank of America tower on 42nd Street and the Avenue of the Americas, "would seriously impact our ability to go forward with our new buildings."
Although the program has bipartisan support in Congress, officials of the Department of the Treasury have expressed some reservations about whether it should continue. And opposition has come from the Consumer Federation of America, which says that the insurance industry can well afford to assume the risk of terrorism on its own.
The terrorism insurance law requires the federal government to cover 90 percent of combined damages in excess of $12.5 billion this year (rising to $15 billion next year) up to $100 billion. It covers only acts that occur within the United States that are committed by people acting on behalf of a foreign person or cause.
The statute has another 18 months to run, but a more immediate deadline is looming. By Sept. 1, the Treasury secretary must decide whether to extend a provision that requires insurance companies to make terrorism coverage available. If the Treasury Department does not grant the extension, the provision will expire on Dec. 31. Anne Womack Kolton, a department spokeswoman, could not say whether the department would act before the deadline. "We want to make a very thorough examination of the issue before making a decision," she said.
The Sept. 1 deadline is too late for many insurance companies, according to a recent General Accounting Office report. "Insurers," the report said, "need to make underwriting, price and coverage decisions for these policies in mid-2004." Gail Davis Cardwell, a senior vice president at the Mortgage Bankers Association, a trade group, said that some insurance policies that expire in June are being renewed only through the end of the year.
Testifying before two House of Representatives subcommittees on April 28, Gregory V. Serio, superintendent of the New York State Insurance Department, urged that the decision be made sooner. He called the insurance measure "a key factor in stabilizing and re-energizing New York's economy."
At the hearing, Wayne A. Abernathy, assistant Treasury secretary for financial institutions, said the department would not decide whether to support the renewal of the terrorism insurance law itself until June 2005, when it completes a mandatory report on whether the measure, which was intended to be temporary, is still needed. Under questioning, he said that if the federal government continued to provide a backstop, the insurance industry might be discouraged from developing methods for assessing and pricing the risk from terrorism.
But Robert J. Hartwig, the chief economist for the Insurance Industry Institute, a trade association, said that unless the terrorism insurance coverage was reauthorized this year, negotiations for next year's property insurance renewals would become more complicated. Not knowing whether the backstop will be available would be bad not just for owners, but also for investors, Mr. Hartwig said.
Until Sept. 11, 2001, insurers had considered the risk of terrorism so low that it was included in property and casualty coverage without being priced separately. After the attack, however, many insurance companies stopped providing terrorism coverage or made it extremely costly.
In a survey conducted in 2002, the Mortgage Bankers Association found that nearly $8 billion worth of transactions in the first half of the year were either halted or delayed because of a lack of terrorism insurance coverage, Ms. Davis Cardwell said. The ratings agencies downgraded about $7.5 billion in commercial real estate securities because of concerns about inadequate terrorism insurance, the mortgage bankers' group said. Since that time, however, terrorism insurance has become widely available, not just from traditional insurers but also from new companies, and prices have become competitive, said Richard A. Chicotel, the chief financial officer for Shorenstein, a San Francisco company that owns 20 million square feet of property throughout the nation. Mr. Chicotel said he would like the federal program to continue to keep prices down, but he said its continuation was less crucial for landlords with large and geographically diverse portfolios that spread the risk. Shorenstein buys blanket policies covering all its properties from a syndicate of 15 carriers, he said.
The Coalition to Insure Against Terrorism, made up of nearly 60 trade associations, corporations and nonprofit organizations, has been clamoring for renewal of the law. Yet surveys have shown that few policyholders are taking advantage of the coverage. Commercial brokers who responded to a survey released in March by the Council of Insurance Agents and Brokers, a trade group, said that only 20 percent of their clients were buying the coverage (yet 80 percent of the respondents said the program should be extended).
Marsh, a global insurance brokerage company, recently surveyed its offices around the country and found that the number of policyholders buying the coverage had increased each quarter, rising to 27.3 percent by last fall. The Northeast had the highest rate of participation (30.3 percent) and the West the least (18.6 percent), but the company said the figures represented the region where the insurance order was placed, not necessarily the location of the property.
According to the General Accounting Office, most of the policyholders buying terrorism coverage are in the high-risk areas. Insurance Services Office, a company in Jersey City that advises property and casualty insurers on risk and liability, has identified New York, Washington, San Francisco and Chicago as high-risk cities and Boston, Seattle, Los Angeles, Philadelphia and Houston as cities where the risk is moderate. The remaining 95 percent of the country is viewed as low risk, according to David Dasgupta, a spokesman for the Insurance Services Office.
Stephen L. Gaitley, the real estate practice leader at Woodruff-Sawyer, an insurance brokerage company in San Francisco, said the classification developed by Insurance Services Office was a "fair reflection of how underwriters are viewing" the terrorism risk.
Given that the insurance industry itself believes that most of the country is not at risk, the Consumer Federation of America argues that there is no justification for continuing the federal backstop program. If one exists at all, a federal reinsurance plan could be aimed at the areas where the risk is greatest, said J. Robert Hunter, the director of insurance for the federation, which represents 270 consumer groups. "If you're going to cover it," Mr. Hunter said, "make sure you cover only the minimum necessary."
Last month, the federation suggested that a more limited program would impose an industrywide deductible of $50 billion after taxes for the first year, increasing by $10 billion a year after that. (Insurance losses from the Sept. 11 attacks have been estimated at $40 billion before taxes.) Insurers should be required to pay a bigger share of the losses and should be charged a premium for the reinsurance provided by the government, the federation said.
"There is no reason," the federation report said, "why taxpayers should subsidize the wealthy property/casualty insurance industry in the provision of terrorism insurance."
But Mr. Hartwig of the Insurance Industry Institute described the federation's opposition as a "knee jerk" reaction from the industry's long-standing antagonist. "In the end," he said, "this is not an insurance industry issue. It's an issue for corporate America."
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