Magazine article The RMA Journal

Terrorism Insurance Coverage for Commercial Real Estate. (Insurance Issues)

Magazine article The RMA Journal

Terrorism Insurance Coverage for Commercial Real Estate. (Insurance Issues)

Article excerpt

On March 11, RMA hosted an audioconference with a panel of speakers representing banks, insurers, rating agencies, and investors who discussed terrorism risk, once considered a remote risk in the U.S. This article is a summation of those proceedings.

Demand for terrorism insurance coverage is one of the challenging ripple effects of September 11, 2001. As institutions consider the risks associated with possible future terrorist attacks, they are scrutinizing portfolios for geographic concentrations. While most banks are not requiring commercial real estate borrowers to have terrorism insurance, its availability and affordability are concerns, not only for bankers and property owners but also for analysts and investors.

Peter Haley, managing director and group credit executive for commercial real estate, JP Morgan-Chase, said real estate practitioners, owners, and lenders face many new risks and uncertainties since September 11 that are changing the risk equation.

"Taking all this new risk is not the responsibility of the financial institution," said Haley. "We're not being paid to take that risk, nor is it appropriate for us to take it. We're clearly not pricing for it."

JP MorganChase has a large real estate portfolio spread around the country that offers some diversification, yet vigilance is still needed, said Haley. Before lending to large institutions with considerable real estate holdings, the bank must now examine more closely the borrower's portfolio concentrations and the inherent risk and exposure to a terrorist event within those portfolios.

"Many of us, including JP MorganChase, distribute much of our real estate risk via syndication, securitization, or private placements. It is therefore crucial that we know where the other practitioners in the market are and their appetite for this risk. It's very hard for us to take the risk to position a piece of paper when the liquidity and appetite for the paper have become so uncertain.

"The liquidity and pricing discipline of the capital markets has changed the face of real estate compared to the 1990s. The uncertainty of the terrorism insurance issue is impacting those flows, adding to the risk of the business.

"We're reviewing our portfolio to understand what our concentrations are. But it's very difficult. We cannot be in the insurance underwriting business and try to estimate where and what the next terrorism event will be and how it will impact property. I'm concerned about a biological or chemical event. Most biological and chemical exposure is excluded from whatever terrorism insurance is available today."

Haley also noted that JPMorganGhase is investigating portfolio or secured creditor insurance to cover calamity or uninsured risk, as well as investigating parallels to earthquake risk, layering of coverage, and self-insurance. One outcome may need to be the significant delivering of real estate to compensate for the risk of partial casualty or the need to require recourse from deep-pocket players.

"The question is not whether insurance is commercially available or reasonable," he said. "Terrorism risk is new and will be with us for a long time. It significantly adds to the risk of owning and lending on real estate. Until we all better understand and get some clarity on ways we are approaching this risk, the markets will be more volatile, illiquid, and fragile."

Rating Agency Perspective

Analysts from Standard & Poor's and Fitch Rating Service agreed that there was no probabilistic model they could use to determine ratings, and that the risk had to be accounted for in the rating. But they disagreed on how ratings could be determined.

Kim Diamond said Standard & Poor's has considered a couple of approaches. One is to downgrade or place on a negative credit watch those deals that have no coverage for key assets, but she added that the firm is not likely to take that approach. …

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