The Rationale for TRIA: A Look at the Turmoil in the Commercial Mortgage Markets after Sept. 11, 2001, Suggests Some Reasons Why Congress Needs to Extend the Terrorism Risk Insurance Act (TRIA). the Private Sector Is Not Ready to Go It Alone in This Area

By Glitz, Donald R.; Marquardt, Kathryn | Mortgage Banking, September 2005 | Go to article overview

The Rationale for TRIA: A Look at the Turmoil in the Commercial Mortgage Markets after Sept. 11, 2001, Suggests Some Reasons Why Congress Needs to Extend the Terrorism Risk Insurance Act (TRIA). the Private Sector Is Not Ready to Go It Alone in This Area


Glitz, Donald R., Marquardt, Kathryn, Mortgage Banking


THE UNCERTAINTY CREATED BY THE EXPIration of the Terrorism Risk Insurance Act of 2002 (TRIA) at the end of this year can't help but make us recall the turmoil in the insurance and commercial lending industries in the months following Sept. 11, 2001. During that period, the commercial real estate mortgage industry, commercial property owners and the insurance industry spent enormous amounts of energy determining appropriate or acceptable amounts of coverage and whether that level of coverage was available. No group may have been more affected by this turmoil than commercial mortgage-backed securities (CMBS) lenders, servicers and investors.

The specter of TRIA's expiration and replacement by a substantially reduced program that's less dependent on the federal taxpayer or by another short-term solution raises the question: When we look down the road ahead, do we see the same traffic jams and mishaps that are in our rear-view mirror?

Prior to the attacks of Sept. 11, obtaining property insurance for newly originated or existing commercial mortgage loans was a routine function, with borrowers providing coverage as required by the lender. The scope of required insurance coverage was rarely, if ever, a deal-breaker.

In the months following Sept. 11, however, insurance came center-stage. The commercial real estate mortgage market struggled to adjust to a new world where acts of terrorism on U.S. soil were thinkable; where insurance companies excluded acts of terrorism from "all risks" and "special perils" coverage policies; where specific premiums for terrorism coverage surfaced with dramatic increases in cost; and where coverage for terrorism in general was spotty and capacity in the standalone terrorism insurance market was extremely limited.

As 2002 unfolded, commercial real estate mortgage servicers were forced to perform additional work on policy renewals, interpreting the specific requirements of each loan and negotiating insurance coverage borrower-by-borrower and insurer-by-insurer. This was being done in an environment in which terrorism insurance capacity changed almost daily. In addition, specific requirements in loan documents relating to the ratings of insurance carriers and deductibles were weighed against coverage availability and cost.

Although commercial mortgage originators started with a clean slate when determining the insurance language requirements of their new deals, the challenge of making loans in this environment was daunting. This was especially true considering the sometimes limited and changing availability of coverage, borrower resistance to substantially higher insurance premiums and inconsistent investor views of appropriate coverage amounts. At the same time, commercial mortgage investors grew concerned with the new risks they were potentially exposed to--especially on large loans and "trophy" properties.

The passage of TRIA in November 2002 brought stability to both the real estate and insurance industries. This act required property and casualty insurance companies to make terrorism coverage available to all interested commercial property owners in connection with their purchase of property and casualty insurance. This was possible because the government was able to design a program to limit the loss exposure of primary insurers.

The defined backstop provided for in TRIA allowed insurance companies to better assess and price the risk of providing terrorism coverage in a standard "all risk" policy. With TRIA in place, insurers provided a terrorism insurance product that was readily available at reduced prices.

Pre-Sept. 11 terrorism coverage

Prior to the terrorist attacks on the World Trade Center and Pentagon on Sept. 11, 2001, terrorism insurance was not a specific concern of borrowers, lenders or investors in commercial real estate. As a rule, commercial mortgage loans required "all risk/special perils" coverage, and policies containing "all risk/special perils" were routinely provided. …

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