With an eye on the looming expiration of the Terrorism Risk Insurance Extension Act next year, policyholders–led by commercial real estate interests–are taking the lead in drafting proposals for a politically-palatable framework for ongoing federal involvement.
Under the proposal drafted by the Real Estate Roundtable, the government's role would shift from a direct reinsurer of terrorism losses to a partner in a state-chartered mutual reinsurer.
"The current program is a recoupment system," explained Clifton E. Rodgers Jr., senior vice president of the Roundtable. "This is an advanced funding mechanism." He said the "brand new" proposal is being drafted "because we realize the current program is expiring Dec. 31, 2007, and there appears to be no political momentum to merely do another extension of TRIA."
The proposed pooling mechanism is based on terrorism reinsurance systems used by 14 countries. The $30 billion is a conservative estimate of the costs of the Sept. 11 attack, Mr. Rodgers said.
Although no one within the policyholder or insurance community would comment, the proposal is being shopped around Congress in anticipation that a report on the need for a federal backstop–due out Sept. 30 from the Treasury Department–will not favor an extension of the current program.
However, the industry does anticipate that a separate report on the need for an ongoing federal backstop for terrorism risks–expected Sept. 26 from the Government Accountability Office–will be more favorable, several sources said.
That report was requested by Rep. Mike Oxley, R-Ohio, who is retiring at year's end as chairman of the House Financial Services Committee and who has recently been a strong supporter of ongoing federal involvement in terrorism coverage.
One of the provisions in the Roundtable's proposed "framework" would mandate that insurers "offer" coverage for nuclear, biological, chemical and radiation risk–a provision in legislation Rep. Oxley shepherded through the House last year, but which went no further.
That congressional contacts are being initiated for the new proposal was confirmed on Sept. 11 by Jamie Burnett, legislative director for Sen. John Sununu, R-N.H., in comments during a panel discussion on insurance issues at the American Bankers Insurance Association annual meeting. He said whether Congress should extend TRIA "will have to be dealt with relatively soon."
Mr. Rodgers said work is starting on a replacement for TRIA now because policyholders are seeing "springing exclusions"–a rider stipulating that if the current federal program is not extended or a new program not created, terrorism coverage is null and void as of the expiration date of the program.
The constituents of the Real Estate Roundtable are the owners of the largest office, industrial, retail, hotel and apartment complexes. "We represent the people who need to buy the coverage and are the key consumers of terrorism risk insurance," Mr. Rodgers said. They are concerned because loan covenants in mortgages require all-risk coverage, he added.
"We have a very viable pocketbook interest here," he noted. "We have no evidence that without some type of federal involvement there will be adequate capacity to insure the U.S. economy" when the current TRIA bill expires.
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