Fitch Ratings is warning that failure to renew the Terrorism Risk Insurance Act could reduce product capacity in larger metropolitan areas, raising premium rates.
It could also, in the short term, leave individual insurers with commercial property and workers compensation exposure from a potential event above prior risk tolerance levels, Fitch Ratings analysts say.
Fitch's statement came on the heels of a Marsh & McLennan Companies report released last week raising concerns that Congress may not fully address the renewal of the Terrorism Risk Insurance Act before the scheduled expiration of the law at the end of 2014.
Fitch says legislation extending the program introduced in the House in February "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, the report said.
"If Congress fails to extend TRIA legislation, the impact would be felt in industries such as banking, commercial real estate, and construction," Fitch says.
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, Fitch Ratings analysts said.
"A lack of available insurance coverage can create secondary economic repercussions that affect property values, construction activity, and employment," Fitch Ratings analysts say.
"Insurers' sophistication regarding terrorism risk has evolved significantly since 2001, with a heightened focus on managing risk aggregations in larger metropolitan areas," Fitch says.
Still, the industry remains in a challenging position in terms of modeling and underwriting terrorism-related risk, the report adds.
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