The federal program could end at the close of 2014, causing costs in commercial real estate to spike.
The federal terrorism insurance is on the cusp of expiring and many in the industry are now cautioning that if it is allowed to be eliminated or scaled back, this could cause costs in commercial real estate to take off in an unprecedented way.
The federal Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) expiration could lead to liquidity risks.
Reports are showing that terrorism insurance continues to play an important role, which should not be ignored. According to risk management firm Marsh & McLennan in a report that they recently released, the demand for the coverage “remains strong and the existence of TRIPRA plays a key role in making coverage available and affordable.” That publication also suggested that the fears and insecurities that have already been growing just from the belief that TRIPRA will expire have already made it harder to obtain the coverage.
Insurers are making their plans to step away from the terrorism insurance sector as they no longer see profitability.
Without the involvement of the government, through TRIPRA, many insurance companies have decided that the involvement in that sector will no longer be economically sensible.
The federal legislation had first been signed in 2002 in response to the 9/11 attacks in New York and on the Pentagon. It was meant to provide a government-backed facility for reinsurance in order to protect insurers who experienced losses as a result of an event involving terrorism. So far, there have been two extensions to that law. The first was in 2005, followed closely by the second one in 2007.
The current concerns are that if the law is to be renewed once again, it will involve a notable scaling back of the coverage. This will considerably increase the owner and tenant costs for commercial real estate. This will be especially noticeable in markets that are considered to have a higher risk, such as Boston and, of course, New York City.
Should TRIPRA be called back – or allowed to expire, for that matter – the cost of terrorism insurance will skyrocket as the number of insurers who offer those products is likely to drop through the floor, even more than it already has.