What the TRIA Extension Bill Means to CMBS

Huxley Somerville, Fitch Ratings

By Keith Loria, Contributing Editor

At the end of 2014, the U.S. Senate struck down the TRIA extension bill (Terrorism Risk Insurance Program Reauthorization Act), which provided government-sponsored property insurance in the event of a terrorist attack, and was widely supported by the real estate industry.

A new report by Fitch Ratings, “U.S. Terrorism Insurance Lapse May Lower Coverage, Hurt CMBS,” predicts Congress’ failure to renew the bill could have repercussions for the insurance industry and segments of the broader economy, particularly commercial real estate, mortgage lending and construction markets in the year ahead.

According to Huxley Somerville, Fitch Ratings’ managing director and head of U.S. CMBS, TRIPRA is a vital component of the CMBS market and has become common in many transactions. In fact, the report named nearly 20 Fitch-rated transactions that would be put on Rating Watch Negative without the insurance.

“As loan documents require terrorism insurance over the life of the loan, CMBS servicers may increasingly force-place coverage from their own carriers,” he said. “This would likely be at a very high cost if coverage can be found at all.”

The report goes on to say that if TRIPRA is not renewed, it would have a negative impact on ratings of office properties with loans in CMBS single-asset transactions. It could also affect some multi-borrower transactions, if the number and size of the loans lack sufficient coverage, or the risk of terrorism-related losses could not be mitigated by the rest of the pool.

The law originally came about in the wake of the 9/11 terrorist attacks, creating a government-backed insurance facility for businesses that suffered losses after the tragedy. Before the law was in place, insurers frequently excluded terrorism exposure from coverage.

However, the report says, commercial property insurers have gradually enhanced their ability to measure and model exposure to terrorism events. Net exposures are managed currently through the availability of large reinsurance limits through TRIPRA.

“Withdrawal of TRIPRA reinsurance protection without readily available substitute coverage will likely prompt insurers to exclude terrorism from property coverage so as to manage geographic risk aggregations in large metro areas,” Somerville said in the report. “By statute, workers’ compensation writers are forbidden from excluding terrorism coverage in their policies. Therefore, the expiration of TRIPRA may lead underwriters to withdraw from writing workers’ compensation in large cities that are thought to be targets for terrorism.”

Additionally, insurer withdrawal of underwriting capacity in response to a lack of terrorism reinsurance protection could have broader economic consequences for commercial real estate and construction markets.

The report theorizes that compared to 2002, conditions remain difficult to predict whether financial and property markets have a greater propensity to adapt to an environment without a government-sponsored terrorism insurance program.