TERRORISM RISK INSURANCE - March 7, 2014 Roundtable Weekly

RAND Study Shows Importance of Terrorism Risk Insurance Act (TRIA) to Economic Security; Roundtable and CIAT Urge Congress to Renew Legislation As Soon as Possible  

A study released yesterday by the RAND Corporation profiles the negative consequences for U.S. national security if the federal Terrorism Risk Insurance Act (TRIA) is allowed to expire at year-end.

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Download the RAND report, National Security Perspectives on Terrorism Risk Insurance in the United States

The Real Estate Roundtable issued a media statement yesterday on the report, National Security Perspectives on Terrorism Risk Insurance in the United States, noting that it “clearly shows the enormous value of TRIA to our national security, economic health and the real estate industry … and points out that allowing TRIA to expire – as it is set to do at the end of this year – would clearly make our country less resilient in the event of an attack.” 

The key findings of the RAND report are:

Terrorism remains a persistent threat. Attacks using arson, conventional explosives, or firearms are most likely, though al Qaeda and other groups aspire to conduct more destructive attacks using unconventional weapons. 

Terrorism risk models based on historical events or theories of terrorist decision-making are limited: They cannot extrapolate to estimate the likelihood of future attacks from terrorist threats beyond those that have been already recognized. 

The $27.5 billion threshold for aggregate insured losses in TRIA ensures that the insurance industry, rather than the taxpayer, is ultimately responsible for paying for incidents that are within the realm of the industry's modeling capability. 

Terrorism insurance can contribute to making communities more resilient to terrorism events. Recovery from an attack will be more rapid and efficient when it is clear how much compensation will be available and how it will be distributed. 

To the extent that terrorism insurance is more available with TRIA than without it, renewing the legislation would contribute to improved national security.

The Roundtable news release also emphasized that “The extension of TRIA should not wait until the end of the year. It works. It has virtually no ongoing cost to taxpayers and the delay in acting is already slowing transactions and impending economic growth. We encourage policy makers on Capitol Hill to review this study closely and move legislation to renew TRIA as soon as possible.” 

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 Chart - Estimates for the Maximum Total Modeled Losses from Attack Scenarios Represented in the Risk Management Solutions Terrorism Risk Mode - from the RAND report: National Security Perspectives on Terrorism Risk Insurance in the United States. 

The multi-industry Coalition to Insure Against Terrorism (CIAT) also issued a statement yesterday, noting that the RAND study demonstrates how TRIA continues to be the major influence behind the wide availability of terrorism risk coverage today. “TRIA is a shield against the potentially devastating economic impact of terrorism and a major component of our national security policy. CIAT strongly advocates that TRIA be reauthorized.”

During a Senate Banking Committee hearing last week on TRIA, Real Estate Roundtable member W. Edward Walter (Host Hotels and Resorts, Inc.) testified on behalf of CIAT that the 9/11-era law and its subsequent extensions have played a critical role in protecting the American economy and maintaining liquidity in commercial real estate credit markets. [Read testimony]

Walter stated, “In the current climate, banks and other capital providers have indicated they will not provide new financing without terrorism insurance.” Meanwhile, insurers are writing exclusions into policies that run beyond Dec. 31 — just in case TRIA ultimately is not extended.

Walter explained that nearly 10 months before the law is scheduled to sunset, “borrowers are being forced to confront the question of what options will exist after year-end 2014. . .The lack of clarity around this issue will likely slow the pace of new financing, especially in the case of properties that are perceived to be at a higher risk of terrorist attacks.”

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During a Senate Banking Committee hearing last week on TRIA, Real Estate Roundtable member W. Edward Walter (Host Hotels and Resorts, Inc.) testified on behalf of CIAT

Failure by Congress to act now, Walter declared, would “run the risk of short-circuiting” economic recovery.

Henry Willis, lead author of the study and director of RAND’s nonprofit Homeland Security and Defense Center, also states in the report that if TRIA expires at the end of 2014, “and the take-up rate for terrorism insurance falls, then our country would be less resilient to future terrorist attacks.” (see RAND news release)

RAND’s analysis points out the significant contribution TRIA makes to national security by enabling more rapid rebuilding after an attack. “The primary influences of TRIA on national security,” the study noted, “are likely through improvements in resilience and recovery. To the extent TRIA leads to greater access to insurance, this could improve both the pace and effectiveness of recovery efforts and in turn makes communities more resilient to future terrorism events.

This RAND study on the national security impacts of TRIA is the first of three planned on the effects of the legislation. Forthcoming research will explore in detail the effect of TRIA on the economy and on the Workers’ Compensation insurance marketplace. 

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