DESPITE PLEAS FROM insurance and business executives to extend a federal program that has helped them to offer or buy terrorism risk insurance, congressmen are questioning whether the federal government should continue to offer the program.
The expiration of the 2002 Terrorism Risk Insurance Act could have broad implications for the hospitality industry, officials say, including higher insurance costs and suppression of new construction.
Without an extension, says Bradley Wood, senior vice president of risk management for Marriott International, the question becomes whether there will be enough private terrorism insurance capacity to fill the void. “Based on early indication, it isn't there,” he says.
Insurance prices will increase without an extension, Wood warns, and the combination of higher prices and lack of capacity will have a chilling effect on new construction. “The ability to develop and build requires capital, and the lending industry requires a policy holder to carry terrorism insurance. It creates a concern for the economic growth of our industry, and our country.”
The 2002 Terrorism Risk Insurance Act requires insurers to make terrorism risk insurance available, with the federal government in return guaranteeing to reimburse insurers for losses above a certain threshold. The purpose of the program is to lower the cost of insurance and increase availability in the wake of the September 11, 2001, terror attacks.
With TRIA set to expire December 31, insurers and business executives are eager to have the act extended, but during a Senate Banking Committee hearing April 14, several senators expressed reluctance, with charges that the act was simply providing the industry with a taxpayer-provided subsidy.
This stance was echoed by Robert Hunter, director of insurance for the Consumer Federation of America. “I cannot blame the insurance industry for wanting to keep what was always meant to be a temporary measure during a difficult period of our history,” he said. “This law should not be extended without a thorough examination of whether this temporary tool is still necessary.”
In April, Chicago-based AON issued an update to its 2004 report on the terrorism insurance marketplace. According to AON, the percentage of its clients that are electing to take some kind of terrorism coverage is trending up, especially in the financial/real estate sector (which includes the hospitality industry).
At the April 14 senate hearing, Robert Lowe, CEO of Lowe Enterprises and chairman of the Real Estate Roundtable, testifying for the Coalition to Insure Against Terrorism (a body of more than 75 associations and businesses, including the American Hotel & Lodging Association, Marriott International, and Hilton Hotels Corp.), said that the government “must continue to provide a reinsurance backstop beyond 2005 if we are to avoid major disruptions to the economy.”
In its study, AON finds that uncertainty regarding the TRIA extension has led to limits on — and in some cases the exclusion of — terrorism risk insurance on policies withterms extending beyond 2005.
A Treasury Department report analyzing the industry's ability to provide terrorism coverage without an extension of TRIA is due this month, and observers believe no action on TRIA will take place until that report is released.
What are the prospects for a TRIA extension? “It's a jump ball right now as we see it,” says Wood.