WASHINGTON, D.C. — After 10 months of inconclusive wrangling, pressure seems to be peaking for definitive congressional action on terrorism insurance.
        Separately approved House and Senate bills have now moved to a joint conference committee. But the two bills' prescriptions for providing terrorism insurance differ sharply - as do opposing camps' highly vocal, well-funded campaigns.
        In the meantime, more than US$8 billion in commercial property transactions have been significantly impacted in 2002 by the lack of comprehensive, affordable terrorism insurance, according to the Mortgage Bankers Assn. of America (MBAA at www.mbaa.org). The terrorism-insurance-pool drought has killed some $3.7 billion in commercial deals in 2002's first six months; and it's "delayed or changed the pricing" on $4.5 billion more, the MBAA asserts.
        The MBAA has been among the host of real estate-related groups pushing for federally sponsored "backstop" terrorism insurance. MBAA leaders, however, voiced surprise over the volume of affected deals documented in the industry survey that the association conducted in June.
        "We have heard anecdotally about the problems on specific properties, but the magnitude of these numbers astounded me," MBAA Chairman Jim Murphy said of the survey results, which were released last week.
        "We are looking at billions of dollars in commercial financing that has been killed in the first half of the year because Congress thus far has been unable to reach agreement on a bill," he added. "The delay has been costly. And those costs will continue to go up the longer the delay."

Terrorist insurance "is a crucial aspect for a fairly large segment of the economy," Federal Reserve Chairman Alan Greenspan (pictured) testified.

Host of High-Profile Industry
Groups Backing Federal Action

The MBAA is only part of a high-profile chorus advocating federally funded backup terrorism insurance.
        Federal Reserve Chairman Alan Greenspan, for example, called terrorist attack insurance "a crucial aspect for a fairly large segment of the economy" during House Financial Services Committee testimony earlier this year.
        "This is not an insurance industry problem or a policy-holder problem. It's a national economic problem that demands a national solution," said House Financial Services Committee Chairman Michael Oxley (R-OH), who co-sponsored the House-approved legislation. "Affordable, available terrorism insurance is necessary for the economy to function efficiently."
        Similarly, many well-known real estate organizations are backing federal action, largely through the Coalition to Insure Against Terrorism (CIAT at www.insureagainstterrorism.org). An informal alliance of trade groups and corporations, the CIAT is lobbying for a federal solution to the dramatic post-9/11 contraction in terrorism insurance. CIAT member organizations include the American Public Power Assn.; Associated Builders and Contractors; BOMA International; CCIM Institute; the Electric Power Supply Assn.; the Institute of Real Estate Management; NAIOP; the National Assn. of Manufacturers; and the Real Estate Roundtable.
        CIAT has run a series of ads bearing the tag line: "Economic Security and National Security Go Hand in Hand."

Dueling Remedies: Loans or Outright Aid?

But getting a hand firmly around just what the federal government should do has proved a sticky wicket. Terrorism insurance has been intensely debated on Capitol Hill since only days after 9/11.
        The House acted relatively quickly, passing its bill in November. But not until late last month did the Senate pass its own version of the Terrorism Insurance Act - a delay that prompted Rep. Sue Kelly (R-NY) to charge, "The Senate leadership's failure to act . . . is imposing a fear tax on America."
        Even with House and Senate bills finally passed, though, a clear solution for the shortage of terrorism insurance hasn't emerged.
        The Republican-controlled House's bill, for example, would require insurers to pay the first $1 billion in claims from a future terrorist attack. Thereafter, the federal government would offer long-term loans to help pay the balance.
        In contrast, the Democratic-controlled Senate brought its own bill directly to the floor, avoiding even considering the House bill. The Senate-approved legislation places a far higher ceiling on insurers' out-of-pocket payments - $10 billion. Thereafter, though, the government would pay 90 percent of all remaining claims.

"Under a 'close-to-worst-case' scenario, which could conceivably involve $1 trillion of damage," investment guru Warren Buffett told Berkshire Hathaway shareholders, "the insurance industry would be destroyed unless it manages in some manner to dramatically limit its assumption of terrorism risks."

Buffett: 'Only the U.S.
Government Has the Resources'

The long legislative delay has sparked a rising hue and cry from property owners, insurance firms and lenders alike.
        Since Sept. 11, most new policies specifically exclude terrorism coverage. Only seven carriers worldwide were still offering terrorism lines as of mid-July.
        And the little terrorism coverage that remains is often shaky, industry analysts say. "Virtually all terrorism insurance policies have some form of deficiency that leaves lenders and investors with less protection than they had prior to 9/11," said a late-April Moody's Investor's Service bulletin.
        Terrorism insurance's big chill began on Jan. 1, 2002 - when some 70 percent of U.S. reinsurance contracts expired. Insurance carriers have long relied on reinsurance operations to bear part of policy risks. Since Sept. 11, though, reinsurance firms have sharply veered away from assuming terrorism liability.
        Self-preservation is driving that wariness, says investment guru Warren Buffett. As chairman of Berkshire Hathaway, Buffett saw his Omaha, Neb.-based holding company's reinsurance operations lose $2.4 billion in Sept. 11's wake. Federal involvement is imperative, Buffett asserts.
        "Under a 'close-to-worst-case' scenario, which could conceivably involve $1 trillion of damage, the insurance industry would be destroyed unless it manages in some manner to dramatically limit its assumption of terrorism risks," Buffett wrote in his annual letter to shareholders. "Only the U.S. government has the resources to absorb such a blow. If it is unwilling to do so on a prospective basis, the general citizenry must bear its own risks and count on the government to come to its rescue after a disaster occurs."

A number of high-profile real estate groups - including BOMA International, the CCIM Institute, the Institute of Real Estate Management, NAIOP and the Real Estate Roundtable - are aligned with the Coalition to Insure Against Terrorism. The lobbying group's ads (sample pictured above) assert: "Economic Security and National Security Go Hand in Hand."

        Even stripped of terrorism coverage, many new policies are far pricier. Anecdotal accounts have reported premiums rising to as high as 3 percent to 6 percent of properties' total value. And as prices are rising, coverage is shrinking.
        Case in point: San Francisco's Golden Gate Bridge. Golden Gate's 2002 premiums have reportedly doubled to $1.1 million. But the legendary bridge's 2002 coverage has been slashed from $125 million to $50 million.

Consumers Union: Insurance Industry
'Hasn't Come Close to Proving Its Case'

Opponents of federal support are aggressively making their case. Despite the evidence that the real estate industry has marshaled, the terrorism insurance issue is bogus, opposing groups contend.
        "While some problems exist in Manhattan and a few cities, taxpayers should not be forced to foot the bill for businesses and insurers that have already found terror coverage," J. Robert Hunter, Consumer Federation of America (www.consumerfed.org) director of insurance, said in a letter to Senate Majority Leader Tom Daschle. "[The Senate bill] will kill the strong market for terrorism insurance that has been emerging in the last few months," Hunter claimed.
        "The economic collapse predicted by the insurance industry has not happened. The insurance industry hasn't come close to proving its case," contended Frank Torres, legislative counsel for the Consumers Union (www.consumersunion.org).
        Public opinion, particularly in the current corporate-Watergate climate, will also likely be a significant factor in resolving the issue. A New York Times/CBS News poll released last week, for example, showed that respondents felt, by more than 2 to 1, that the Bush administration is more interested in defending large corporations' interests than those of ordinary citizens.

Avoiding Cure Worse Than Sickness

In addition, a whole set of other terrorism insurance issues must still be settled.
        One is clearly defining terrorism. How, for example, would incidents that appear to be arson be conclusively differentiated from terrorism? On the other hand, if the government gets involved after conclusive terrorist attacks, will there be any limit to federal-level punitive damages?
        Another concern is creating a solution that doesn't kill off private-sector providers - which is just what happened with the National Flood Program (NFP). As with the two congressional proposals on terrorism insurance, the NFP was created to step in after the private sector had been completely tapped. Instead, though, the government imposed premiums so low that private-sector providers altogether abandoned underwriting flood policies.
        And those are only a few of the tough issues that remain, insurance analysts say.
        In the meantime, many companies are resting uneasily with existing exposure, as underscored in a recent Lloyd's of London/Harris Interactive survey:
        Almost two-thirds of CFOs, the survey found, said that they had "little or no confidence" in the insurance industry's ability to provide a comprehensive package to protect against any future terrorist attacks."