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Expect 'repercussions' without final terrorism-insurance solution.

Expect "numerous repercussions" for the commercial real estate market if the current federal terrorism-insurance backstop expires before a long-term insurance solution has been crafted, according to a report by Fitch Ratings, New York.

In its report, Terrorism Insurance and U.S. CMBS, Fitch noted it is most concerned about how a lack of terrorism-insurance coverage will affect large single-asset commercial mortgage-backed securities (CMBS) transactions because of their vulnerability to event risk.

"Without a long-term solution, pricing could emerge as an issue again," the report states. "The lack of a federal backstop that provides insurance companies with a way to measure risk could lead to larger-than-expected increases in terrorism-insurance premiums and fewer borrowers electing to obtain coverage."

This would most likely have a greater impact on large, high-profile properties in major metropolitan areas, where premiums could increase substantially, noted Fitch.

The Terrorism Risk Insurance Extension Act of 2005 (TRIEA), P.L. 109-144, signed by President Bush at the end of last year, authorizes full, mandatory taxpayer reimbursement for federal assistance provided under the program, while significantly raising the deductibles and co-shares over current program levels.

Just as with the original Terrorism Risk Insurance Act of 2002 (TRIA), which expired at the end of 2005, TRIEA is designed to keep a temporary federal terrorism-insurance mechanism in place through 2006 to the end of 2007 until a permanent solution is crafted (see Mortgage Banking, January 2006, p. 97; and February 2006, p. 134).

Another area of potential concern, Fitch noted, is revised CMBS documentation requiring all-risk coverage for properties securing a loan, and in particular, new language stating that terrorism-insurance coverage is to be obtained at a "reasonable rate" or only if it is "commercially available."

These provisions could make it more difficult for a servicer to demand coverage in the future, as well as increase the likelihood for litigation, noted Fitch.

"When deciding how rigorously to pursue coverage, servicers must now weigh possible legal costs to trust the potential losses to bondholders if the courts rule in favor of the borrower," said the report.

Meanwhile, the Presidential Working Group on Financial Markets (PWG)--whose formation was mandated under TRIEA to perform an analysis regarding the long-term availability and affordability of insurance for terrorism risk that includes nuclear, biological, chemical and radiation risks, as well as life coverage--is expected to submit its report to Congress by Sept. 30.
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Title Annotation:Commercial; Terrorism Risk Insurance Extension Act of 2005
Publication:Mortgage Banking
Geographic Code:1USA
Date:Aug 1, 2006
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