Aon has issued a bulletin, which notes that “a recent report by Fitch Ratings suggesting a benefit to the U.S. commercial real estate market if Congress extends the U.S. Terrorism Risk Insurance Act (TRIA) for two more years when it expires on Dec. 31, 2005, is ‘right on point.’”
Aon’s Aaron Davis, a vice president in National Property Syndication, commented. “Aon completely agrees with Fitch’s analysis of the potential impact on the real estate loan origination and servicing market if TRIA expires. In fact, the issue could be more serious than it was immediately after 9/11 as many pre- 9/11 loan agreements did not specify the need for terrorism coverage.”
The Fitch report predicted that a potential TRIA expiration would also adversely affect commercial mortgage-backed securities (CMBS) servicers, who currently enforce the inclusion of terrorism coverage on the loans they service. Because of changes in mortgage loan documents, the servicers may have a more difficult time demanding terrorism coverage if TRIA is not extended.
Davis noted that currently, most of the new loans include specific language about terrorism insurance requirements. “Many of these commercial loans allow the borrower to stop buying terrorism coverage if the costs are more than two times their ‘all-risk’ property pricing.” If premiums for terrorism coverage go up, the Fitch report stated that servicers may no longer be able to rely on the language of the loan documents to enforce the terrorism insurance requirements, and this may result in an unnecessary disruption to the CMBS market.