NEW YORK--(BUSINESS WIRE)--To the market’s surprise, the Senate adjourned without passing a bill to renew the Terrorism Risk Insurance Act (TRIA). The program is set to expire on December 31, 2014.
Terrorism insurance became unavailable in 2002 in the wake of the September 11, 2001 terrorist attacks. Congress responded by passing the Terrorism Risk Insurance Act of 2002. The legislation established a program that requires insurers to include terrorism insurance in their all-risk casualty policies, and established a loss sharing arrangement between the government and private insurers for losses incurred due to terrorist attacks.
While we are optimistic that the bill will be renewed in January 2015, we cannot predict Congressional actions. Should the passing of the bill be delayed for an extended period of time, or not passed at all, it is possible that master servicers may force-place insurance for certain properties. KBRA has reached out to the servicing community to understand their position on the issue, as different organizations may have different approaches to the situation.
Should coverage be force-placed, special servicing transfers and/or litigation costs may arise, as has happened in CMBS 1.0. The related costs impacted the trusts, including rated securities on single borrower transactions, which lack the benefit of pooling as well as a first loss piece. Although KBRA is not initiating any Watch Placements at this time, we will continue to monitor the status of the legislation. Currently, KBRA has identified 27 CMBS single borrower securitizations within our rated universe where we believe the master servicer may be inclined to force-place insurance. Should this occur, the ratings on these transactions may be at higher risk of rating actions. Thus far, we have determined that all related borrowers within the transactions are required to maintain terrorism insurance should TRIAA not be extended, provided it is commercially available, subject to an expense ceiling. The question will be, as it was in the past, “Will the insurance be attainable at rates the borrower is willing and/or able to pay?”
Terrorism, by its very nature, is unpredictable. KBRA does not believe it is in the position to tier properties and make assumptions about where and when events may occur, the form they will take, nor their order of magnitude. Given the vastness of the commercial real estate property markets, we believe the probability of any given asset being the subject of a terrorist attack is fairly small, and we do not plan to initiate any Watch placements at this time. However, while the probability of an event may be low, its effects can be significant. As such, we are hopeful that the bill will pass. Should it not, it may have an impact on the overall health of the commercial real estate market, as the failure to have coverage in place may ultimately have a bearing on the financeability of larger assets, particularly those in major cities where an event is more likely to occur. It will also result in increased insurance expense on existing transactions, reducing cash flows.
We will continue to monitor the situation as it evolves for both our existing portfolio, as well as on new issuance deals and post updates accordingly.
About Kroll Bond Rating Agency
KBRA is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (NRSRO). In addition, KBRA is recognized by the National Association of Insurance Commissioners (NAIC) as a Credit Rating Provider (CRP).
