Commercial Real Estate Sector Breathes Sigh of Relief

Late last week, eight days after the Terrorism Risk Insurance Act (TRIA) expired, the US House of Representatives and the US Senate overwhelmingly approved H.R. 26, legislation reauthorizing TRIA until the end of 2020.

President Barack Obama is likely to sign the legislation in the coming days. The legislation will restore order in the property and casualty insurance market, saving many commercial property owners from technical default on existing loans (if they lack terrorism coverage) or from substantial premium increases and delays or denials for new loans, as lenders require terrorism insurance on the loan collateral.

Background

TRIA became law following the September 11, 2001 attacks and the ensuing crisis in the property insurance marketplace. TRIA provides a federal backstop given that catastrophic terrorism is largely an uninsurable risk, as many policyholders found in the days since the December 31, 2014 TRIA expiration and as described in a 2014 Rand Corporation analysis.

TRIA is especially important to the commercial real estate sector. One real estate trade association noted that, without TRIA, commercial property owners would experience “significant delays in all types of real estate transactions — such as purchases, sales, refinancing and construction — as well as significant job losses across the country.”

Why Did It Take So Long?

Action in 2014

During 2014, Congress at first appeared to be moving towards approving a TRIA extension before its expiration on December 31, 2014. In July, the Senate passed a bipartisan bill, S. 2244, that included TRIA and unrelated consensus provisions addressing insurance broker licensing and Federal Reserve community banker participation by an overwhelming 93-4 vote.

In the House, however, Financial Services Chairman Jeb Hensarling (R-TX) and Housing and Insurance Subcommittee Chairman Randy Neugebauer (R-TX) continued to express skepticism about the Senate bill’s TRIA provision and pushed for a major rewrite of the program.

Because Chairman Hensarling’s proposal lacked enough support to pass the House and the Chairman opposed the Senate-passed bill, the House was deadlocked. After months of discussions involving Reps. Hensarling and Neugebauer, the House Republican leadership, Sen. Chuck Schumer (D-NY) (TRIA’s leading Senate Democratic proponent), and Rep. Pete King (R-NY) (TRIA’s leading House Republican proponent), the legislators agreed on a TRIA compromise that extended the program for six years and increased the private sector role.

The story didn’t end there. Over objections from many Democrats, the House added a Dodd-Frank derivatives end-user reform that was relatively noncontroversial as a substantive matter — a stand-alone version had earlier passed the House with more than 400 votes — but was problematic in the sense that it injected a Dodd-Frank issue into a consensus-driven bill. Nevertheless, the House approved its bill — now a combination of TRIA, insurance broker licensing, Federal Reserve community banker, and Dodd-Frank derivatives end-user provisions — by a 417-7 vote.

Despite the earlier Senate 93-4 and House 417-7 votes, S. 2244 was in trouble. The Dodd-Frank derivatives end-user provision drew objections from the Obama Administration and many Senate Democrats, notably Sen. Elizabeth Warren (D-MA), concerned about any effort, however minor, to amend Dodd-Frank outside the Senate committee process, and it looked like their opposition could be the end of S. 2244. Ironically, however, it was a surprise objection from retiring Sen. Tom Coburn (R-OK) to the insurance broker licensing provision, not anything related to Dodd-Frank, that ultimately sank the TRIA bill in the final hours of the 113th Congress.

Action in 2015

With TRIA expiring on December 31 and the commercial property insurance marketplace severely disrupted, the Coalition to Insure Against Terrorism (CIAT), the US Chamber of Commerce, and other leading business trade associations engaged over the normally quiet holidays in a coordinated grassroots effort. In a January 6 “joint trades” letter, they stated that, “For the past dozen years, the United States has relied on TRIA as a fiscally responsible terrorism risk management plan to protect taxpayers and our national security and stability,” and that “It is critical that Congress act immediately to keep our terrorism insurance protection program in place.”

In an important early test for the new Congress, the House and Senate Republican and Democratic leadership teams took swift action to restore TRIA in the opening days of the session. The House and Senate agreed on the same TRIA compromise that had cratered in December — an extension of TRIA until the end of 2020 coupled with reforms requiring more private sector “skin in the game,” including gradually increasing the insurer co-share from 15 percent to 20 percent, raising the program “trigger” for federal coverage from $100 million to $200 million, and increasing the obligation to help pay back the government after an attack (recoupment).

The TRIA portion of the legislation also includes provisions requiring 1) a Treasury Department rulemaking on changes made to the recoupment mechanism; 2) a Treasury Department study and report to Congress followed by a rulemaking on the terrorist act certification process; 3) a GAO study considering the viability and effects of collecting upfront premiums from insurers participating in the TRIA program and the potential creation of a capital reserve fund followed by a report to Congress; 4) an advisory committee on nongovernmental risk-sharing mechanisms; 5) additional insurer reports to the Treasury Department on premiums, pricing, and related issues followed by a Treasury Department report to Congress; and 6) an annual Treasury Department study of the market competiveness of small insurers participating in the TRIA program.

The House and Senate also agreed to include the insurance broker licensing provision (no longer controversial with Sen. Coburn’s retirement) and the Federal Reserve community banker provision in the package.

The House again added the Dodd-Frank derivatives end-user provision, despite renewed objections from Senate Democrats and the Obama Administration, and passed the bill, now H.R. 26, by a 416-5 vote.

The derivatives provision was again a potential obstacle in the Senate — where near unanimity on procedure is necessary to pass legislation quickly. The Senate Republican and Democratic leadership solved the problem with a unanimous consent agreement under which the Senate would consider the House-passed bill, Sen. Warren would have the opportunity to offer an amendment removing the derivatives provision from the bill subject to a 60-vote threshold, and the bill would clear the Senate subject to the same 60-vote threshold. The Warren amendment fell short, and the Senate then approved the House bill by a 93-4 vote and sent it to the President for signature.

Upshot

The US business community now has much-needed certainty over the availability of terrorism risk insurance until the end of 2020. Policyholders and insurers will be closely monitoring the Treasury Department’s implementation of the new law.