By Tad Philipp, Managing Director, Moody's Investors Service
Five months after its passage, the Terrorism Risk Insurance Act (TRIA) has begun to have its intended effect on the commercial mortgage-backed securities (CMBS) market. Rates for terrorism coverage have clearly abated from the sky-high levels of a year ago. Additionally, "per occurrence" language has returned versus the stingier aggregate limits that affected many policies immediately after 9/11. Coverage for domestic terrorism is beginning to reappear as well, at reasonable costs in some cases and for no cost in others.
Even for office properties in Manhattan there has been an improvement in the availability and affordability of terrorism insurance. Leading insurance brokers with whom Moody's has consulted report quotes for terrorism insurance at 10% to 30% of the cost of a property's overall property and casualty (P&C) policy. These levels are half or less than they were one year ago. However, pricing for the very highest of the high-profile buildings is still very much determined on a case-by-case basis, with few data points available.
Terrorism insurance rates for higher-profile properties are generally in line with the recommendations of the Insurance Services Office (ISO), an organization that drafts standard language and recommends rates for more than 800 insurance companies. The ISO divides the U.S. into three risk zones. The lowest zone garners an approximate 1% increase over the regular P&C rate, the middle zone an approximate 10% increase, and the highest zone (which includes all or part of four cities: Chicago, San Francisco, Washington DC, and Manhattan below 59th Street) is pegged at a maximum of 25%.
On a cautionary note, the insurance industry's loss retention under TRIA increases significantly over the next two years. This may pose a challenge to the favorable pricing regime now being established.
The market for terrorism coverage appears to be shifting away from stand-alone terrorism insurance policies. More high-profile borrowers are buying terrorism coverage from their regular P&C carriers. However, when P&C carriers have attractive non-terrorism prices but unappealing TRIA rates, a stand-alone terrorism insurance policy can still be cost- effective.
As borrowers take advantage of the increased availability and affordability of terrorism insurance to increase their levels of coverage and improve key policy provisions, it may be possible for Moody's to restore some of the ratings on single-asset and large-loan transactions downgraded last September. Moody's applauds the efforts of leading office landlords, such as Boston Properties, which provide security measures and insurance coverage levels consistent with high investment grade ratings.
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