Perhaps some of the largest impact felt due to the events of Sept. 11 comes by way of insurance. At the end of September an insurance industry group announced that terrorism and acts of war would most likely be excluded from future insurance policies starting in December, according to a Salomon Smith Barney report. Aside from the obvious damage this might do to credit spreads, the American Insurance Association approximates that "70% of insurance policies without terrorist exclusions expire on January 1st each year," according to the Merrill Lynch CMBS Weekly.

Within the sector, it is the trophy asset class that is likely to feel the biggest impact. These assets, notes Salomon, are not likely to receive new financing or be able to roll existing financing because of the increase in perceived risk and change in risk profiles.

To head off potential problems, there are at least two proposals on the table to deal with this shortcoming. While President Bush is dressing down the "evil-doers" of the world, his administration has offered a plan to share the liability of terrorist damage with the insurance industry. The plan would have the government pay 80% of the first $20 billion in claims for 2002 and 90% of the next $80 billion. Congress would have to approve any claims beyond that. Over the next two years, government coverage would phase out, with the insurance industry being responsible for the first $20 billion in 2004. Salomon notes that this plan falls short of a 1992 British system, which pooled the terrorism policy payment from all insurers to provide coverage above the first 100,000 British pounds, spreading the risk across the real estate industry and limiting individual insurers liability. Still, the Bush proposal will provide a cap on future claims and allow insurers to price terrorism coverage into policies down the road.

A second proposal from the American Insurance Association, mentions Merrill, calls for a government reinsurance plan that considers terrorism risk for property as well as other types of insurance, which seems to match up more with the U.K. plan. Either way, there will be deep discussion and political wrangling over whether or not these plans are viewed as a bailout policy for insurance companies. In the end, however, some form of government back-up will likely be implemented before year-end to ward off any credit concerns or liquidity constraints while more permanent measures are discussed for the future.

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