In a report released yesterday, Merrill Lynch explained the implications of losing the Terrorism Risk Insurance Act or TRIA. This is in light of the Treasury Secretary's recent comments.

In recent remarks, U.S. Treasury Secretary John Snow said that the Bush Administration does not seem inclined to renew the TRIA expiring December 31, 2005. By June 30, 2005 (possibly earlier), the U.S. Treasury will recommend to Congress to either extend, modify or simply allow TRIA to expire. Merrill Lynch said TRIA offers federal backstop insurance to insurance companies for losses incurred over a deductible resulting from a certified terrorist act. Meanwhile, in contrast to the Treasury's Snow, both the Chairman of the House Financial Services Committee Michael Oxley and the Chairman of the Senate Banking Committee Richard Shelby stated that the extension of TRIA would be a top priority of their respective committees. In a related development, World Trade Center Properties LLC, an affiliate of Silverstein Properties, Inc., last week announced the appointment of Aon Risk Services, Inc. to find insurance coverage for the construction of the Freedom Tower in lower Manhattan. Merrill said that an impetuses for TRIA's enactment was to promote real estate construction as well as job creation resulting from that construction.

Merrill Lynch said that single-borrower CMBS would probably be the most likely to suffer if TRIA's removal results in a shortfall of available terrorism insurance. Analysts said that single borrower deals usually have concentrated exposure to large and iconic properties. The risks are the following: losses as a result of a terrorist act, higher insurance costs, as well as trust expenses associated with enforcing insurance requirements or force-placing insurance. They added that first loss and lower-rated classes would bear the most risk.

Analysts think that in the absence of an intervening terrorist attack, the markets will not face a dislocation as bad as that seen in 2001-2002 because of several factors including the passage of time and shock, recognition of enduring terrorism risk, the development of terrorism loss risk models, improved insurance company capacity, specific language governing insurance requirements, as well as price reductions in the face of competition. Merrill even said that these factors might make for the beginnings of a reasonable foundation for building a viable terrorism insurance market.



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