Insuring Against Attacks

RAY SUAREZ:

Joining me are Deborah Beck, executive vice president at the Real Estate Board of New York, a trade association representing owners and builders of commercial and residential properties; and Travis Plunkett, legislative director for the consumer federation of America.

Deborah Beck, President Bush says the lack of terrorism insurance is holding up millions perhaps billions of dollars of economic activity. Is he right? And if it's doing it, how is it doing it?

DEBORAH BECK:

Well, President Bush is right on that, and also has been a strong advocate, as you know, for terrorism insurance backup legislation. And the reason that this is happening is that for high profile, or what we would call high value properties, the market for insurance is very different than the market for smaller properties and homeowners and the like.

It's a market that is, for the most part, not regulated in the same manner. And what has happened, with the removal of the reinsurers who back up the insurance companies that write for high profile or high value properties, the amount of available insurance has diminished to almost none. There are in fact new companies that had to be formed in order to make this kind of insurance even on a very modest scale available.

RAY SUAREZ:

So, if you wanted to build a skyscraper in lower Manhattan or an office complex in Washington, D.C., you couldn't get underwriting for it today?

DEBORAH BECK:

Well, I can't say categorically that 100% of such projects would be stopped, but I know for sure from speaking to one lender in the major bank that does construction lending across the country, that at least five of the buildings that he was contemplating funding construction for are stopped until terrorism insurance covering the value of the loan is made available.

At this time, there is not complete coverage available in the marketplace. Right now the coverage that is available is not only inadequate in terms of its amount, but it's also inadequate because it does not cover the full range of terrorism acts, including the environmental acts.

RAY SUAREZ:

Travis Plunkett, do you feel the government should get involved in this way in backing up insurance that's available in the private market?

TRAVIS PLUNKETT:

Well, consumer groups originally supported a short-term backstop. We were fearful that the insurance industry would be destabilized and that as the result, there would be a major drag on the economy. What we've seen in the last year though is a pretty vigorous private market for terrorism insurance has developed. And all but the riskiest projects can get coverage. Rates are high. They were free before September 11 in a lot of cases. It was a freebie thrown into a lot of property casualty policies. So certainly rates are higher.

But the question is whether this proposal, which is very generous to insurance companies and subsidizes high-end real estate, is necessary a year after September 11. The European Union just discontinued its state-backed terrorism insurance programs. Now we have a situation where a year later Congress is finally putting a law on the books. Taxpayers pick up 80 to 90 percent of the tab. Insurance companies are going to be paying far less than they should. And it has implications for national security and for the private market that's developing which will ultimately be thwarted.

This is a three-year program. Initially what we had in mind and most people had in mind was a one or two-year program. What started as a good idea has become a subsidy.

RAY SUAREZ:

Senator Christopher Dodd of Connecticut, a senator who has a lot of insurance interests in his state, says this isn't a subsidy, it isn't a bailout; it's just a backstop to help protect companies against catastrophic loss in the case of really large claims like those that are coming out of lower Manhattan right now.

TRAVIS PLUNKETT:

The question is whether the backstop is (a): Necessary, given the developing private market, and (b): Wise, given the fact that if there is, god forbid, future terrorist attacks, the insurance industry could quite easily cover more of those losses than they will be required to cover.

And the second thing is that this is a subsidy right now because it is the taxpayers stepping in to provide reinsurance for an industry that can afford primary coverage and for which reinsurance is initially — it's very initial at this point, starting to develop. So it's a subsidy now, and it is also a subsidy for insurance rates that high end real estate interests are paying. We're sensitive to the situation in Manhattan, and to some extent in Chicago and Washington. We just don't think a broad backstop program, where taxpayers pick up so much of the costs is a good idea. You need something more targeted.

RAY SUAREZ:

Deborah Beck?

DEBORAH BECK:

Well, I think the real problem is one of a different market. In high-end properties, target properties or properties that surround major transportation centers, stadiums, hospitals, schools, universities, all of these properties can go into the marketplace, and buy a certain amount of terrorism insurance from companies that have actually been formed in the last year, to provide a certain amount of coverage at a very high rate. But the coverage that they're providing is not only limited in amount at a high rate, but it's also not covering the environmental terrorist risks that are also, you know, potentially out there.

RAY SUAREZ:

So you're disagreeing with Travis Plunkett's assertions —

DEBORAH BECK:

I do disagree. I think the market is totally —

RAY SUAREZ:

— that the market is adjusting to this situation?

DEBORAH BECK:

No, the market is not adjusting. When you have five companies selling limited amounts of coverage that in no way even touch the full pool of coverages that are necessary, you can't say that the insurance industry has either the capacity or the will to come in and provide that without this backup insurance for a three-year period from the federal government.

TRAVIS PLUNKETT:

Our research shows that small medium and large businesses are getting coverage if they want it. On the high end $500 million to a billion dollars worth of coverage is available. Why isn't the federal government stepping in over that amount and saying, all right, we will help you, but only above the amount that you can insure. We are not going to insure below that amount. That allows a private market to continue to grow and it doesn't subsidize businesses that don't need it.

RAY SUAREZ:

Deborah Beck, a more targeted product?

DEBORAH BECK:

Well, I think it's an interesting — potentially an interesting scheme, but the problem is with schemes, in the meantime, there is this very pressing need that isn't being met. And the pressing need that isn't being met is the availability of reinsurance from the global market, which was typically the market that provided the backup insurance for the primary carriers who wrote the policies. And while those reinsurers are coming in in small amounts, they're certainly not restoring the market to where it was before September 11. And that is really why it's so essential when the marketplace cannot meet the need that government come in and support its citizens, its business owners, and also the investors in all these businesses.

One of the things that most people think about is oh, these are very large valuable buildings owned by very rich individuals. The reality is many of these very high valued properties are part of REIT portfolios. Many individuals own mutual funds that hold such — stock in such portfolios. There are — the huge commercial mortgage backed securities market, which has taken a terrible hit since 9/11 also has suffered and has been unable to pull together the capital needed to fund these high valued properties that are interested in going into development. It's also had a terrible dislocating effect on refinancing.

This is a problem, not just between insurers and owners. It's also a problem for the lending community because lenders must be certain, and usually require in their agreements with the individual or consortium taking out the loan, that full terrorism coverage, all casualty is covered.

RAY SUAREZ:

Let me get a response from Travis Plunkett.

DEBORAH BECK:

Sure.

TRAVIS PLUNKETT:

You know, Ray, in April, the Federal Reserve Board did a survey of bank lending and it showed that bank lending had not been affected by the terrorism insurance situation. A private consultant did a similar survey, found the same thing. We are seeing very big exaggerations of the problem in an effort to get a broad federal backstop on the book for three years. And then the concern is what happens after three years — because we don't have a private market that's developed. Will there be a strong argument that we are going to need to renew the federal backstop? Is this reinsurance program going to last for six years or ten years? That would be a real travesty.

RAY SUAREZ:

What about the passage of time taking care of some of this, this as a bill that gets us through an emergency period in this market, quickly.

TRAVIS PLUNKETT:

Well, what it is going to do is stall the market which was developing. So the passage of time is going to be frozen in place, the private market will be. It is not going to help the private market grow.

RAY SUAREZ:

Travis Plunkett, Deborah Beck, thank you both.

DEBORAH BECK:

Thank you.