Wind and Terrorism Risk Lead to Insurance Uncertainties

Dec. 4, 2006
BOMA Intl. predicts impact to insurance availability in 2007

This year was marked by higher insurance rates and vastly higher wind deductibles as part of the aftermath of the deadly and destructive 2005 hurricane season. In addition, the federal government's terrorism risk insurance program comes to an end at the close of 2007, adding even more uncertainty. Now, as 2007 approaches and insurance policies once again come up for renewal, what can property owners expect?

Windstorm Insurance Coverage
Few would argue that our nation is facing a growing insurance crisis as the insurance and real estate industries struggle to prepare for the possibility of multiple events and the inevitability of rising insurance costs. Across the country, building owners and managers are dealing with how to manage and pass through costs, though buildings in the Gulf Coast region have undoubtedly been hit the hardest.

In Florida, for example, some commercial property owners have seen the cost of insurance increase between 400 and 1,000 percent as a consequence of eight hurricanes in 2 years. According to Tampa, FL-based Cushman & Wakefield of Florida Inc., insurance companies took in approximately $7 billion in premiums in 2004-2005 and paid out close to $40 billion for hurricane losses during that same period. Further exacerbating the problem, the power grids in Florida suffered major damage, and some experts predict that rates for commercial rate payers will increase approximately 35 percent to cover the cost of repairs and upgrades to the infrastructure.

According to some insurance statistics, the average 300,000-square-foot building in Orlando, FL, saw the cost of insurance triple (from roughly 30 cents per square foot to $1.15 per square foot) and the wind deductible increase (from $100,000 to over $2.5 million) while the building value remained unchanged.

This dramatic rise in rates for windstorm coverage is driving some companies to consider self-insuring, or at least self-insuring the wind-damage component of their insurance. In some cases, insurers themselves are dropping some policies as they come up for renewal in order to reduce their risk.

While most leases allow building owners and managers to pass insurance costs through to their tenants, deductibles have gotten so high that tenants may not be able to pay their deductible in the event of a catastrophic event, leaving the building owner with options of spreading the cost over several years or amortizing costs, both of which come with their own set of drawbacks.

Unfortunately, insurance and risk-management experts are predicting that rates won't go back down anytime soon, even if the 2006 hurricane season passes without any major storm events.

Terrorism Risk Insurance Coverage
Another insurance issue that promises to compound uncertainty in 2007 is the anticipated expiration of the federal terrorism insurance program on Dec. 31, 2007. Building owners and managers should expect that, as policies come up for renewal, they will begin to receive notice from insurers that the terrorism portion of their coverage will sunset at the end of 2007.

Following 9/11, many owners of commercial properties were advised that their policies would not be renewed or that their new policies would exclude terror/war risks.

After more than 1 year of intense advocacy efforts, BOMA scored a huge victory when Congress passed the Terrorism Risk Insurance Act of 2002 (TRIA) and again in late 2005 when Congress voted to extend TRIA for an additional 2 years. The Terrorism Risk Insurance Extension Act of 2005 (TRIEA) expires on Dec. 31, 2007.

When Congress acted in 2005 to extend the act, legislators made it clear that they did not want to continue the program beyond 2007 and that the federal government should not continue to serve as a reinsurer for terrorism coverage. TRIA and TRIEA were designed as short-term solutions to provide coverage while the insurance and reinsurance industry worked on putting long-term solutions into place.

Congress has begun holding hearings, and the President's Working Group on Financial Markets (PWG) and the U.S. Government Accountability Office (GAO) each released a report on the issue. The President's Working Group report recognizes the difficulty in modeling for terrorism risk and identifies concerns over chemical, nuclear, biological, and radiological (CNBR) risks. The GAO report focused on the extent that risks associated with CNBR terrorist attacks are measurable and insurable by the private and public sectors, and concluded that the private insurance market would not be able to provide sufficient coverage to American businesses from such attacks.

If the insurance and reinsurance industries are not capable of providing adequate levels of service beyond 2007, the United States will once again experience economic disruption as real estate projects are unable to get financing, new construction projects are halted, and jobs are lost.

For more information on these and other issues, call BOMA Intl. at (202) 408-2662 or visit (

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