Last fall, soon after the Sept. 11 attack on the World Trade Center, the nation's insurance companies, supported by bankers, builders and real estate companies, warned that if Congress did not shield insurers from losses in future attacks, terrorism coverage would vanish and the economy would grind to a halt.
But Congress did not act. Now, two months into the new year, the consequences appear to be far milder than the insurers suggested.
PHOTO: NY TIMES
Commercial insurance costs in general have risen steeply, and terrorism coverage, still extremely limited, is particularly expensive. But there is growing evidence that American businesses and their insurers are solving their problems without Washington's help.
Terrorism coverage, which was unobtainable immediately after the attacks, is becoming more widely available and in larger amounts. Premiums are falling as more insurers enter the market.
So what of the dire predictions? The proponents of government intervention, which include Bush administration officials, maintain that hard times are coming -- that calamity has simply been slow to develop. They say the lack of full terrorism coverage at reasonable prices is creating a drag on the economy, the effect of which may not be felt for months.
"This is a slow-moving glacier that will destroy everything in its path," said Stephen Bartlett, the president of the Financial Services Roundtable, an association of some of the largest insurers and banks.
The General Accounting Office, the investigative arm of Congress, echoed those concerns in a report released Tuesday afternoon. The report, requested by Representative Michael G. Oxley, R-Ohio, the author of legislation providing for government assistance that has so far succeeded only in the House, cited nine examples across the nation of unidentified commercial property owners being unable to get full or partial terrorism coverage or being unwilling to pay what insurers were asking. A congressional hearing on terrorism coverage is scheduled for Wednesday afternoon.
But Congress' interest in the issue has generally cooled as it has become preoccupied with the Enron debacle, and major business disruptions have yet to occur. Many insurers said they doubt that, barring another major attack, any help will be coming from Washington.
Some in Congress still say that they favor government intervention, but no action is scheduled.
Sense of urgency wanes
"The air has been taken out of the balloon," a Democratic staff member in the Senate said. "The urgency doesn't seem to be there. We're now into February, and we don't seem to have a major problem."
More than a dozen entrepreneurial insurance companies are now collectively offering up to US$500 million in coverage per building. This is less than the cost of replacing the tallest buildings, but more than enough for most commercial properties. The policies cover physical damage to property from terrorism and, in some cases, loss of business income.
Dazzled by the enormous premiums that terrorism coverage is generating -- sometimes 10 or 20 times basic commercial property insurance -- several other insurers, including Allianz of Germany, Swiss Reinsurance and Zurich Financial Services, are considering offering it.
"They're looking at this as a new product line to grow their revenue," said Gary Mathieson, a senior executive at Willis Group Holdings, a big insurance broker.
For their part, businesses are either paying for terrorism coverage or betting that they are unlikely targets and can put off buying policies until premiums drop.
Scores of corporations are talking with consultants about setting up their own insurance funds. The Air Transport Association of America, the trade group for the nation's big airlines, said it hoped to decide soon whether to start an insurance cooperative.
In New York, some big real estate transactions have stalled over negotiations for terrorism coverage, but others are proceeding. The market for bonds based on commercial mortgages, which are secured by buildings, is going strong.
Darrell Wheeler, a financial analyst at Salomon Smith Barney, said the terrorist attacks have had virtually no effect on 80 percent of the US$70 billion market in commercial mortgage bonds. Most older bonds are trading at about the same prices, he said, and new ones are being issued. But for the remainder of the market, there is some reluctance to finance projects of US$100 million or more, he said, and some investors are reluctant to buy bonds tied to individual office towers, apartment buildings and shopping malls.
Instead of foreclosing on existing loans because buildings now lack full insurance coverage, lenders are increasing their interest charges, requesting borrowers to put up more cash, or, as a real estate executive said, "holding their breath."
Softening requirements
Some financial institutions have also begun softening their insurance coverage requirements. Instead of insisting on full coverage, some lenders now just say that borrowers should make "reasonable efforts" to obtain terrorism coverage.
Mathieson said that US$100 million in terrorism coverage could easily cost US$5 million to US$10 million a year, down from US$20 million at the end of last year, but this is an approximation. Late last year, a nationwide retailer, which did not want to be identified, said it received quotes of US$3 million and US$7.5 million for US$150 million of terrorism coverage. Now, Mathieson said, the retailer is buying the coverage for US$450,000.
"It looks like the market is beginning to work this out," said Kenneth A. Froot, a financial economist at Harvard Business School. "We haven't moved to the point where we have as much coverage as we need. But we should see continuing improvement over the next 12 to 18 months."
Froot and some other economists say that the government should keep its distance from terrorism coverage. "There are big benefits from delaying any government plan," he said. "First, the true price will emerge, as opposed to an artificial one. Second, prices will force people to make decisions about construction and security. With government intervention, that is not going to happen."
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