The insurance business is all about odds and risk, a form of betting where you "win" if something bad happens but you win more when you have a "losing" bet.

At first this seems confusing and contradictory, but think about it: If you're hit by a bus you collect. If you don't get hit you're not paid but you avoid hospitalization, rehab, and the need for a new leg.

All of which brings us to real estate and insurance. If you own property you need insurance. You can't get a mortgage without insurance because the property is security for the loan and lenders won't make a loan with fire, theft, and property coverage. No less important, you want insurance because if there's a claim you want a strong financial partner to fight on your behalf and pay most of the bill if that becomes necessary. In effect, you're spreading the risk of ownership and insurance companies, for their part, are willing to take that risk in exchange for premium payments.

Insurance companies, in turn, behave much like property owners. An insurance company covers your property and then turns around and spreads the risk by seeking insurance on its coverage, so-called re-insurance.

Insurance, then, is really a system of risk reduction based on the idea of spreading exposure in exchange for a premium to each player who enters the risk pool.

The catch, of course, is that not every bet has equal odds. Some are more risky than others so insurance companies try to shift the risk by requiring higher deductibles, limiting coverage, and raising premiums. In the worst case, the odds are so hideous that insurance companies refuse to play and no coverage is available.

That's been the situation with commercial real estate since September 11th. Premiums have risen precipitously when coverage has been offered, building economics have changed for the worse, and in many cases there is no coverage to be had and thus no lender willing to make new loans.

There just isn't a company that wants to be the sole insurer of a billion-dollar building complex that might be a terrorist target, certainly not at yesterday's rates. The situation is so serious with commercial real estate that no combination of insurance firms -- a worldwide network of huge companies -- has been prepared to take such risks under the terms and conditions which existed before September 11th.

While the matter of commercial insurance coverage may seem distant and unimportant except to the landed gentry, it's a problem that cuts across economic lines.

"More than $15 billion in real estate transactions have been canceled or put on hold because owners and investors could not obtain the insurance protection they need," according to President George W. Bush. Commercial construction is at a six-year low, said the President, who added that thousands of jobs have been lost, bond ratings for commercial mortgage-backed securities have been lowered and bond market investors have been hurt -- including perhaps the pension fund designed to provide for your future.

You get the picture. Under the just-enacted "Terrorism Risk Insurance Act of 2002" Uncle Sam has become the re-insurer of last resort. Now all taxpayers are in the building insurance business, a responsibility which seems entirely fair.

Why? Because terrorism is not an attack on a given property or institution. It's an assault on us all, our way of life, and the principles we value.

Will some people benefit more than others with the passage of the terrorism-insurance law? Sure. That always follows with national legislation. But more importantly, if the threat of terrorism can stop construction projects nationwide, then we have a bet which everyone has lost. As a country we just can't allow that to happen, and with the passage of a national insurance law we didn't.

For more articles by Peter G. Miller, please press here.

Published: December 3, 2002

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