The report was prepared by GAO for tomorrow's scheduled House Financial Services Committee hearing. The Committee released excerpts from the report late yesterday.

GAO says that without terrorism insurance, direct losses to businesses, employees, lenders and others would increase dramatically beyond those of Sept. 11 in the event of another terrorist attack.

Moreover, GAO says, should the government decide to intervene only after the fact, it would do so without the readily available claims processing and payment mechanisms that exist in the insurance industry.

But even in the absence of an attack, there are growing indications that some sectors of the economy, particularly real estate and commercial lending, are finding difficulties finding sufficient terrorism coverage at any price.

"If allowed to go unchecked, these difficulties are likely to increase as more insurance contracts come up for renewal over the next year," GAO says.

"The resulting economic drag could slow economic recovery and growth," GAO adds.

Since Sept. 11, GAO says, reinsurers and insurers have been shedding their exposure to terrorism risk, leaving policyholders exposed to losses from a terrorist attack.

"The potential for more severe economic impacts is increasing as the level of uninsured risk climbs," GAO says.

Because of the lack of terrorism insurance, GAO says, lenders' and investors' collateral is less secure, raising their risk of loss. At the same time, GAO says, higher costs for insurance might make it more difficult for property owners and developers to pay their loans.

"Ultimately, the shifting of terrorism risk leaves property owners and developers, along with their employees, lenders, investors, tenants and other affected parties much more vulnerable to severe or catastrophic economic consequences in the event of another terrorist event," GAO says.