Fitch found that the timing of the passage of the bill may be indicative of a period of increased risk for the insurance market. The Senate voted 86-11 for final approval Nov. 19.

Approval for the bill, Fitch noted, followed Congress' authorization of President Bush to take military action against Iraq, and the Central Intelligence Agency's announcement that the Al Qaeda terrorism network continues to pose a threat.

Fitch said that while many insurers will be better protected from the economic consequences of another terrorism attack, the probability of another costly attack may now be higher.

The legislation establishes a three year cost-sharing program that applies to all primary commercial property-casualty insurance companies.

Under the program, insurers would pay losses up to an amount equal to 7 percent of their direct earned premiums in the first full year of the program, 10 percent in the second year and 15 percent in the third year.

Fitch said it estimates at an assumed $150 billion of industry-wide commercial premium, the overall industry deductible would be $10.5 billion in the first year, $15 billion in the second year and $22.5 billion in the third year.

For losses in excess of those percentages, the federal government would cover 90 percent and insurers would cover 10 percent, subject to a recoupment program funded through subsequent surcharges on commercial policies of up to 3 percent of premium.

The total amount of government coverage is set at $100 billion annually. Congress would have to revisit the issue to decide how to handle losses above that mount.

The program covers acts of terrorism on all policies, and also includes acts of war for workers' compensation.

Fitch said the bill is especially beneficial for insurers writing coverages such as workers' compensation, for which state insurance regulations prohibit any form of terrorism exclusion.

The company said the measure also aids insurers that have not been fully effective in gaining terrorism exclusions in their general commercial policies, and those in the 30-plus states that required use of the Standard Fire Policy, which does not permit exclusions for fire damage resulting from a terrorist attack.

Fitch found the most significant negative in the bill is the requirement for all primary insurers to offer terrorism insurance going forward with their standard policies.

Insurers that had been able to effectively eliminate the bulk of their terrorism exposure through policy exclusions up until now, may now actually have an increased exposure to a moderate terrorism event, Fitch said.

The rating firm said this is because all insurers have a significant retention of terrorism-related losses, or 'deductible', that are borne before the government catastrophic protection becomes available.

As Fitch sees it, the compulsory nature of participation in the program is also likely to hinder development of other more market-oriented methods of managing and insuring terrorism exposures, which will add to uncertainty in three years when the current legislation expires.

Fitch also repeated its concerns that the structure of the program could induce insurers to take less prudent risks in pricing and accumulating terrorism exposures.

The new program differs from traditional reinsurance structures, in which treaty terms are based largely on the cedants underlying risk profile and losses are funded by premiums ceded at actuarially determined rates, Fitch said.

Under the legislation, there is one policy limit for the entire industry, insurer retentions are dictated by size, and losses that exceed individual insurers' retention are ultimately funded by future assessments on all commercial insurance policies, Fitch said.

Fitch noted that that the bill poses some immediate administrative challenges for commercial insurers by terminating all terrorism exclusions in place.

Insurers have 90 days to notify policyholders of the change in coverage for terrorism exposures under this program, and the applicable increase in premium for this additional coverage.

Insureds then have 30 days to decide whether to continue to exclude the terrorism coverage under the program or to pay the additional related premiums for coverage.

Fitch said several areas of uncertainty remain regarding the response to the program and this new availability of terrorism coverage.

The company said it is unclear what primary insurers will charge for the additional terrorism coverage under the program, how these rates will be derived, and what the impact of this program will have on broader commercial insurance pricing trends.

The extent to which insureds will choose to pay for this additional coverage or opt out of receiving additional terrorism coverage is also unknown, Fitch pointed out.

Insurers will be exposed to a high risk of adverse selection for a period of time, Fitch said. If a covered terrorist act were to occur to an insured party after the bill is signed, but before that insured had accepted or declined the offer of additional coverage, the insured will certainly accept the offer.

Fitch said it believes the length of this exposure will vary by insurer and can be anywhere from 31-to-120 days, since the 30-day acceptance period begins when the insured receives written notice of the suspension of the exclusion and the new pricing for terrorism coverage.

The sooner an insurer is able to provide customers with written notice, Fitch said, the shorter the company's exposure to the risk of adverse selection.

Fitch said it is still not clear what reinsurers will do. The company suggested reinsurers might not will be willing to remove terrorism exclusions from the protections they provide to primary insurers.

Without reinsurance protection for losses within their retention, some insurers could actually be more exposed to terrorism losses when their terrorism exclusions are voided than before passage of the bill, Fitch said. Reinsurers are not protected by the program for any terrorism-related losses that they assume.

Overall, Fitch said the bill is a favorable development for the U.S. economy, and it will likely have a greater impact on industries other than property-casualty insurance, such as real estate and construction mortgage lending and property management, which could spur new activity in these sectors.