The Center's report argues that the federal government should be involved in providing a backstop to terrorism risk insurance because "government policy and actions significantly influence the risk of terrorism," and because the private market currently has limited capacity to provide coverage for extreme losses from terrorism.

Further, the federal government should be involved because the states constrain insurance rates and mandate coverage for particular lines of coverage, such as workers' compensation and property insurance.

"Federal disaster assistance following a major attack will likely be significantly greater if there is no predefined public sector role in a terrorism insurance program," the report continues, noting that "creation of a pure government program excludes insurer expertise and financial and operational capacity."

The Wharton study also includes specific policy recommendations for Congress as it drafts legislation that would restructure the TRIA program for the short-term by scaling it back.

The report's authors call for increasing the program's trigger for "certified events" from $5 million to $500 million, so that private insurers and reinsurers would be wholly responsible for any attack where aggregate losses totaled less than $500 million.

Another recommendation for the short term is to clarify how any government recoupment process provision applies to all affected parties.

Currently, according to the report's authors, there is uncertainty associated with TRIA's recoupment process. They note that "aside from the equity issues associated with this feature of TRIA, the law has introduced additional uncertainty in the loss sharing process between the insurers, all commercial policyholders and taxpayers."

"Knowing in advance who is responsible for paying losses is an important component of any program that involves the public and private sectors," the authors concluded.

The study was funded by 11 insurance companies and trade groups, including ACE INA, American Insurance Association, American International Group, American Re, Liberty Mutual and Lockheed Martin.

Other contributors included the Property Casualty Insurers Association of America (PCI), State Farm Fire and Casualty Company, Swiss Re, Wyndham Partners Consulting, Ltd. (an Affiliate of RenaissanceRe Holdings, Ltd.) and Zurich North America.

The study builds on research undertaken by the Risk Management and Decision Processes Center over the past four years, coupled with 17 years of research on how to manage and finance low probability-high consequence events, Center officials said.

Among those who paid for the research, the study was immediately cited by the American Insurance Association, which supports TRIA's extension. AIA said the Center's work "provides compelling evidence in support of a continued national terrorism insurance mechanism based on a public-private sector partnership."

The report, "TRIA and Beyond: Terrorism Risk Financing in the U.S," contains a comprehensive analysis of the roles both the public and private sectors can, and should, play with respect to managing the financial risks related to catastrophic terrorism.