The government would recoup some of those losses, however, by means of a policyholder assessment through insurers to recover up to $10 billion.

For more conventional attacks, the AIA proposed a system similar to the current TRIA program, which expires at the end of 2007. Under such a proposal, carriers would be required to make terrorism coverage available, and the federal government would serve as a “backstop” to cover losses above a certain threshold for specified lines. This proposal also includes a post-event surcharge aimed at helping the government recoup its losses.

Additionally, the AIA proposed that the Treasury conduct a thorough periodic review of the private market for terrorism insurance to determine the levels of capital available and adjust per-company retentions as warranted. Should the market lose available capital, the thresholds could be reduced. They also could be increased if the Treasury determines that more capital has moved into the terrorism market.

To attract capital, the AIA proposed the implementation of incentives for companies to enter the market. The proposals range from simple tax incentives to a possible preemption of state coverage requirements and oversight, or the relaxation of pre-loss reserving requirements. Additionally, the AIA proposed the possible creation of voluntary risk pools.

“Within this framework, some insurers may find it useful to pool their existing capital and mutualize their risk,” the AIA said in the paper. It added, however, that “such pools should be purely voluntary and are not expected to build sufficient capacity to obviate the need for the federal program described above.”