The working group, which operates under the Treasury Department, in its report made no firm suggestions regarding the implementation of a long-term terrorism risk solution, or what form any solution should take.

Their report followed a Sept. 26 study by the Government Accountability Office, which concluded that Congress should limit government support for terrorism reinsurance to nuclear, biological, chemical and radiological (NBCR) risks.

The PWG report noted much of the industry has made progress in understanding the severity of terrorism risk, although figuring frequency and severity of NBCR (risks, remain problematic.

According to the PWG “TRIA appears to negatively affect the emergence of private [terrorism] reinsurance capacity because it dilutes demand for private sector reinsurance.”

The Property Casualty Insurers Association of America (PCI) said it disagreed with that conclusion and believes TRIA's federal backstop, “is the single reason any private market whatsoever exists in this area.”

In a letter to Senate Banking Committee Chairman Richard Shelby, R-Ala., Treasury Secretary Henry Paulson did say positively that TRIA “has helped support a continued increase in private sector participation in the terrorism risk insurance marketplace,” even with the changes made in the extension legislation raising the thresholds for government involvement and insurance company deductibles.

“TRIA was not intended to be permanent, but rather was intended to help stabilize the insurance industry,” Mr. Paulson added. “It has been successful in that regard, as the insurance industry is in a better position now than it was after September 11, 2001, both in terms of financial health and understanding of overall terrorism risk exposures.”

The improved understanding of terrorism risk and the improved ability to model for terrorism losses are among the major factors for a stronger terrorism insurance market, the PWG noted in its report.

“The amount of capital an insurance company is willing to allocate to a particular risk, line or region is based largely on its understanding of its maximum loss under different scenarios,” the group noted in the report.

“To that end, insurers have made greater use of sophisticated modeling of severities of terrorism events to measure and manage accumulations of risk in any given location or area. Improved risk accumulation management allows insurers to diversify and control their terrorism risk exposures, and may encourage additional capacity in the long term.”

However, the report also noted that problems continue to exist in modeling for frequency of terrorist attacks, listing it among the factors making it difficult to determine if a long-term private market solution to the terrorism risk issue will be found.

“The greater uncertainty associated with predicting the frequency of terrorist attacks along with what appears to be a general unwillingness of some insurance policyholders to purchase terrorism risk insurance coverage makes any evaluation of the potential degree of long-term development of the terrorism risk insurance market somewhat difficult,” the PWG concluded.

Like the overall primary market, however, the PWG found a similar strengthening in the terrorism reinsurance market, with further progress possible if insurers are willing to adapt to the conditions in the reinsurance market.

“Reinsurers have gradually allocated more capital to the terrorism risk due to improvements in the market (better understanding and modeling of the risk, primary insurers' management of accumulations, favorable loss experience and pricing), and available capacity continues to increase year to year,” the PWG concluded.

“Long term, if insurers were willing to pay higher reinsurance costs and were willing to pass along those costs to policyholders, additional reinsurance capacity would likely enter the market and alternative risk transfer mechanisms might develop.”

The PWG did find two areas with little change in their markets–one of which is a positive, and the other a problem. As a positive for policyholders, the PWG found that the group life market remains healthy and that, “based on what appears to be a highly competitive market today, there is no reason to expect that those market conditions will not continue in the long term.”

A more serious issue for the insurance industry, the PWG found, is the lack of development in the area of more severe nuclear, biological, chemical or radiological attacks.

“In contrast to the overall market for terrorism risk insurance, there has been little development in the terrorism risk insurance market for [NBCR] risks since September 11,” the PWG found. “Given that insurance companies have historically excluded coverage for these types of losses–even if not caused by terrorism–there may be little potential for future market development.”

The Independent Insurance Agents & Brokers of America said the PWG and GAO reports highlights the “need for a continued federal role for terrorism insurance” including NBCR.

The reports also confirm the difficulties in the markets, ability the handle the terrorism risk, said IIABA and it urged the Bush Administration and Congress to work on a long-term public-private partnership to provide terrorism insurance protection.

Mark Racicot, president of the American Insurance Association, said NBCR risks “truly are acts of war and easily could overwhelm all of the assets of the U.S. private property protection system.”

The uniqueness of terrorism risk that led to the establishment of TRIA is unchanged and the federal government must continue some form of help “for the foreseeable future,” he said.

Carl Parks, National Association of Mutual Insurance Companies senior vice president government affairs said after the Sept. 11, 2001 terror attacks insurers “withdrew from a market they couldn't predict or price and policyholders couldn't get the coverage they needed” and carriers “are convinced the same things would happen again if there is no private/pubic federal terrorism program.

This article was updated at 11:51 a.m. Oct.3