NU Online News Service, Aug. 25, 3:05 p.m. EDT

WASHINGTON–Marsh is telling the Obama administration that cutting the federal terrorism risk insurance program would have a dire impact on the availability of terrorism insurance in the U.S.

Reducing the government's potential risk from a terrorism event would "greatly reduce the availability of terrorism insurance in high-risk areas, such as business districts within major metropolitan areas," Marsh said in a letter to the President's Working Group on Financial Markets.

"Marsh also anticipates that pricing for terrorism insurance would dramatically increase in these high-risk areas," Marsh said.

"This would have a profoundly negative impact on those businesses with the greatest need for protection against terrorism risks," the letter states.

The U.S. government has provided terrorism risk backup coverage since enactment of the Terrorism Risk Insurance Act (TRIA) in late 2002.

In its comment letter, Marsh said, "On occasions when TRIA coverage has been unavailable, Marsh clients have used terrorism policies provided by insurance companies on a standalone basis to manage and transfer their terrorism risk adequately.

"However, a significant increase in either natural catastrophes or man-made events–such as terrorism–would likely result in a market hardening, which in turn would have an adverse impact on the affordability of terrorism risk insurance in the future," Marsh said.

"This effect would be exacerbated in the absence of a mandated terrorism risk insurance mechanism," Marsh said in its comments.

The comments were requested as part of the Obama administration's 2011 budget request, submitted in February.

So far, the Treasury Department has received 49 comments on the proposal, most from insurers and their trade groups voicing concern about the Treasury plan.

The Office of Management and Budget wants to reduce the potential impact of a terrorism event on the U.S. Treasury beginning in 2011 and again in 2013. The 2011 budget generally proposes reduced federal intervention in TRIA by increasing the deductible to be paid by insurers, increasing the insurer co-participation, increasing the event trigger, removing coverage for acts of domestic terrorism and reducing the recoupment percentage from 133 percent to 100 percent.

In its latest report on the availability of terrorism risk insurance in the U.S., Marsh and Guy Carpenter said the administration proposal is just one component of its effort to provide Congress with ways to reduce government spending.

Marsh and Guy Carpenter are operating companies of Marsh & McLennan Companies Inc.

But, in its report, Marsh said that the administration's plan "holds few specifics on how changing the current program would do so."

Moreover, Marsh said in the report that its terrorism experts have had discussions with policymakers "who have indicated there is very little appetite for these changes to be enacted by Congress."

Ben Tucker, leader of Marsh's Property Specialized Risk Group, said in the comment letter, "Terrorism, in all its forms, remains a significant risk that will need to be insured again over the long term."

He added, "Marsh would expect significant and adverse market impact in the absence of the TRIA backstop, as insurers do not have sufficient capacity to meet the terrorism risk needs of policyholders."