Bermuda-based insurers won't benefit from a recently enacted federal backstop in the event of another terrorist attack in the US, according to a leading insurance economist.

Dr. Robert Hartwig, chief economist at the Insurance Information Institute, said the legislation recently passed by the American government - which guarantees a federal backstop, or its stepping in as an insurer of last resort for up to $100 billion in claims from a terrorist attack on American soil - can only be applied to US insurers, leaving Bermuda insurers to face the full brunt of any claims from future attacks.

The local sector could therefore be left with another mult-million dollar hit, as it was after the events of September 11.

Dr. Hartwig said, however, that the US insurance subsidiaries of Bermuda-based companies would be eligible for the "backstop", which would apply to any terrorist attack through 2005 that was on behalf of a foreign interest and resulted in $5 million or more in damages. It does not offer any protection to reinsurers, whether based in the US or elsewhere.

The bill makes the federal government responsible for paying 90 percent of a primary insurer's property-casualty losses above a set annual deductible structured to cover possible terrorist attacks through 2005, and on a sliding scale over that period.

Dr. Hartwig added that although it was not the intent of the bill to influence where insurance companies wrote their business, one potential effect of the legislation could be that foreign insurers - including Bermuda-based companies - may divert more of their US underwriting to their US subsidiaries.

While Bermuda companies are not legally bound to offer terrorism coverage - as US insurers now are - at least one local insurer said market forces will give Island insurers little choice but to offer terrorism insurance.

And Dr. Hartwig said although the legislation was "a step in the right direction, it had not reduced insurers exposure as much as one would think".

For example, he said another attack on the same economic scale of the September 11 catastrophe, and in the third year of the program, would still leave insurers with some $20 billion in claims, despite the federal backstop.

As a result, Dr. Hartwig said insurers would be looking to "off lay risk through reinsurance and it now becomes a bit of a sellers market" and pricing could be high both the insurance and reinsurance sectors are at loose ends as to how to reasonably price the coverage.

Insurance veteran Michael Morrison, a CEO of one of Bermuda's newest insurers Allied World Assurance Company (AWAC) told The Royal Gazette the bill - formally known as the Terrorism Risk Insurance Act 2002 - raised more questions than it answered. Mr. Morrison said: "Insurers now have to offer it (terror cover) but the question is how does one price it?"

And he added that although Bermuda-based companies were under no legal obligation to comply with the legislation, ultimately the market would dictate that Bermuda insurers write terrorism coverage.

From the time the legislation was enacted - American president George Bush signed off on the bill on Tuesday - insurers had 90 days to notify policy holders of the terms and conditions of terrorism coverage. Policyholders then have 30 days to respond and can decline coverage.

Now it is crunch time with Dr. Hartwig saying: "In the next 90 days insurers need to answer the question 'how much should it cost' six million times - or once for every business in America," he said.

Although he said there is now first generation terrorism modelling, to gauge the level of risk of a terrorist attack for various scenarios, "any model is going to be subject to a great deal of uncertainty especially when it comes to the frequency of any scenario", he concluded.