Time is almost up for the US Government to declare how it is to proceed with the financial "backstop" to assist with insurance losses after acts of terrorism within the States beyond the end of this year.

In the aftermath of the September 11 attacks on New York and Washington DC in 2001, the US Government has provided a safety net promise of financial aid to assist the insurance industry should it face immense losses from a future, large scale terrorist event.

But, with less than two weeks remaining, the continuation of the current Terrorism Risk Insurance Act (TRIA) beyond its current deadline of December 31 remains uncertain.

For Bermuda insurers and reinsurers inparticular, the uncertainty is worrying.

"It looks again that the US Congress will be holding the market hostage to last minute extension, amendments or expiration of TRIA," said Bradley Kading, president of the Association of Bermuda Insurers and Reinsurers.

"It is unfortunate. It is frustrating. The market could deal much better with meeting customer needs if the Congress was able to act in a timely manner that would provide some certainty about what federal support would be available for terrorism risk."

Since 2002 the US government has had in place TRIA, which currently is triggered if losses from a single event exceed $100 million. The cap on Fed assistance is $100 billion. The backstop has never been used and was extended from its original deadline at the end of 2005 to the end of 2007.

President George W. Bush has previously indicated he does not want to see the Act renewed, however the insurance industry believes it is needed.

Variations to the Act have been under debate throughout the year, as of this week a final decision has not been made.

California-based Risk Management Solutions, which provides catastrophe risk management products and services, has warned that cancellation of the Federal backstop could eliminate growth and availability of commercial terrorism coverage.

"There remain critical issues to be addressed regarding the extension of TRIA. Unless the discrepancies between the US House of Representatives bill and the US Senate bill can be resolved, policyholders, the insurance industry, and taxpayers could lose out on crucial benefits," it pointed out.

"TRIA provides the insurance industry with solvency, not subsidy. This would continue to be the case under either version of the TRIA extension. The growth and availability of terrorism coverage will only continue with assurance that the Federal government will support this process in the medium-term by guaranteeing TRIA for a number of years."

And warning that without this backstop policyholders may be left without coverage in the face of devastating losses, RMS' vice president of emerging risk models Derek Blum said: "TRIA has provided protection to policyholders by ensuring a viable commercial insurance market for terrorism coverage.

"We have started to see a stand-alone market develop, which may signal the entrance of new capital into the industry. The economic impacts of TRIA are also evident in the strength of real estate development and commercial lending in higher-risk areas like New York and Chicago, as well as general availability of commercial terrorism insurance."

RMS has been using its expertise to do the sums and believes it can show the worth of TRIA continuing - both as a benefit to US taxpayers and an important security for the industry.

Its US Probabilistic Terrorism Model has been used to help evaluate the impacts of modifying and extending TRIA, both by the Congressional Budget Office and the RAND Corporation, according to RMS.

"Contrary to criticisms about TRIA being used as a government handout to the insurance industry at the expense of taxpayers, a RAND study showed that TRIA reduces taxpayer costs for certified attacks that cause losses of less than $40 billion," said the company.

"Based on the model, the likelihood of exceeding this amount in a given year is just 0.2 percent. Government outlays through the program are more than offset by reductions in government compensation for uninsured losses after an attack; the large deductibles ensure that TRIA provides coverage for only the most extreme events, leaving insurers with a significant share of the costs."

Mr. Blum, explained further: "Catastrophe risk modelling plays an important role in public policy by providing unique insight into the probability of major events like the occurrence of terrorist attacks and their potential financial impact.

"By having this crucial information, the Federal government can evaluate different options that will help the insurance industry create a market for terrorism risk coverage."

RMS has further taken a position on various still-unresolved elements of the an extension to the Act.

Regarding duration of a further extension, the US Senate has proposed a further seven years, while the House is seeking 15 years.

"RMS believes that an extension for seven years or more is appropriate to provide greater certainty in the government's commitment and also allow adequate time for the industry to continue to develop appropriate products and the risk appetite for terrorism insurance," said the company.

While the House of Representatives seeks to force insurers to cover losses from chemical, biological, radiological, or nuclear attacks, RMS believes an insurance market covering such losses "is unlikely to develop independently," therefore: "With these risks remaining uninsured, the Federal government may be left to decide what level of support to provide in the unfortunate event of such an attack."

TRIA currently excludes losses from domestic terrorist attacks, which could create complications if the source of a terrorist attack cannot be clearly defined.

"The House and Senate would like to eliminate this exclusion going forward. RMS estimates that only around 7.6 percent of the average annual loss is due to domestic terrorism, and thus including domestic terrorism would only minimally increase the assumed risk while greatly simplifying the terms of TRIA coverage," according to RMS.

The company does not think it vital that the Act provide group life insurance coverage because it does not feel terrorism is a large threat to group life insurers.