Terrorists carrying out a "dirty bomb" nuclear, chemical or biological attack on Manhattan could create a catastrophic loss event of such a magnitude — one estimate is $700 billion — that global insurance or reinsurance industry would never be able to cope.

Even the US Government's own "backstop" assistance to cover insurance losses from terrorist acts in the US is capped at $100bn per year. That backstop, which operates through the Terrorism Risk Insurance Act Extension (TRIAE), is for conventional acts of terrorism, not those classified as nuclear, chemical or biological.

Mind-blowing losses that can only be guessed at because they exist so far outside the realm of experience and risk modelling, were discussed at the second-day of the Insurance Day Summit in Hamilton.

The question before the panel was whether terrorism risk can be successfully modelled and underwritten without the TRIAE backstop, set up post 9/11 and which reaches its latest "deadline" at the end of this year.

The US government vehicle has given insurers and reinsurers a defined limit to the losses they would be exposed to in the event of a major terrorist act in the US. Currently, if losses from an event exceed $100m the Federal Government steps in to cover around 90 percent of the excess.

But that assistance could end, or be replaced with something else, as of December 31 this year.

In the insurance and reinsurance world there is apprehension about what happens next. If insurers are forced to blend full terrorism risk into their other lines of business, such as property catastrophe, the unquantifiable risk undertaken would tie up huge amounts of capacity normally leveraged or available for other insurance lines.

XL Capital's James Veghte, chief executive of XL's Reinsurance General, foresees pandemonium in the industry if ever such as scenario were to become a reality.

He told the summit delegates that a survey last year on the availability of stand-alone reinsurance protection for terrorism estimated there is about $6 to $8 billion of total capacity.

"If you consider that 9/11 was a much bigger loss than that.The American Academy of Actuaries did an analysis on an NBCR (Nuclear, Biological, Chemical Risk) event in Manhattan and came up with a number of $700bn, it is clear to me the industry does not have the capability to provide the capacity," he said.

On the possible loss of the US Federal "backstop" provided through TRIAE, he added: "There would be pandemonium. Clearly if there was pressure on the reinsurance market to accept terrorism risk, if terrorism coverage was somehow blended into coverage that we provide like catastrophe where we clearly understand the exposures and models and so forth, there would be significant reduced capacity in the reinsurance market."

And it wouldn't only be the insurance and reinsurance industry that would feel the effect. He said: "There would be huge knock-on effects on the economy in areas like construction. I don't know of any developer who would deploy their capital and build very large property in a major metropolitan area if they weren't able to secure terrorism coverage."

Rey Becker, a vice president of the Property Casualty Insurers Association of America felt TRIAE had worked well, adding the caveat: "But it should be remembered that since it came into force there has not been an event in the US of sufficient magnitude to trigger the Act."

He warned that within the US Congress there is a minority of politicians who believe the Fed backstop is stifling innovation within the ranks of insurers and reinsurers to develop solutions to handling the terrorism insurance risks.

Mr. Becker said everything should be done to discourage those politicians from seeking to end the backstop facility because that would lead to no insurance coverage at all because of the immense, open-ended risks involved.

Rory MacGregor, Axis Capital senior underwriter and terrorism manager, said there was still a strong private market with insurers and reinsurers carrying most of the cover, except for the large terrorism events including those involving nuclear or biological attacks.

He did not think the industry scenario would be as bad following a major terrorist act in the US today compared with post-9/11 when many companies withdrew from the market. Outside the main metro areas (11 US cities have been judged high risk targets by AM Best) he feels insurance prices against terrorism would be stable and there would be little difference within property and stand-alone insurance coverage.

Looking to the short-term future as TRIAE reaches its next expiration due date, Property Casualty Insurers Association of America's Mr. Becker said: "There is now legislation introduced in Congress, the first bill which we have seen would extend the TRIAE programme and it is called HR2761.

"There are aspects of it that we like and some that we don't care for. The good news is the Bill would extend the programme for an additional 10 years, the programme would be expanded to cover domestic acts of terrorism as well as foreign-inspired acts as present, we would add group life insurance as a covered line.

"One of the things we are happiest about is that the event trigger — which is presently set at $100m would be reduced down to $50m - from our perspective a much more workable figure for small to medium sized companies."

He added: "Probably the most controversial portion of the legislation would be to create a new mandate that commercial property casualty and life insurers would be required to make available NBCR coverage and that would have a different deductible, rather than the existing 20 percent deductible you would see a 7.5 percent deductible on property casualty side."