Terrorism insurance rates could rocket and coverage would become hard to obtain for the most vulnerable areas if the US Government discontinues its terrorism insurance backstop.

That is the view of leading insurance broker Marsh, which expressed its views in a letter to the President's Working Group on Financial Markets.

The Terrorism Risk Insurance Act (TRIA) was introduced in 2001 after the September 11 terrorist attacks on New York and Washington, DC.

Through the end of 2005, federal aid under TRIA was to be triggered when insured losses exceeded $5 million. The trigger level was raised to $50 million in 2006 and $100 million in 2007.

President George W. Bush signed a seven-year extension to the TRIA five days before it was due to expire at the end of 2007.

Marsh, along with fellow Marsh & McLennan operating company Guy Carpenter, submitted the comments earlier this month in response to a request for industry opinion on the availability and affordability of terrorism insurance.

If Terrorism Risk Insurance Act (TRIA) is allowed to expire and is not replaced by a similar government-sponsored programme, Marsh anticipates that the availability of terrorism insurance would be greatly reduced in high-risk areas, such as business districts within major metropolitan areas.

And pricing for terrorism insurance would dramatically increase in these high-risk areas. This would have a profoundly negative impact on those businesses with the greatest need for protection against terrorism risks.

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

"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."

The findings of "The Marsh Report: Terrorism Risk Insurance 2010", Marsh's recently published annual report on terrorism, indicate that the long-term availability of an affordable terrorism risk transfer mechanism is critical to businesses operating in the US.

The report found that 61 percent of firms surveyed purchased property terrorism insurance in 2009, an increase from 57 percent in 2008 and representing a steady climb from 27 percent in 2003.

It added that median premium rates declined from $37 per $1 million of total insured value in 2008 to $25 per $1 million in 2009, owing largely to the protection afforded by TRIA.

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.