A unit of the Wharton School at the University of Pennsylvaniahas prepared a study which concludes that government has a role andresponsibility to collaborate with the private sector and provideprotection against terrorism losses.

The study was prepared by the Risk Management and DecisionProcesses Center of the Wharton School. The report, releasedyesterday, is titled "TRIA and Beyond: Terrorism Risk Financing inthe U.S."

Release of the study came as the Republican majority in Congressand the Bush administration are making efforts to wean theinsurance industry away from the government's backstop forterrorism risk insurance.

The current government backstop program, the Terrorism RiskInsurance Act, expires Dec. 31, and the Bush administration andimportant members of the Republican leadership in Congress say theywon't support such an extensive program going forward. Democrats,however, contend the current program should be extended until abipartisan program can be negotiated that only gradually backs awayfrom a government backstop.

The Center's report argues that the federal government should beinvolved in providing a backstop to terrorism risk insurancebecause "government policy and actions significantly influence therisk of terrorism," and because the private market currently haslimited capacity to provide coverage for extreme losses fromterrorism.

Further, the federal government should be involved because thestates constrain insurance rates and mandate coverage forparticular lines of coverage, such as workers' compensation andproperty insurance.

"Federal disaster assistance following a major attack willlikely be significantly greater if there is no predefined publicsector role in a terrorism insurance program," the reportcontinues, noting that "creation of a pure government programexcludes insurer expertise and financial and operationalcapacity."

The Wharton study also includes specific policy recommendationsfor Congress as it drafts legislation that would restructure theTRIA program for the short-term by scaling it back.

The report's authors call for increasing the program's triggerfor "certified events" from $5 million to $500 million, so thatprivate insurers and reinsurers would be wholly responsible for anyattack where aggregate losses totaled less than $500 million.

Another recommendation for the short term is to clarify how anygovernment recoupment process provision applies to all affectedparties.

Currently, according to the report's authors, there isuncertainty associated with TRIA's recoupment process. They notethat "aside from the equity issues associated with this feature ofTRIA, the law has introduced additional uncertainty in the losssharing process between the insurers, all commercial policyholdersand taxpayers."

"Knowing in advance who is responsible for paying losses is animportant component of any program that involves the public andprivate sectors," the authors concluded.

The study was funded by 11 insurance companies and trade groups,including ACE INA, American Insurance Association, AmericanInternational Group, American Re, Liberty Mutual and LockheedMartin.

Other contributors included the Property Casualty InsurersAssociation of America (PCI), State Farm Fire and Casualty Company,Swiss Re, Wyndham Partners Consulting, Ltd. (an Affiliate ofRenaissanceRe Holdings, Ltd.) and Zurich North America.

The study builds on research undertaken by the Risk Managementand Decision Processes Center over the past four years, coupledwith 17 years of research on how to manage and finance lowprobability-high consequence events, Center officials said.

Among those who paid for the research, the study was immediatelycited by the American Insurance Association, which supports TRIA'sextension. AIA said the Center's work "provides compelling evidencein support of a continued national terrorism insurance mechanismbased on a public-private sector partnership."

The report, "TRIA and Beyond: Terrorism Risk Financing in theU.S," contains a comprehensive analysis of the roles both thepublic and private sectors can, and should, play with respect tomanaging the financial risks related to catastrophic terrorism.