The stand-alone terrorism insurance market is growing healthier,but customers in high-risk zones can pay a substantial premium, andthe expiration of the Terrorism Risk Insurance Act may onlyexacerbate the situation in the United States, according to aninsurance broker's report.

Chicago-based Aon's London office has issued a report titled“Stand-Alone Terrorism Insurance Market Update,” reviewing thehistory and current status of the stand-alone market.

The report said the terrorism insurance market has increasedcapacity, filling a gap worldwide, and since 2002 rates havedeclined 40-to-50 percent, but some hot spots are theexception.

While the few insurers willing to write the coverage arereluctant to drop prices on renewals this year, post-HurricaneKatrina, there are rate reductions of 5-to-15 percent where brokershave generated competition, the report said.

“The lack of any knee-jerk reaction to the Madrid commuter trainattacks and the events in London in July last year demonstrates thestand-alone insurance market's maturity,” said Will Farmer, adirector in Aon's crisis management division, in a statement.

Mr. Farmer added, “The debate over the extension of theTerrorism Risk Insurance Act (TRIA) at the end of last yearhighlighted the market's growing importance.

“While government-backed schemes such as TRIA have assisted inproviding terrorism capacity, their effectiveness varies. Thenecessity of such schemes in countries where the private market isable to meet demand is questionable. The stand-alone market has avery important role to play going forward,” he said.

The report asserts that the number of insureds buying terrorisminsurance has increased as risk managers take advantage of a softmarket and spend their budgeted insurance costs on the insurance,coupled with lower rates in the stand-alone market. Banks are alsoinfluencing the purchase of a program as lenders insist thatclients obtain the coverage.

Market capacity has grown 25 percent since January 2004 andcurrently stands at $1.3 billion, but much of this has come fromexisting underwriters increasing capacity and not new entrants intothe market. Premiums range from .025-to-1 percent of total insuredvalues, the report said.

Reinsurers are limiting capacity and forcing large insurers totake on large retentions for each event, the report said. Pricingis high, which “has been a significant barrier to entry into thestand-alone market” for new insurers.

The demise of TRIA, the report went on to say, will meaninsurers will re-impose terrorism exclusions. Rates will alsoincrease for stand-alone coverage.

TRIA has helped increase capacity, Aon said, but unless there isa “sea-change” in the government's thinking, the broker believesthe program will not be renewed or extended in its current formbeyond its sunset at the end of 2007.

Robert P. Hartwig, vice president and chief economist for theInsurance Information Institute based in New York, said Aon'sreport is similar to earlier reports from others and onlyunderscores the success TRIA has had in helping to developsolutions for terrorism risk.

He said the TRIA backstop has been wildly successful, allowinginsurers to develop programs and businesses to have an incentive topurchase the insurance knowing the full faith of the U.S.government is behind it.

“The extreme irony here is that this program is bringing suchgreat benefit to workers and businesses, and it is now threatenedwith extinction,” Mr. Hartwig remarked. “I don't believe thebusiness community has yet to become engaged in working to get thisbackstop reinstituted.”