In November 2002, the federal government enacted the Terrorism Risk Insurance Act creating a temporary federal reinsurance program to limit insurance companies' risks of financial loss from terrorist attacks and to increase the availability of terrorism coverage for property owners. TRIA is scheduled to expire on Dec. 30, 2005, and Congress has been considering proposals to extend the program. To that end, the Congressional Budget Office has prepared a paper analyzing TRIA and assessing changes in insurance markets since the law's enactment.

A primary consideration in the decision about TRIA's future is how long the elevated risk of terrorism is expected to last. If the increase in risk turns out to be temporary, TRIA may have succeeded in keeping property owners and insurance companies from overreacting to the 2001 attacks.

However, the growing belief that the terrorism threat is long-lived does not support a simple extension of TRIA, the authors continue. A persistent high-level risk of terrorism implies that the owners of assets at risk should adopt measures to reduce their losses. By providing zero-premium coverage and not requiring policyholders to take actions to reduce their exposure to losses, TRIA effectively lessened incentives for property owners to make costly adjustments to a short-term threat, according to the report.