When the Terrorism Risk Insurance Act finally runs out of steamin 2007, prospects for the insurance industry to pick up the slackappear pretty dim, according to executives with the insurancebrokerage firm Aon.

In a Web seminar hosted by the Chicago-based firm, Aaron Davis,vice president, property syndication, Aon Risk Services; TomFitzgerald, managing director, Aon strategic account management;and Gail Norstrom, managing director, property syndication, AonRisk Services, were joined by George Stratts, senior vice presidentwith Lexington Insurance Company, a subsidiary of AmericanInternational Group, to discuss the status and future of TRIA.

There seems to be little hope that the industry will havesufficient capacity in place when the U.S. government ends itsinvolvement with terrorism risk in 2007, said the Aon executives.They advised clients to prepare for the end of TRIA, as thereappeared to be little appetite in Congress or the White House toconsider extending the program past 2007.

They predicted that 80-to-85 percent of the current capacitywould disappear with the end of TRIA, leaving an estimated totalcapacity of $1.5 billion–back to 2003 levels–with limits of $550million for a single risk. The exception in this estimate isBerkshire Hathaway, which would supply capacity beyond theselimits, but at substantial cost. Cost for coverage also is expectedto rise substantially, with insurers writing terrorism exclusionsinto their policies.

According to an Aon executive, approximately 60 percent of thebroker's clients have purchased terrorism coverage in some form.Risks in tier-1 areas (central city centers considered highexposure risks, such as entertainment or financial centers) wouldhave difficulty securing coverage. Conversely, those whoseaggregate loss would be considered low should be able to purchasecoverage either on a stand-alone basis or as part of the propertyinsurance coverage.

Pressures are building among commercial property owners topurchase terrorism risk coverage, the executives noted. Corporategovernance demands proper placement of the risk as awareness of thepotential for a terror attack grows. Lenders also are pressuringborrowers to secure the coverage.

Lexington's Mr. Stratts said coverage will be available on astand-alone basis among a handful of carriers, but insureds willhave to rely upon the individual appetite for risk among thesecarriers.

He noted the only long-term solution is government involvementthat would provide coverage for “extreme” losses.

“Absent a government mandate, insurers will not become involvedin pooling risk,” said Mr. Stratts, noting some insurers wouldprimarily be concerned that their individual exposure in such apool would be more than they could handle.

He held out some hope that once insurance buyers understand theramifications of TRIA's loss, they may pressure Congress to act inthe future.

An Aon executive said the firm has its own idea for a plan thatwould be similar to Florida's wind storm pool. This plan providesproperty coverage for Florida property owners by insurers sharingin the overall risk through assessments. It also makes the federalgovernment the insurer of last resort.

In the meantime, they suggested that clients begin preparationsfor a world without TRIA–by forming relationships with carriers andpurchasing stand-alone coverage beyond 2007.