The private insurance market, lacking U.S. government involvement, cannot provide sufficient capacity to meet increasing demand for terrorism insurance, according to a report by a global insurance broker.

The study by New York-based Marsh, a subsidiary of Marsh & McLennan Companies, found that nearly 60 percent of its risk management and middle-market clients obtained terrorism property insurance during 2005.

Titled “Marketwatch: Terrorism Insurance 2006,” the report said the numbers are a dramatic increase from the 2003 average of 27 percent and up 50 percent from 2004.

The report is based on data compiled from 1,623 businesses and government entities that purchased or renewed property insurance policies in 2005 through Marsh offices across the country.

“There's an increasing awareness of terrorism among businesses across the country,” Robert Blumber, a managing director in Marsh's North America property practice, said in a statement. “Clearly, businesses and their leadership at the highest levels recognize that this exposure is likely to be with us for some time and that insurance can help them address some of the financial consequences of this risk.”

However, the report noted, insurers are avoiding accumulation of risks in high-profile urban areas due to the high cost of reinsurance.

It found that other carriers are already showing unwillingness to provide the coverage after the 2007 expiration of the federal Terrorism Risk Insurance Act (TRIA). Reinsurers are also providing little capital to cover programs.

Marsh said the present standalone market for terrorism is covering current needs. However, failure to renew TRIA or have a permanent reinsurance solution in place would reveal that the market lacks the capacity to provide for the need, according to Marsh.

For companies that do not have sizable exposures in high-risk locations, typical maximum standalone capacity is approximately $500-to-$600 million. In major metropolitan areas with high levels of concentrated risk, the broker estimates there is $150-to-$300 million in capacity. Capacity above $500 million may be available at higher prices, it added.

Marsh said that if TRIA is allowed to expire, “the terrorism insurance market is likely to once again become unstable, with potentially harmful effects on the economy.” It added that it supported a joint effort on the part of government and the private sector to find a long-term solution.

Print copies of the 30-page report are available from local Marsh offices.

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