WASHINGTON--A Bush administration finding that the reinsurancemarket for terrorism risk is growing and could continue to do sowas labeled "wishful thinking," by a reinsurers' trade group.

A report by the President's Working Group on Financial Markets,which was called for in legislation extending the Terrorism RiskInsurance Act to 2007, concluded that the insurance industry, onboth the primary and reinsurance side, has made gains in attractingcapital and adding capacity to cover terrorism risk.

In a statement responding to the report, the ReinsuranceAssociation of America said it was "very speculative" for thereport to conclude that private reinsurance capacity will grow, andthat no new capacity has been specifically raised to coverterrorism.

"The report's conclusion is premised on wishful thinkingthat...reinsurers will have more confidence in modeling this riskand that the claims environment will continue to be 'favorable,'"RAA said in its statement.

The group acknowledged that capacity has increased somewhat forterrorism risk in the reinsurance market, and their comments werecited by the PWG as the source of their conclusions. However, RAAsaid in its statement that the amount of capacity that has come indoes not come close to meeting the potential needs of theindustry.

According to RAA, the total capacity for terrorism risk was$4-to-$6 billion prior to the extension of the TRIA program, withan additional $2 billion being added in 2006. "Technically therehas been an increase, but far short of the industry deductible" of$36 billion, the group noted. "Reinsurance capacity has gone fromzero to 'not very much' to 'not nearly enough.'"

Similarly, the RAA disputed the PWG's conclusion that someterrorism risk capacity may be emerging from capital marketparticipants. No commitments have been made by the capital marketsto assume any terrorism risk or finance a recovery, the RAA noted,and what capital has flowed into the reinsurance market has notbeen designated for terrorism risk.

"In late 2001 and early 2002, $11 billion of new reinsurancecapital was added to global reinsurance markets. Since September2005, $23 billion of new capacity has entered the (re)insurancemarket," the RAA noted. "Yet, none of this capital has gone tosupport terrorism risk. Instead, it has been allocated to naturalcatastrophe exposure and to replenish capital lost from 2001, 2004and 2005 extreme events."

RAA did agree with the PWG in two key areas, however. The groupsupported the PWG's assertion that there is "great uncertainty inthe models" for terrorism exposures, and also on the key issue ofnuclear, biological, chemical and radiological exposure. The PWGconcluded that the appetite for taking on NBCR risk is very low andthat the potential for broad gains in the market for those risks"may be limited."

"The RAA supports the report's conclusion that there is a verylimited reinsurance market" for NBCR, the group said.