Two industry analyses on the potential industry impact of theTerrorism Risk Insurance Act extension warn insurers that they needto reassess their exposure strategies and that TRIA ramificationscould include a capacity shortage in some areas.

Reports by AIR Worldwide Corporation and insurance broker Marsh,a subsidiary of Marsh & McLennan Companies, detail the changesmade under the TRIA extension bill, which increased thecertification trigger for insurers and decreased the percentage ofthe federal government's share of loss over the next two yearsbefore the act sunsets.

(The certification trigger==the level of damage at which thefederal terrorism insurance backstop kicks in--will increase fromthe current $5 million to $50 million in 2006 and $100 million in2007. Deductibles and co-participation percentages of insurers willbe increased in each year as well.)

AIR, based in Boston, and a subsidiary of Insurance ServicesOffice, Inc. headquartered in Jersey City, N.J., used its terrorismloss models to give a loss example of a sample company with $2billion in total annual premium. The company was assumed to have ahigh concentration of exposure in major cities.

In a worst-case scenario==a chemical attack in a major U.S. citycosting $85 billion in insured loss for the industry--thehypothetical company would retain $407 million of its $1.4 billionloss in 2006, nearly $500 million in 2007, and the total $1.4billion loss when TRIA expires in 2007.

Under a scenario with a lower level of terror losses, a $12billion industry terrorism loss would result in the hypotheticalcompany keeping all $230 million in total modeled terror lossesover all years covered under the TRIA extension because thedeductible would not be reached.

"The impact of these changes on insurers will vary depending onthe severity, location and timing of any future attack and on anindividual insurer's actual book of business," said Jack Seaquist,a senior manager at AIR in a statement. "Therefore, it is essentialthat insurers re-evaluate their own terrorism risk assessmentstrategies with respect to industry best practices."

In its TRIA update report, Marsh said the industry wouldprobably react favorably to the legislation, but the higher $50million trigger could have an impact on small regional insurers andcaptives writing primary terrorism risk, creating "some capacityshortages in those areas."

The report said the standalone insurance market would continueto offer "terrorism risk-transfer solutions with TRIA's extension."The primary demand will be to cover the $50 million events nolonger covered by the backstop; support of TRIA captives primarilythrough reinsurance; certain coverage for select or singlelocations; and global or international-only terrorism insurancepolicies.

TRIA's sunset and uncertainty over long-term risk transfer meansmore investigation into the standalone market. Because of TRIA wasextended to 2007, Marsh suggested that the standalone market may bewilling to offer longer-term solutions to clients "permitting afoothold in the standalone insurance market for clients'risks."

A copy of AIR's report is available through:www.air-worldwide.com.

The Marsh report can be viewed at:www.solutions.marsh.com/TRIA/.