And TRIA II actually provides incentive. No doubt, the extended TRIA enlarges the risk for the insurance industry of inheriting the lion's share of losses from another terrorist attack the likes of 9/11, which cost the industry an estimated $32 billion. While changes under TRIA II seem to be modest, catastrophe-modeling agencies, which devise estimates of insured losses based on different types of man-made and natural disasters, say the industry under TRIA II would absorb large losses in the event of another major terrorist attack. Newark, Calif.-based Risk Management Solutions, for instance, estimates if another 9/11 occurred today, more than 90% of the loss would be retained by the industry. "While TRIA provides solvency protection (to individual carriers) in extreme events, it is not an insurance industry subsidy," the company stated.

Critics of extending the original TRIA legislation like Robert Hunter, director of insurance at the Consumer Federation of America, supported the end-of-session compromise reached by Congress and the White House, calling it "fair and balanced." Hunter says, "I wanted the industry weaned away from free reinsurance, which the original TRIA offered. It's abundantly clear now that Congress has taken very strong steps in that direction." When the current extension expires, Hunter, a longtime industry critic and former insurance regulator, says "that's it ?? 1/2 there won't be another. There's no way Congress will extend it again, unless there is another attack."

Others concur. "Clearly Congress and the White House have no appetite at all for helping insurers assume risks they feel the industry should otherwise be able to handle," says Suzanne Douglass, managing director in the property insurance division of New York insurance broker Willis Risk Solutions. "The concern for clients is at which point is too much of [insurers'] capital at risk, giving them less capital to spare for other responsibilities."

With another extension a virtual impossibility unless the country suffers a major terrorist attack, insurers must focus on life after TRIA, which is set to officially expire now on Dec. 31, 2007. "Come that time, the government is saying it will wipe its hands of this and will not go forward with another extension," says Marsh's Blumber.

The task of designing a solution will likely fall to insurance trade associations and their member companies. Julie Rochman, senior vice president of public affairs at the American Insurance Association (AIA), says the organization is working on several potential solutions. "The industry is taking this very seriously, focusing very energetically on the work done by academia, modeling firms, consultants and individual insurers, and is taking those ideas to distill them into something that is workable and possible politically," she says. "We just don't know at this point where we may end up."

Douglas says Willis has met with fellow members of the Council of Insurance Agents and Brokers to devise a market solution, as well as with reinsurer members of the Reinsurance Association of America. "Someone needs to take the tiger by the tail," she says. "We need our clients to be vocal, too, since they have an interest in this, as well." A particular issue to be addressed is the antipathy toward terrorism risks articulated by the private reinsurance industry, she adds. At present, insurers that are most at risk of suffering a terrorism loss are unable to buy reinsurance to spread it. "TRIA gives no incentive per se to the reinsurance community to become involved because they get no federal backstop," says Douglas.

One possible market remedy is a pooling mechanism similar to the one that exists in the United Kingdom to absorb terrorism losses. Pool Re, funded by UK insurers and reinsurers based on a percentage of their annual premiums, reinsures individual insurer losses to an aggregate level, at which point government funds kick in. If the U.S. insurance and reinsurance industry could muster a similar mechanism, Congress might be willing to offer some form of federal backstop. "The simplest thing would be to institutionalize the status quo, meaning TRIA; barring that a pooling mechanism is a strong possibility," says Hartwig.

"A pool along the lines of Pool Re would be the best solution," AIA's Rochman agrees, "but when we first proposed this to the federal government in 2001 they said no. And that's the same administration that will be in office at the end of 2007."

Marsh's Blumber says the need for "a massive industry consensus on an effective program to somehow deal with this exposure" is great, though, he concedes, will be "difficult to achieve." He adds, "It is critical for the industry leadership to coordinate efforts to produce a workable solution that responds to client needs, with a clear goal of reducing federal participation over time. This process should start sooner than later."