Discontinuation of a government-mandated terrorism backstop would have an adverse effect on the long-term availability and affordability of terrorism insurance, according to a letter submitted by Marsh to the President’s Working Group on Financial Markets.

Marsh, along with Guy Carpenter, submitted the comments earlier this month in response to a request for industry opinion on the availability and affordability of terrorism insurance. Marsh and Guy Carpenter are operating companies of Marsh & McLennan Companies Inc.

In the event that the Terrorism Risk Insurance Act (TRIA) is discontinued and not replaced by a similar government-sponsored program, Marsh anticipates that the availability of terrorism insurance would be greatly reduced, and pricing dramatically increased, in high-risk areas, such as business districts within major metropolitan areas. This would adversely affect those businesses with the greatest need for protection against terrorism risks.

The findings of Marsh’s recently published annual report on terrorism, The Marsh Report: Terrorism Risk Insurance 2010, indicate that the long-term availability of an affordable terrorism risk transfer mechanism is critical to U.S. businesses and foreign businesses operating in the United States.

"Terrorism, in all its forms, remains a significant risk that will need to be insured again over the long-term,” said Ben Tucker, leader of Marsh’s Property Specialized Risk Group. “Marsh would expect significant and adverse market impact in the absence of the TRIA backstop, as insurers do not have sufficient capacity to meet the terrorism risk needs of policyholders.”

On occasions when TRIA coverage has been unavailable, Marsh clients have used terrorism policies provided by insurance companies on a standalone basis to manage and transfer their terrorism risk adequately. However, a significant increase in either natural catastrophes or man-made events—such as terrorism—would likely result in a market hardening. This effect would be exacerbated in the absence of a mandated terrorism risk insurance mechanism.