WASHINGTON—The availability and affordability of terrorism risk insurance provided by the private sector has improved since 2006, according to a report prepared by the President’s Working Group on Financial Markets.

The group is required by the law that extended the federal government’s terrorism insurance backstop through 2014 to present periodic reports on the state of terrorism insurance market to Congress. The group sought comments from stakeholders—including the Risk & Insurance Management Society Inc.—during the summer as it prepared the document.

The report noted that many of those who submitted comments pointed out that the program provides an incentive for insurers and reinsurers that might not otherwise underwrite terrorism coverage at current capacity or at current prices without federal support or state mandates.

“It does this by providing some degree of certainty of an insurers’ maximum loss exposure. However, policymakers should review aspects of the program in order to encourage further development by the private sector,” according to the report.

The report, which was posted on the Treasury Department’s website this week, said terrorism insurance takeup rates among commercial policyholders have remained basically flat at 60% since 2006.

It also said improvements in the terrorism risk insurance market may be due to improvements in modeling, managing accumulation and concentration of aggregate loss exposures; new market entrants and increased competition; and heightened capital positions of the property/casualty insurance and reinsurance industries.

“The industry better understands aggregate risk, and the increased capacity and competition have resulted in decreases in price generally,” the working group found.

But the report also noted that the nature of terrorism means that probabilistic models are limited in their ability to address the “uncertainty associated with predicting the frequency and severity of terrorist attacks. This may limit further development of reinsurance capacity.”

“Market Conditions for Terrorism Risk Insurance 2010” is available at www.treasury.gov/resource-center.