WASHINGTON—A government study showing that the availability and affordability of terrorism risk insurance has improved since 2006 underscores the need to keep the federal terrorism insurance backstop in place, risk managers and industry observers say.

The report, prepared by the President's Working Group on Financial Markets, was posted on the Treasury Department's website in late January.

Since the enactment of the Terrorism Risk Insurance Act of 2002, the federal government has provided a backstop for insurers that underwrite terrorism insurance. The working group is required by the 2007 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 last issued a report in 2006, and is slated to issue a report again in 2013 as Congress considers whether to extend the program after its scheduled expiration on Dec. 31, 2014.

To prepare the report, “Market Conditions for Terrorism Risk Insurance 2010,” the working group sought comments from stakeholders last summer. 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, according to the report.

The report said the terrorism insurance takeup rate among commercial policyholders has been 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 improved 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.

“However, policymakers should review aspects of the program in order to encourage further development by the private sector,” according to the report.

Brad Wood, senior vp-risk management for Marriott International Inc. in Bethesda, Md., said the report demonstrates the program's success in keeping coverage available at reasonable costs.

“It is easy to be lulled to sleep by such a favorable report; however, increased capacity and declining premiums have as much to do with current market conditions and the lack of terrorism attacks as modeling improvements and reinsurance maturity,” said Mr. Wood. “One should not expect that private insurance markets will ever be able to fully manage this risk based on the indiscriminate and catastrophic nature of terrorism. The government backstop remains critical toward protecting our long-term economic stability as part of our fight against terrorism.”

The New York-based Risk & Insurance Management Society Inc. welcomed the report.

“We're pleased to see that they continue to see a role for the federal government at least in terms of the backstop for TRIA,” said John Phelps, RIMS secretary and board liaison to the external affairs committee. “The backstop has really enabled a market for terrorism insurance. Without the federal support, appropriate insurance coverage is not likely to be available. If it is, coverage will be restricted and costly,” said Mr. Phelps, who also is director-business risk solutions at Blue Cross and Blue Shield of Florida Inc. in Jacksonville.

“The underlying message is, there still needs to be a TRIA mechanism in the future because the market probably still isn't there to take on this risk in the United States, broadly speaking,” said Ben Tucker, senior vp in Marsh Inc.'s property specialized risk group in New York.

He said that in terms of terrorism as part of a property program, terrorism rates have stabilized or declined slightly during the past 18 months. The story is very similar in the stand-alone terrorism insurance market, except for perceived high-risk areas such as certain areas of New York.

Capacity also is plentiful. Mr. Tucker said coverage as part of a property program would follow the client's limits, which can mean programs with $500 million to $1 billion in terrorism coverage. In the stand-alone market, limits typically range from $300 million to $700 million, although in some cases limits may reach $1.2 billion, he said.

“I think it's heartening that (the working group is) beginning to draw the same conclusions we have at Aon relative to the importance of the continuance of the terrorism backstop,” said Aaron Davis, managing director with Aon Corp.'s national property practice in New York.

Noting that the market remains stable, Mr. Davis said Aon recently completed its 2010 year-end benchmark study and found that, on average, pricing decreased 8.5% for embedded and stand-alone terrorism coverage.

“I think the market's pretty flat on terrorism—I don't see it going into a steep decline,” said Wendy Peters, terrorism practice leader at Willis North America in Philadelphia. “Terrorism is still unmodeled on a frequency basis. I think right now we've probably maxed out on the capacity.”

Insurer groups said that the report bolsters the case for the federal program.

“Importantly, the report acknowledges the value of TRIA in promoting stability in the insurance market,” Stef Zielezienski, senior vp and general counsel of the American Insurance Assn., said in an e-mail. “While there are certainly improvements that can be made to the program, TRIA remains a necessary government backstop.”

Jimi Grande, senior vp in the National Assn. of Mutual Insurance Cos.' Washington office, said the report has political implications, noting the document was meant “to lay the groundwork for scaling back the program by building a case for the capacity of the private market to handle risk.

“However, they were also forced to address many of the realities of the situation, mainly that capacity remains very constrained for high-risk locations and market participants remain highly skeptical of the ability of risk models to predict terrorist attacks,” he said.

Ms. Peters said she thought a lot of the market is waiting to see whether the program is extended again. “I think we're all in a wait-and-see mode at this point.”