WASHINGTON—Congressional action to allow risk retention groups to cover property insurance would add capacity and competition to the terrorism insurance marketplace, according to some market observers and lawmakers.

But including expansion of the Liability Risk Retention Act in legislation as part of an effort to extend the federal government's terrorism backstop beyond its slated Dec. 31 expiration appears certain to run into a legislative roadblock set up by a key congressional backstop proponent, who also questioned the need for a long-term extension of the backstop.

At a hearing on terrorism insurance last week, Rep. Paul Kanjorski, D-Pa., chairman of the House Financial Services Committee's Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises made clear that any extension bill should focus solely on terrorism insurance and be free of unrelated insurance reforms.

Rep. Kanjorski added that he views dealing with the issue of risk retention group reform with "considerable skepticism" in the context of extending the terrorism insurance backstop.

The Risk Retention Act was passed in 1981 to allow the formation of RRGs to cover product liability risks and was amended during the liability crisis in the mid-1980s to let RRGs cover all other liability risks, except workers compensation.

Some members of the panel, though, did seem amenable to amending the Risk Retention Act to allow RRGs to provide property cover as a means of bolstering the terrorism insurance market.

The subcommittee's ranking minority member—Rep. Deborah Pryce, R-Ohio—was particularly supportive of the idea.

"Expansion of the Risk Retention Act" would put the private insurance marketplace in a better position to assume more terrorism risk, she said. Doing so would be an "important step in insuring that the market will be able" eventually bear terrorism risk without a federal backstop, she said.

"Providing adequate capacity for terrorism risk will require many different solutions," said Janice Abraham, president and chief executive officer of United Educators Insurance, an RRG in Chevy Chase, Md., during an interview after the hearing during which she had testified.

"We want additional capacity and RRGs can be part of adding additional capacity. Currently we're doing this with liability insurance, however the need for property insurance capacity in the terrorism context remains high," said Ms. Abraham, who is a former officer of the Minneapolis-based National Risk Retention Assn.

"I think they truly are looking for public-private partnerships," she said of the panel. "I think that speaks in a nonpartisan way to having business and nonprofits work together to help themselves in solving one of the most difficult problems in the risk transfer market."

"I think that allowing property insurance to be sold by RRGs" would help create terrorism capacity, said Lawrence Mirel, lead counsel to the American Risk Retention Coalition. "But it's not the full answer because not everybody who needs property insurance will be able to be part of a risk retention group," said Mr. Mirel, who is a partner in the Washington law firm Wiley Rein L.L.P.

In addition to being leery of expanding the scope of RRGs, Rep. Kanjorski also said that lawmakers should resist the temptation to include reform of surplus lines insurance in the terrorism insurance debate, and that any extension of the program should be neither permanent nor "semi-permanent," suggesting that a six- to eight-year extension would be desirable.

That timeframe would put him on collision course with many other members of the subcommittee, who used the hearing to call for extensions ranging up to 20 years if the program is not made permanent.

Rep. Gary Ackerman, D-N.Y., for example, said that the program should run for at least another 15 to 20 years to meet long-term insurance needs of the construction industry.

"Uncertainty is the enemy we're fighting," said Rep. Ackerman.