In a blow to the prospects for renewing the federal backstop for terrorism coverage that expires at the end of this year, the Congressional Budget Office (CBO) issued a report critical of the program in January. The CBO argues that the Terrorism Risk Insurance Act (TRIA) discourages businesses from making changes that would lessen losses in the case of another terrorist attack and makes it less likely that the insurance industry will come up with alternative methods of insuring against terrorism. Longer term, the backstop could hurt the economy "by delaying the private sector's adjustment to a continuing risk of terrorism," it says.

Insurance industry sources say that while the report may be viewed as negative by legislators, its analysis is flawed. Joel Wood, senior vice president for government affairs at the Council of Insurance Agents & Brokers, questions the CBO's emphasis on risk mitigation activities like relocating operations out of high-risk areas and retrofitting buildings. Given the possibility that terrorists could change tactics or employ nuclear, chemical or biological weapons, such mitigation efforts could be "impractical and probably not very effective in reducing the potential amount of loss," he says.

Robert Hartwig, chief economist for the Insurance Information Institute, says the CBO is too optimistic about the insurance industry's ability to fill the void if TRIA were not renewed. The report itself says that if TRIA is not renewed, "rates for workers compensation policies could rise substantially, at least in the near term." And its enthusiasm about using catastrophe bonds or some other form of securitization is misplaced, Hartwig says, because the large number of data points required for securitization don't exist for terrorism risk.