Stickinq to fundamentals: the new terrorism insurance backstop is not a panacea. (Underwriting Insight: Property/Casualty).

The federal government's decision last November to backstop insurance industry losses in the event of another catastrophic terrorist act is critical to ensure the viability of an insurance industry still feeling the effects and learning the lessons of Sept. 11,2001. Passage of the Terrorism Risk Insurance Act of 2002 showed true leadership by Congress and President Bush, who campaigned hard for its enactment.

But as we in the industry knew while the debate over the bill was still going on, the new terrorism insurance backstop is not a panacea. That's why carriers will need to continue to write responsibly, mindful of their aggregate exposure, even with the TRIA backstop.

As grateful as we are for the government support, aggregation management remains essential. The new law contains high insurer deductibles that progressively increase over the next two years. By 2005, the last year of the new act, deductibles will increase to more than twice what they are now. Equally worrisome: We don't know what role the government will play in 2006 when the act sunsets and, conceivably, our backstop disappears.

Moreover, the terrorism risk insurance law only covers commercial lines, where most of the losses for the World Trade Center attack occurred. Unfortunately, it's entirely plausible that future terrorist attacks could incur significant personal lines or life losses that are not covered by the law So companies that write significant amounts of personal and life business would find insufficient backstop relief from the new law--a serious problem. Prudent insurers are taking that very real possibility into account as they tally their exposures.

Before Sept. 11, we could count on the reinsurance market to help cover our exposure, but we no longer have a full complement of adequate and affordable reinsurance. Since that event--in which reinsurers absorbed huge losses--they have added terrorism exclusions to policies and, although reinsurers are selling some terrorism coverage, the market clearly has not returned to pre-attack days.

An equally weighty concern is that reinsurers don't cover the RNBCs--the radiological, nuclear, biological or chemical threats. That means insurers have no cover for those potential losses within insurers' high deductibles under the law. Congress had anticipated that reinsurers would step back into the mix and market forces would take over, yet more than six months into the life of the new law, reinsurers show no apparent appetite to re-enter the broad market for terrorism coverage. In their absence, primary insurers will continue to bear significant exposure to a clear and present danger.

Recent research from the Brookings Institution, for example, shows that a mega-terrorist event could cause up to $1 trillion in damages if weapons of mass destruction were shipped via containers or the mail into the United States. The release of biological agents in a major urban area could cause $750 billion in damages, the same study found. Even with a loss of "only" $2.5 billion, a Conning Research & Consulting Inc. report says insurers could incur hundreds of millions of dollars of losses each, with very little benefit from the new federal law

The bottom line: responsible insurers will never return to their earlier underwriting stance, even with the federal backstop .They remain vigilant about managing their total aggregation of risk and allocation of capacity. Those fundamentals are more important today than ever. Prior to Sept. 11, large insurers would have welcomed the opportunity to bid on property or workers' compensation coverage for major law firms, brokerage houses or accounting firms in prestigious, first-class office buildings in any major American city. Today those same carriers are exercising caution in their capacity allocation, making sure not to overwrite in areas that could be considered likely terrorist targets.

In short, responsible companies are taking the steps required to ensure that they can pay claims and remain financially healthy. They cannot relax their diligence in underwriting.

Nor can industry leaders assume Congress will automatically renew the terrorism insurance act. They realize that they need to work with Congress to craft a more comprehensive backstop to be implemented after TRIA expires. Carriers know a permanent, joint government and industry solution is needed. Meantime, prudent carriers will continue to write sensibly and remain mindful of their internal capacity thresholds.

Since Sept. 11, the underwriting rubric has expanded to take on previously unexplored dimensions. It has taught insurers that an event can impact all lines of business converging at one point in time. We will apply that lesson to future discussions with Congress. For now, as an industry, we are taking responsibility to ensure that we have the capacity to cover the customers we write to keep America's businesses in business.

Judy Blades, a Best's Review columnist, is senior executive vice president, property-casualty, The Hartford Financial Services Group Inc. She can be reached at [e-mail].