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updated 3/22/2004 8:52:08 AM ET 2004-03-22T13:52:08

If foreign terrorists were to launch an attack on U.S. soil this year, some liability insurers' exposure to risk could be twice as high as their net losses from the attacks on the World Trade Center in 2001, according to a new report from Morgan Stanley.

Seven insurers could face a total of more than $4.6 billion in losses before the federal government would help under TRIA, its terrorism insurance program. Their initial losses from the World Trade Center attacks amounted to $2.3 billion, the research study indicates. For example, Travelers' potential exposure is $928 million compared with $490 million in losses over September 11.

The recent bombings in Madrid, in which 202 people died, have raised new fears within the insurance industry.

Most insurers have not purchased reinsurance to cover their exposure, according to Rod Thaler, a vice-president at Willis Reinsurance, the broker. "A minority of companies have bought it," he said.

When reinsurance premiums shot up in the wake of the September 11 attacks, many insurers opted to "go naked" and control the risk themselves by spreading their exposure. Reinsurers are also hesitant to write coverage because TRIA — which is the insurers' only financial safety net — would not cover their exposure. Most have excluded terrorism coverage from catastrophe policies. After what happened in Madrid, concern in the industry about TRIA's future is also increasing.

Robert Hartwig, chief economist at the Insurance Information Institute, says: "Uncertainty was creeping into the markets before the Madrid railway bombings. Now insurers are very concerned about the renewal of TRIA. Only the government has the financial ability to handle a large-scale attack."

After September 11, Congress passed a bill stating that the government must pay most of all insured losses greater than $12.5 billion following a nuclear, biological or chemical attack by someone from another country.

In return, the government required that those insurers that had stripped terrorism coverage from their policies for certain lines of business such as workers compensation must reinstate it.

However, TRIA only guarantees its support until the end of next year. It must be reapproved by the U.S. Treasury and fears are growing that its passage could be derailed. In his report, Vinay Saqi, Morgan Stanley's insurance analyst, said that he was cautious about its future. "At this point, the renewal of the bill is uncertain," Mr. Saqi wrote.

The industry is pushing to increase awareness about the risks of terrorism ahead of the debate on Capitol Hill.

Copyright The Financial Times Ltd. All rights reserved.

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