The US terrorism pool may follow Australia’s lead and begin purchasing private reinsurance, according to a new report from the Congressional Budget Office.

The Terrorism Risk Insurance Act (TRIA) was established following the September 11 2001 attacks as terrorism cover became unavailable or very expensive.

The law expired at the end of last year before a six-year extension was signed into law on January 12.

The report examines future options for the scheme, such as shifting more risk to insurers by raising deductibles and co-payments, or narrowing the program’s scope.

Charging premiums for TRIA coverage may reduce the cost to taxpayers, and reinsurance could be purchased to cover a portion of its risks.

The report highlights the Australian Reinsurance Pool Corporation (ARPC), set up under the Terrorism Insurance Act of 2003, as an example.

“A notable feature of Australia’s pool is its purchase of private reinsurance, which spreads risk globally and provides a market price signal,” it says.

The ARPC finalised a $2.9 billion retrocession program earlier this year, contributing to an overall capacity of $13.3 billion, including the $10 billion Commonwealth guarantee.

The Congressional Budget Office report says the US Government could initially reinsure only a small fraction of its exposure.

“It would not strain the current capacity of the reinsurance market to take on 1% or 2% of TRIA exposure. The Government could increase its purchases over time if private reinsurers were willing to assume more of the risk, as has been true in Australia.”

The report speculates on spreading terrorism risk in capital markets through insurance-linked securities.

“Capital markets play a small but growing role in bearing risks from natural disasters but a very minor role in backing terrorism risk.”

However, it notes the ARPC considered purchasing insurance-linked securities but found them too expensive compared with traditional private reinsurance.  

ARPC CEO Chris Wallace told insuranceNEWS.com.au that it remains interested in tapping the benefits of alternative capital, but that traditional capital “offers better value for money at this point in time”.