Offering terrorism insurance is now just part of the routine for commercial property insurers, with the federal government providing backing to the vast majority of policies on offer.

But with federal deficits at the forefront of America’s national conversation, potentially reduced federal backing for terrorism insurance has many insurers worried about price increases for consumers and underwriters.

The latest federal budget, completed last month, reiterated a plan originally floated in 2009 that includes scaling back the Terrorism Risk Insurance Act’s (TRIA) provisions. The Obama administration says the private market for terrorism insurance has grown, and is now robust enough to thrive without government help. Shrinking the plan could add an extra $250 million to government coffers, according to estimates.

Dubious Savings

Most insurers that sell both stand alone and TRIA insurance beg to differ. Foremost, the $250 million in savings will only come to pass if there’s an event that triggers a TRIA payout, said Claire Wilkinson, vice president of research association the Insurance Information Institute.

Potentially paying only 75 percent of severe damages, rather than 85 percent as is currently mandated, would save the government cash in the event of a catastrophic attack. But the $250 million savings figure is based on projections for terrorist events that may or may not occur, and insurers point out that this means the government won’t have any immediate savings.

More importantly, analysts say, the private market is too shaky to stand on its own. A federal scaleback would both cause insurers to stop offering the coverage, and drive prices up for consumers that should have it. A report from Chicago-based Aon, an insurance broker and consultant with offices in Massachusetts, predicted that proposed changes to TRIA would lead to 70 to 80 percent of insurers pulling out of the market.

The task of calculating the risk for a terrorism attack on any particular business is daunting: Attacks are devastating, wildly unpredictable and rare. The 2002 act essentially created the market for such insurance, after 9/11 vividly illustrated the dire possibilities for man-made damage.

Under TRIA, insurers are mandated to offer terrorism insurance to commercial property owners. For any terrorism act that causes more than $100 million in damages, the government will pay 85 percent of costs. That, analysts say, at least made the risks more tenable to insurers.

But not everyone is dead set against the idea of a rollback. Francis Mancini, executive director of the Massachusetts Association of Insurance Agents, said at some point larger insurers may very well create better risk estimates to price terrorism coverage, without federal assistance.

But he didn’t foresee an immediate change to TRIA, saying the federal government’s programs have a tendency to run on auto-pilot unless the public gets involved. He pointed to the example of the Federal Flood Insurance Program, which insurers say needs reform. Instead, it has gotten a long series of short-term extensions without much consideration.

As for the agents who sell terrorism insurance, the coverage is just a part of the routine, Mancini said. Whether through TRIA or a private plan, commercial property/casualty insurers must offer terrorism coverage to all commercial property owners, from high-rise towers in New York City to multifamily building owners in suburban Boston.

Making Waves

While private insurance policies often include terrorism coverage for more obvious targets, insurance consultants say most people still get their coverage through TRIA. Tarique Nageer, vice president in the Property Specialized Risk Group at New York City brokerage giant Marsh, said 71 percent of all Marsh’s clients maintain some type of terrorism insurance coverage. While a few hundred have standalone terrorism coverage, he said, the vast majority have at least some coverage through TRIA.

Aaron Davis, managing director with Aon’s property brokerage group, said he doesn’t foresee the federal scaleback actually going through this year, but noted the mention of it has made waves in the industry.

TRIA is not a perpetual government program – it must be periodically renewed or it will expire. After its creation in 2002, it received a number of short-term extensions. A 2007 update extended its life until 2014.

But as soon as spring 2009, federal officials were already talking about tinkering with something that was supposed to be a settled question.

“There was a real concern that these changes would come as a surprise, when everybody was expecting stability,” Davis said. “They were troubling on a number of fronts.”

If allowed to drop out of offering TRIA, as proposed, Mancini and other officials speculate that most small and mid-sized insurance companies would stop offering it. Those policies that remained on offer to protect against terrorist attack would likely be far pricier than most could afford.

The insurers would be increasing their risk if the government pulled back its coverage. With that in mind, insurers would pass along price increases, and fewer owners would be able to afford it – likely dropping their policies, pushing the price up even further.