The recent dustup about security features in the new buildings proposed for the World Trade Center site has highlighted the way the September 11 attacks have changed how we design large buildings in prominent spaces. But September 11 also had a profound behind-the-scenes impact on real estate development by changing the way they are insured. A year after the attacks, with the private market for terrorism insurance in shambles, Congress stepped in with a stopgap government solution. This summer, the first branch will revisit the issue and have a chance to move us closer to a fully private terrorism insurance market.

Congress passed the Terrorism Risk Insurance Act late in 2002 to make sure that terrorism insurance would remain available. In the wake of big September 11 payouts, insurance companies found it difficult or impossible to buy terrorism reinsurance (insurance that covers insurance companies in the face of large, unexpected claims). Since they couldn’t get reinsurance, insurers stopped covering terrorism. Congress stepped in to force them to do so, and in exchange, the solons promised to force American taxpayers to cover losses above a certain threshold; if TRIA is reauthorized, that limit would be $20 billion by 2007.

Congress claimed it was only intended, like the income tax years ago, to be a temporary measure that would end in 2005, by which point the market was supposed to have developed a private way of offering this coverage. Yet, with that three years almost up, proponents are arguing that we need at least another two years to let the markets come up with a solution to the problem. Senators Schumer and Clinton, with 12 colleagues from both parties, have sponsored a bill that only changes the original version’s 2005 end date to 2007, although it does call for yet another study of the issue.

No one doubts terrorism is hard to insure. It’s too unpredictable. There’s no reliable way to know what the risks are, or what the costs associated with those risks might be, so there’s no reliable way to set premiums. Therefore, even many conservative economists agree, the government needs to be involved in some way.

But too much government interference adds complications of its own. Douglas Holtz-Eakin, director of the Congressional Budget Office, told a Senate hearing in April that it’s possible the current version of TRIA is hindering the development of private efforts to manage terrorism risk. For example, the TRIA backstop allows insurers to charge lower premiums, and those cheap premiums don’t provide an incentive for businesses to take steps to reduce their terrorism risk, such as setting up new offices outside of high-risk areas.

The answer is to tweak TRIA. A start would be larger increases in the “deductible” insurers must pay out before the government steps in. This would shift more of the burden into the private sector, easing the potential burden on taxpayers and providing a spur for private insurers to develop market-based solutions. Charging a premium to insurance companies for TRIA coverage is also important. Currently, TRIA reinsurance is free, but there’s no economic reason for that.

Unfortunately, Congress has its back to the wall. Although several bills attempted to raise the issue last year, Congress decided to delay for a year before making any decisions. As a result, construction projects in the city worth over $2 billion are facing an uncertain insurance future when TRIA expires on December 31. With companies across the country already renewing their insurance policies and only months to go before the 2002 act expires, it may be too late to change the system this time around.

But Congress can at least resolve to avoid making the same mistake twice. Relatively small changes, such as larger increases in the ceiling before the unwitting taxpayer is forced to step in, or requiring the payment of a premium for TRIA coverage, would be steps in the right direction. The market is making tentative steps in developing tools like mutual risk pools or catastrophe bonds that would eventually form the basis of a private terrorism reinsurance market. If Congress can take this opportunity to nudge those efforts along, that will be a victory of sorts.

Even more important, however, is that Mr. Schumer and Mrs. Clinton and their colleagues on the hill not back the taxpayers into this corner the next time around. Congress should start looking for alternatives next year, not months before an extension would expire at the end of 2007. Otherwise, we won’t make any progress toward a permanent, private solution.