NEW YORK (CNN/Money) - As Congress recessed in late July, the insurance industry was confident that upon its return, a hearing would be set to renew the $100 billion safety net the industry wants the U.S. Government to pledge in the event of a costly terrorist attack.

Then came Hurricane Katrina.

And now with only 103 days left before that federal backstop known as TRIA -- Terrorism Risk Insurance Act --sunsets on Dec. 31, industry groups are concerned that if an extension of TRIA fails to be a top priority for Congress, the insurance industry may respond by dropping terrorism coverage altogether for high-risk commercial properties or charge exorbitantly higher rates to policyholders to reflect increased exposure.

"The easiest thing to do would be to extend TRIA for a year or two while working on a longer term solution," said Robert Hartwig, chief economist at Insurance Information Institute. "Without TRIA, if there was a major terrorist attack, it would make the response to Katrina look like a well-oiled machine."

Dropping terrorism coverage altogether could have a ripple effect on the economy, said Joseph Annotti, spokesman for the Property Casualty Insurers Association of America.

Given that a number of banks and mortgage lenders won't lend money to commercial real estate projects without terrorism coverage, if TRIA were to expire, developers could find themselves unable to find coverage, halting real estate projects and resulting in the loss of jobs related to those projects, Annotti said.

"I believe Congress does understand that the expiration of TRIA would have a negative impact on the overall economy," said. "But with Katrina and the Supreme Court hearings, a hearing for TRIA may be delayed further into October."

For TRIA lobbyists, it's been a long wait already. The insurance industry had hoped for an extension late last year. But skeptics asked for a delay until the Treasury Department could issue a report to determine whether TRIA -- originally designed as a temporary stopgap to aid the insurance industry in the event of a catastrophic attack -- had served its purpose.

And the Treasury Report, issued in June, did little to bolster the case for TRIA, which was created in the wake of the Sept. 11 terrorist attacks.

In a statement at the end of June, Senator Richard Shelby, chairman of the Senate Committee on Banking, Housing and Urban Affairs said, "Upon initial review, it seems to indicate that while the TRIA program has functioned, in part, to act as a stopgap, it has also impeded the development of broader solutions for the problems confronting the marketplace."

He added that the program had actually created "market dysfunction," as reinsurers refused to take on more risk for terrorism coverage, causing the insurance industry to become more dependent on a federal backstop. Shelby said that a temporary but narrower form of TRIA would be needed to address those concerns.

Currently, the government is responsible for paying 90 percent of losses after any one insurer or the industry as a whole has absorbed a certain deductible. For 2005, that deductible is 15 percent of premiums for any one insurer or $15 billion for the industry.

TRIA reformers have suggested that government should be responsible for 80 percent of losses after the deductible has been reached, forcing the industry to retain 20 percent of the risk.

And Treasury Secretary John Snow indicated in June that the Bush administration would only accept an extension if the program significantly increased its trigger point to $500 million from its current $5 million. Snow also called for certain insurance lines such as commercial auto and general liability to be excluded from the backstop.

Peter Ulrich, managing director of enterprise risk management at Risk Management Solutions, a risk modeling firm, warned that the government shouldn't mistake TRIA for a handout and narrow its scope by too much.

"TRIA provides a solvency protection for the insurance industry in worst case events," he said. "If you raise the retention (of risk) by too much for the industry, it won't accomplish what it's there to do."

The insurance industry estimates that a nuclear, chemical or biological attack in a major U.S. city such as New York could reach $309 billion and the workers' compensation costs will be $277 billion, according to Risk Management Solutions. That's a combined loss of $586 billion.

And with reinsurers unwilling to provide any additional financial protection for the insurance industry in high-risk commercial markets such as New York, industry observers worry that a terrorist attack combined with the damage incurred by natural disasters, such as Hurricane Katrina, could leave the industry without reserves to write business going forward.

Howard Mills, superintendent of the New York State Department of Insurance, said the industry will propose that Congress change tax laws to provide the insurance industry with tax credits that could be used to create a national fund to cover terrorism-related losses.

Mills added that the bombings in London in July emphasized the ongoing threat of terrorism and highlighted the need for TRIA.

But just when Congress will meet to discuss TRIA remains a question.

A spokesman for the Senate Banking Committee said while the issue is a priority, the committee is still working on scheduling a hearing. He added that Congress will also be in session longer this fall in order to cover all of the necessary issues before it.

Industry observers, however, worry that Congress may not get around to discussing TRIA in a timely fashion.

"The clock is ticking loudly," said Hartwig. "Insurers are about to enter negotiations with commercial clients to renew their policies for 2006."

Without a concrete plan, Hartwig said insurers are including "pop-up exclusions" in their 2006 policies. If TRIA isn't extended by Dec. 31, policyholders can expect to either lose terrorism coverage or pay exorbitant rates to match the risk.

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Will Congress create new policies in the wake of Hurricane Katrina? Click here for more on that story.