The government must see the real impact of market failure on terrorism before it will widen the type of risks covered by Pool Re, Treasury Economic Secretary Ruth Kelly has warned.

Kelly was speaking at the Association of British Insurers (ABI) biennial dinner on 2 May, attended by insurance industry and government leaders.

Kelly said the government would not automatically intervene in the absence of sufficient market appetite for terrorism risks, for the market's own good.

"The hurdle for government intervention is set intentionally high," she said.

"By its very existence a government-backed scheme will crowd out the competition from the private sector.

"If the price is the same, most people will opt for the certainty associated with a government-backed insurance or reinsurance product rather than the commercial alternative.

"We also need to see evidence of the real impact of market changes rather than relying on rhetoric and anecdotes."

Kelly acknowledged the impact impending regulation was having on the sector.

She said the aim of the regulation currently being formulated was to offer proportionate protection to consumers, while helping insurers take advantage of "the passport into other European countries".