NO.101

TERRORISM INSURANCE ACT REVIEW: 2006

The Treasurer today released a report on the Terrorism Insurance Act 2003.

The report reviews the need for the Act to continue operating and recommends refinements to the scheme established under the Act. The Australian Government has agreed to all of the report’s recommendations.

The Government established a terrorism insurance scheme to minimise the wider economic impacts that flowed from the withdrawal of terrorism insurance in the wake of the terrorist attacks in the United States of America on 11 September 2001.

Australia’s terrorism insurance scheme commenced on 1 July 2003. It applies to insurance for commercial property in Australia and associated business interruption losses and public liability claims.

The Act operates so that terrorism exclusions in eligible insurance contracts are deemed to have no effect. In turn, insurers can reinsure any terrorism risks that the Act requires them to assume with the Australian Reinsurance Pool Corporation (ARPC), which was established to administer the scheme. The ARPC charges insurers a premium for reinsurance and requires that they retain some terrorism risk.

The scheme provides cover for terrorism risks through a number of layers. The first main layer of cover is provided by a monetary pool (which was initially planned to accumulate to $300 million), funded by reinsurance premiums. The pool is supplemented by a line of credit of $1 billion, which is underwritten by the Government, after which the Government has provided a $9 billion indemnity.

Without this Act, insurance for terrorism risks would be very expensive and in short supply, risking reduced business investment and a weaker economy. Three years since its commencement, there is still a need for the Act to continue operating.

The success of this scheme is a result of ‘best practice’ design and the efficient and prudent administration of the scheme by the ARPC.

The report also recommends refining the scheme. Specifically, the report recommends:

• requiring the ARPC to continue charging premiums for reinsurance at the current rates;
• that once the pool reaches $300 million, the ARPC has discretion to use premiums to build the terrorism insurance pool further or purchase reinsurance for the scheme;
• increasing insurer retentions under the scheme;
• that in relation to bundled insurance policies, requiring the ARPC to charge reinsurance premiums only on those sections of the policy that exclude terrorism risks; and
• modifying the scheme to cover all commercial insurance provided for public authorities, ensuring consistent treatment to insurance for government business enterprises and local government (which the scheme currently covers) and other public authorities that commercially insure, such as some local water utilities (which the scheme currently excludes).

These refinements will encourage greater participation of the commercial market and will increase the consistency of the scheme’s application to commercial property and infrastructure. Encouraging greater commercial market involvement is a key principle underpinning the scheme and is consistent with recent changes to terrorism insurance schemes in comparable countries.

The Treasury has commenced work on amendments to the Terrorism Insurance Regulations 2003 and ministerial directions to give effect to the report’s recommendations. Further consultation on these changes will take place in the near future.

The report is available at:

http://www.treasury.gov.au/contentitem.asp?NavId=037&ContentID=1162

MELBOURNE

15 September 2006

Contact: Renae Stoikos

03 9650 0244