NO.031

TERRORISM INSURANCE

Following the terrorist attacks in the United States on 11 September 2001,

insurers began to withdraw cover for terrorist risk around the world.

The Commonwealth Government recently conducted formal consultations with key

industry stakeholders: insurance and reinsurance companies, banks, representatives

of property owners, industry associations, insurance brokers, and actuaries

about the effects of this development and responses to it. The Government has

also examined developments overseas in relation to terrorism insurance.

As a result of this consultation, the Government has decided it will offer

remainder insurance for losses above the cover available from individual insurers,

possibly after private sector pooling of supplementary cover for intermediate

exposure. The exact form of the arrangements will be the subject of further

discussions with industry stakeholders.

This decision is not intended to involve the Government in the insurance market

in the long term. The Government does not want to stand in the way of the revival

of the insurance market in this area. To this end, any intervention by the Commonwealth

will be consistent with the following principles:

(a) the need to maintain, to the greatest extent possible, private sector provision

of insurance;

(b) the need to ensure that risk transferred to the Commonwealth is appropriately

priced to minimise the impact on the Commonwealth’s financial position, and

to ensure that the Commonwealth is being compensated by those benefiting from

the assistance;

(c) the need to allow the commercial insurance and re-insurance markets to step

back in when they are able (that is, ensuring an appropriate exit strategy for

Government); and

(d) the need to be compatible with global solutions.

The Government will also seek to facilitate a common definition of a “terrorist

act” for insurance purposes and will support commercial insurers to implement

such a common definition.

21 May 2002

Contact: David Alexander (02) 6277 7340