NO.080

TERRORISM INSURANCE BILL 2002

The Terrorism Insurance Bill 2002 was introduced into the House of

Representatives today.

The Bill provides the framework for a scheme to insure against terrorist risk,

an area where cover has been withdrawn by insurance and reinsurance companies

in the wake of the events of September 11 2001. This scheme will bring certainty

to owners, developers, financiers, investors and tenants of commercial property.

The legislation deems terrorism risk cover into eligible insurance contracts,

and establishes the Australian Reinsurance Pool Corporation. Eligible insurance

contracts that are in force at, or after, 30 June 2003 are taken to provide

the same amount of insurance cover, in relation to the underlying property,

for eligible terrorism losses as the contract provides for losses or liabilities

arising from other causes.

Insurance companies will be able to reinsure the risk of claims for eligible

terrorism losses through the Australian Reinsurance Pool Corporation. Premiums

that insurance companies pay for reinsurance through the Australian Reinsurance

Pool Corporation will build up the first layer of funds (an expected pool of

$300 million) available to cover claims from declared terrorist incidents. The

pool will be supplemented by a back-up bank line of credit of $1 billion, underwritten

by the Commonwealth, as well as a Commonwealth Government indemnity of $9 billion,

giving aggregate cover of up to $10.3 billion when the pool is fully funded.

Regulations will be tabled in Parliament in the New Year to specify contracts

to be covered in the scheme in accordance with the Government’s 2002 announcement.

The legislation allows the Treasurer to direct the Australian Reinsurance

Pool Corporation to set particular premiums for reinsurance contracts. Premiums

will depend on the risk of insured properties and facilities, and are expected

to cost from around 2 per cent of underlying base premium, with surcharges

of 10 per cent and 2 per cent applying to properties located in capital city

CBDs and other urban areas respectively (to be designated by postcodes). Contracts

between the Corporation and the relevant insurance company will establish this

amount specifically.

My press release of 25 October 2002 indicated that should a terrorist event

occur, the insurance industry will bear the first $10 million of claims,

subject to an individual company exposure limit of $1 million. The individual

company retention is on a per annum basis. The Government Scheme will operate

to pay claims above the insurers’ retention. This retention will apply where

insurers reinsure through the Corporation. The retention would be set in the

reinsurance contract between the Corporation and the insurer.

The Government has developed this scheme in consultation with key industry

stakeholders – including insurance and reinsurance companies, banks, representatives

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

Over coming months we will continue to work with these stakeholders to fine-tune

arrangements, and to ensure the entire framework will be operational for commencement

of terrorism risk cover on 30 June 2003.

CANBERRA

12 December 2002

Contact: David Alexander

02 6277 7340