The Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen MP, today released a report on the 2009 review of the Terrorism Insurance Act 2003.
The review recommends that Australia's terrorism insurance scheme, which was established under the Act, continue in operation for another three years. It also recommends a number of refinements to the scheme.
"The Rudd Government has agreed to all of the report's recommendations", Mr Bowen said.
"There is an underlying shortage of reinsurance capacity for individual terrorism risks at affordable prices. This situation has remained relatively unchanged since 2006, despite some limited signs of recovery prior to 2008.
"Since the end of 2008, the global financial crisis has produced an unprecedented fall in reinsurance and insurance capital.
"Although the Australian general insurance industry is relatively well-positioned despite the global economic environment and difficult underwriting conditions arising from serious weather-related events, it is nonetheless, part of the global reinsurance market.
"Now is not the time to withdraw this important protection from the Australian economy. The shortage of affordable terrorism insurance has the potential to put commercial property developments and jobs at risk, with adverse consequences for the broader Australian economy.
Internationally, government schemes have been an important factor in addressing this shortage, encouraging market stability and protecting economies from the adverse effects of the withdrawal of terrorism insurance.
"However, Australia's scheme was established to operate only while terrorism insurance cover is unavailable commercially on reasonable terms and maintain, to the greatest extent possible, private sector provision of terrorism insurance to the Australian market. Permanent government-subsidised reinsurance would remove any incentive for the private sector to develop alternative risk transfer mechanisms.
In accordance with the Act, the need for it to continue in operation should be reviewed again in no more than three years.
The report also recommends refinements to the scheme, including that:
- the Australian Reinsurance Pool Corporation (ARPC), which was established to administer the scheme, continue to collect premiums at current rates;
- industry retention levels remain at the levels that took effect on 1 July 2009;
- the ARPC not be required to maintain a line of credit facility for the scheme, but should investigate the purchase of additional retrocession; and
- the ARPC examine the effect of extending the scheme to mixed-use, high‑rise buildings that are not predominantly for commercial use.
Australia's terrorism insurance scheme was established to minimise the wider economic impacts that flowed from the withdrawal of terrorism insurance following the terrorist attacks in the US on 11 September 2001. It started on 1 July 2003 and applies to insurance for commercial property in Australia and associated business interruption losses and public liability claims.
Under the Act, terrorism risk cover is deemed into eligible insurance contracts. Insurers can reinsure terrorism risks arising from eligible insurance contracts with the ARPC. The ARPC charges insurers a premium for reinsurance and requires that they retain some terrorism risk.
The report is available from the Treasury Website.
14 October 2009