On behalf of the Government of Australia, let me say how pleased I am to be able to participate in this important conference.
With the first three global terrorism reinsurance conferences having been held in the Northern Hemisphere, it's really significant that the Australian Reinsurance Pool Corporation — in collaboration with the OECD — is hosting the first Global Terrorism Risk Insurance Conference here in the Asia-Pacific region.
The global and domestic threat of terrorism is very real. Australia and Australians have been touched by terrorism both at home and overseas.
In September 2001 the world was shocked by the scale and impact of Osama Bin Laden's attacks in the United States. The real-time footage of the two World Trade Centre towers collapsing broadcast around the world demonstrated the scale of the attacks, the terrible loss of so many innocent lives, the bravery of first responders, as well as the physical damage to our cities and communities.
Australia witnessed terrorism closer to home when the popular holiday destination of Bali was struck in October 2002, the Australian embassy in Jakarta was bombed in September 2004, and Bali was again struck in 2005.
And the method of terror has changed and evolved. In recent years Europe has experienced terrorist attacks of a different nature, with attackers targeting almost simultaneously a music venue, sports stadium, bars and restaurants in Paris in November 2015, and more recently in Nice a truck drove through the Nice promenade, killing 86 women, men and children.
In Australia, in December 2014 we saw the Lindt café siege in Sydney, which saw the loss of two lives, and more recently the specific targeting of police, police employees and police stations.
And to meet this ever evolving threat we must ensure that we are equipped with an appropriate suite of measures to prevent, confront and respond to terrorist events.
We know we must protect not only our citizens, but also our infrastructure, our business communities and the wider economy. And as part of our suite of measures, we must have robust systems to deal with the financial implications of any terrorist act on our shores.
The ARPC and the role of government
In the wake of 9/11, insurance and reinsurance companies around the world, including here in Australia, progressively withdrew cover for terrorism risk, raising concerns as to whether new investment projects would proceed and of a direct adverse effect on the value of commercial developments.
Following calls from the community for the Government to intervene in an area of clear market failure, in 2002 Australia's then-Treasurer, the Hon Peter Costello AC, announced the development of the terrorism reinsurance scheme.
The scheme began in 2003 with a mandate to protect Australia's commercial property sector — and, indirectly, the wider economy — from the economic losses caused by terrorism.
The Australian Reinsurance Pool Corporation administers Australia's terrorism reinsurance scheme and plays a significant role in underpinning the financial stability and economic resilience of Australia.
Today, Australia's terrorism reinsurance scheme provides up to $13.4 billion funding for claims, including access to a $10 billion Australian Government guarantee in the event of a Declared Terrorist Incident — or DTI — for commercial property, associated business interruption and public liability classes of insurance.
As a public financial corporation the ARPC performs a key function in the post-incident recovery phase by providing a known and defined financial response to an incident.
Government and industry working together to manage terrorism risks to the economy
Let me talk a bit about what the Australian Government and industry are doing to manage terrorism risks to the economy.
Clearly, terrorism has the potential to cause significant economic damage to domestic economies – and that is before you consider the very real personal and emotional cost to individuals, families and communities.
Aside from the significant financial costs involved with spending on defence and national security initiatives, such shocks have clear short and long-term impacts: on financial institutions or systems, on investor and consumer confidence, and on tourism — to name just a few.
This year, the Turnbull Government delivered a Cyber Security Strategy, providing a framework to meet the evolving challenges of the digital age and protection of our online interests.
It's clear that cyberspace can't become a lawless domain.
We recognise that both governments and the private sector have vital roles to play.
And, while governments can and do take the lead in facilitating innovation and providing security, businesses must also ensure their cyber security practices are robust and up to date.
Australia and Australians are targets for malicious actors — including serious and organised criminal syndicates and foreign adversaries — who are all using cyberspace to further their aims and attack our interests.
Indeed, the scale and reach of malicious cyber activity affecting the Australian public and private sector organisations, as well as individuals, is unprecedented.
And the rate of attempts to compromise systems is increasing and the methods used by malicious actors are rapidly evolving.
That's why the Australian Government has a proactive approach to protecting our nation from cyber-attack and defending our interests in cyberspace. It's our duty to safeguard the nation against criminality, espionage and sabotage.
The ARPC has, for its part, also undertaken a leadership role in relation to cyber-terrorism risk and, in March this year, published a white paper called Cyber Terrorism and Australia's Terrorism Insurance Scheme: Physically Destructive Cyber Terrorism is a Gap in Current Insurance Coverage.
Ensuring the ARPC is fit-for-purpose
Of course, ensuring the ARPC is fit-for-purpose is critical.
The Terrorism Insurance Act 2003 requires that the scheme, including the ARPC, is reviewed at least once every three years to ensure it is fit-for-purpose. As such, reviews have been conducted in 2006, '09, '12 and '15.
In releasing the first review in 2006, Peter Costello said that "terrorism cover would be expensive and in short supply without the scheme, risking reduced business investment and a weaker economy".
The 2015 Triennial Review Report considered a raft of issues, such as whether the Terrorism Insurance Act should continue, the rationale for the scheme, the ARPC's ownership structure, and ongoing financial sustainability.
The review concluded that market failure still exists in the Australian terrorism insurance market, and recommended that the ARPC remain in place under the current ownership structure and administration.
The review also recommended a medium-term, rather than short-term, policy focus for the scheme. Let me quote an excerpt for you:
"… as the need for the scheme has persisted for more than a decade, the policy framework against which its operation is assessed should no longer be limited to one that conceives of the scheme as a short-term, temporary measure. While the ongoing need for the scheme should continue to be periodically reviewed, the fact that it has matured into at least a medium-term policy response should be recognised and reflected in decisions about the nature and scope of its operation."
Recommendations were also made to extend the scope of the scheme and support its financial sustainability.
In particular, the review recommended that the scope of the scheme be extended, so that it applies to buildings in which at least 20 per cent of floor space is used for commercial purposes, and to buildings with a sum-insured value of at least $50 million, whether used for commercial or other purposes.
It also recommended:
- amending the Terrorism Insurance Act to remove any doubt about coverage for losses involving chemical or biological chemicals
- changing retention levels for insurers and industry as a whole, and
- increasing premiums to enable the ARPC to continue to be self-funded over the medium term, while reasonably compensating the Australian Government for the government guarantee and maintaining an appropriate level of capital.
Many of the review's recommendations have already been implemented, and the Government is finalising the details on the remaining outstanding recommendations.
The Government also knows just how important leadership is to the scheme.
On Wednesday I announced the appointment to the ARPC Board of Mr Mike Callaghan AM and Ms Robin Low for a period of three years, and the re-appointment of Mr Tom Karp for one year.
This renewal will add further depth to the Board and give the market confidence that the organisation is equipped for the challenges of the future.
At the beginning of my speech, I highlighted the importance of the terrorism reinsurance scheme to the confidence of Australians, and to the economic stability and financial resilience of Australia.
I'd like to conclude with some further observations on the importance of resilience, which is critical to both insurance markets and our financial system more broadly.
A central message of the Financial System Inquiry, as many of you will remember, was the importance of a resilient financial system.
By "resilient" the FSI meant a system that can adjust to a changing environment — including severe shocks — while continuing to provide its core economic functions.
That doesn't mean no financial institution should ever fail but, rather, that there are mechanisms in place for an orderly resolution of distressed entities that impose minimal costs on taxpayers, policyholders or depositors, and the real economy.
By any measure, the Australian financial system weathered the GFC well.
That resilience is the result of a number of factors, including a stable macroeconomic environment, prudent risk management by the institutions themselves, and comparatively low-risk and profitable banking and insurance sectors.
Australia's prudential framework — recognised as more stringent than minimum international standards before the GFC — and a proactive approach to supervision helped maintain a healthy and stable financial sector domestically.
Of course, those outcomes are not accidental.
They reflect both market pressure and the fact that the Government and Australia's regulators are ensuring that the strength of Australia's financial institutions and the financial system can continue into the future.
The Turnbull Government is committed to reforms that help maintain the resilience of the Australian financial system in a fluid environment.
Clearly, a critical area includes implementing the recommendations of the FSI related to resilience.
That will require Australia's major banks to hold more regulatory capital, with positive implications for stability and competition with other lenders.
Another area critical to resilience is amending legislation to ensure that financial regulators have the power to resolve distressed authorised deposit-taking institutions, general and life insurers, and financial market infrastructures — and to minimise the systemic impact and public cost of doing so.
Ladies and gentlemen, we live in a world where the global and domestic threat of terrorism is very real.
We have seen terrorism touch Australians both at home and overseas, and we have seen the threat of terrorism evolve.
Much has been achieved to ensure the Government can draw on the range of measures needed to combat and protect against terrorism, but of course, Government must continue to review its readiness.
I am confident we are well-positioned to meet those challenges head-on.
Collaborations such as this are essential in making that happen.