Following the events in the United States of 11 September 2001, insurance and reinsurance companies around the world, including Australia, progressively withdrew cover for terrorism risk.
The Terrorism Insurance Bill 2002 establishes the framework to implement the Scheme for replacement terrorism insurance that I announced on 25 October 2002. The development of the Scheme followed calls from the community for the Government to intervene in an area of clear market failure.
The Scheme is expected to commence from 1 July 2003. The Bill establishes the Australian Reinsurance Pool Corporation (ARPC), through which insurers will be able to reinsure their exposure to liability, under eligible insurance contracts, for losses arising from declared terrorist incidents.
The operating costs of the ARPC will be met by the Scheme. However, the ARPC will require a $5 million equity injection by the Commonwealth at the beginning of 2003-04, as it does not expect to receive any income until at least mid-October 2003. The ARPC will repay this amount in full in the same financial year and so the injection will have no overall impact on the budget.
It is estimated that the ARPC will collect around $100 million per annum in reinsurance premiums. Collections in the first year of operation will be lower, as the ARPC will only start collecting reinsurance premiums for those eligible insurance contracts entered into from 1 October 2003. The main dates for contract renewal in the insurance industry are 30 June and 31 December.