Australia: Terrorism Insurance Scheme Reviewed Against The Backdrop Of The Global Financial Crisis

The Commonwealth Treasury released its report yesterday on the 2009 review of the Terrorism Insurance Act 2003 (Act). The report recommends that Australia's terrorism insurance scheme (Scheme) continue for at least another three years.

The Scheme was established under the Act to minimise the wider economic impacts following the withdrawal from the market of terrorism insurance as a consequence of the terror attacks in New York on 11 September 2001. Approximately 18 other countries have adopted similar schemes and the proposed continuation of the Scheme is consistent with the approaches of other major OECD economies.

The report has determined that despite market improvements, there remains insufficient capacity to meet the demand for terrorism insurance at affordable rates. Global capacity for reinsurance of terrorism risks has also improved for nationally pooled arrangements. However, the report again determines that there is insufficient capacity at reasonable prices for individual risks.

The report recommends a number of minor 'refinements to the scheme', including:

• the Australian Reinsurance Pool Corporation (ARPC), which was established to administer the scheme, will continue to collect premiums at current rates; and will investigate the purchase of further retrocession with funds from the pool
• industry retention levels should remain at the levels that took effect on 1 July 2009
• the ARPC should not be required to maintain a line of credit facility for the scheme, but should investigate the purchase of additional retrocession
• the ARPC should examine the effect of extending the scheme to mixed-use, high rise buildings that are not predominantly for commercial use. Recommendations should be reported to the Minister with findings by 30 September 2010.

The report also acknowledges the strong performance of the ARPC over the 2006 to 2009 period that included the building of financial stability of the Scheme through the management of the pool and the purchasing of retrocession.

Despite lesser growth as a result of the global financial crisis, with an annual increase of approximately $93 million dollars compared with 2007-2008 growth of $125 million dollars, the pool remains valued at a very substantial $550 million dollars (estimated).

Summary

From the perspective of potential Insured's in Australia, the Scheme will remain in place and ensure cover for eligible property (under the Act) against losses resulting from terrorism, at commercially reasonable prices. The potential expansion to non-commercial property will also be viewed with interest.

For both Insurers and Insured's, the additional terrorism levy looks like it is here to stay - at least for another three years.

The additional refinements do not appear to have any substantial impact on an Insured's rights. The next ministerial review is scheduled for 2012.

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