Terrorism Insurance Act Review: 2012



Australia’s terrorism insurance scheme (the scheme) was established to minimise the wider economic impacts that flowed from the withdrawal of terrorism insurance in the wake of the terrorist attacks in the United States of America on 11 September 2001. The scheme was established under the Terrorism Insurance Act 2003 (the Act) to ensure continued provision of terrorism insurance coverage for commercial property and associated business interruption losses and public liability claims. Under the Act, the scheme is administered by the Australian Reinsurance Pool Corporation (ARPC). The scheme commenced on 1 July 2003.

The scheme was established as an interim measure and is intended to operate only while terrorism insurance cover is unavailable commercially on reasonable terms. The Act requires that at least once every three years, the Minister must prepare a report that reviews the need for the Act to continue in operation.  Previous reviews were conducted in 2006 and 2009.

The 2012 Review considers the need for the Act to continue in the context of the Australian and international terrorism insurance market. The Review has found that some commercial market capacity for terrorism insurance is re‑emerging both internationally and domestically, although it remains insufficient to cover demand. Furthermore, there is insufficient capacity for individual risks in Australia, with the quantum of commercial market capacity likely to be significantly below the current $13.4 billion scheme operated by the ARPC.

This Review makes a number of recommendations:

  • Need for the Act to continue — that the Act continue in operation, subject to a further review within three years, at which time an examination of the availability of commercial terrorism reinsurance on reasonable terms be undertaken;
  • Premiums — that the ARPC’s current pricing policy remain unchanged;
  • Retentions — that the ARPC’s current industry and individual insurer retention levels remain unchanged;
  • Size of the Scheme — that an assessment of the appropriate capacity of the scheme should be undertaken as part of the next review of the Act, taking into consideration the size of the government guarantee and  any retrocession purchased by the ARPC, as well as the level of the ARPC’s exposure to risk;
  • that the next review of the Act should reassess the continuing need for, and cost benefit of, the ARPC’s retrocession program in the context of the review of the capacity of the scheme.
  • Mixed-use high-rise building — that the issue of mixed-use high-rise buildings which are not predominantly for commercial use be re-examined prior to the next review of the Act; and
  • Dividend — That the ARPC pay an initial dividend to the Commonwealth of $400 million, to be spread over four years, with the first payment to be made in January 2013.  The question of the frequency and amount of any further dividends beyond 2016 should be considered in the context of the 2015 Review.