Bills Digest No. 110 2002-03
Terrorism Insurance Bill 2002
This Digest was prepared for debate. It reflects the legislation as
introduced and does not canvass subsequent amendments. This Digest
does not have any official legal status. Other sources should be
consulted to determine the subsequent official status of the
Contact Officer & Copyright Details
Terrorism Insurance Bill
12 December 2002
House: House of Representatives
The purpose of
the Bill is to set up the framework for a terrorism insurance
scheme and to establish a statutory authority, called the
Australian Reinsurance Pool Corporation, to manage the scheme.
The events of 11 September 2001 in the United
States, had a major impact on the insurance industry and in
particular saw the withdrawal of cover for terrorism risk by
insurance and reinsurance(1) companies. According to the
Reinsurance Association of America (RAA), the expected insurance
losses from the 11 September events were the largest ever recorded
and were estimated to be between $35 and $75 billion with 60 to 80
percent of the ultimate losses lying with
The Treasurer in his Press Release of 20
December 2001 acknowledged this problem stating:
Action may be required as a result of advice
from international reinsurers that cover for terrorism will be
removed on all new treaty reinsurance from 1 January 2002 and that
terrorist cover on facultative reinsurance has been withdrawn for
new risks and is being withdrawn as existing policies come up for
The Treasurer stated that while there would be
consultations with the relevant industries to determine a response
to this problem he also cautioned:
It cannot be assumed that the outcome of the
consultation process will involve the Commonwealth Government
providing indemnities or financial assurances to the insurance
industry, or particular sectors of the economy. Since insurance is
a commercial matter, obviously it will be necessary to engage the
private sector in risk allocation and pricing
Pressure for government intervention from the
insurance, property and banking industries became stronger in early
2002 and there were calls on the Government to commit itself to
providing a financial safety net by being the insurer of last
resort in claims arising from terrorist acts.(4)
Media reports were suggesting that large
enterprises were finding it not only impossible to get terrorism
insurance, but that this in turn was jeopardising loan contracts
and throwing major projects into doubt.(5)
According to a survey conducted by the
Association of Risk and Insurance Managers of Australasia (ARIMA),
of its 500 members in early 2001, more than 40 per cent of
companies had had terrorism excluded from policies renewed since
September 11, and of those yet to renew, 64 per cent had been told
they also would not get cover.
Bruce Ferguson, president of ARIMA was quoted as
The lack of cover puts financing for key
projects at risk [ ] It means in the case of loans for major
projects, people are technically in default for these sorts of
exposures. In the worst-case scenario, it will stop investment in
major projects [ ] Organisations need a financial safety net, and
the only logical means of providing it is through a
In May 2002, the Government announced that it
would offer remainder insurance for losses above the cover
available from individual insurers, possibly after a pooling
arrangement. However the Treasurer noted that any intervention
would need to be consistent with:
- the need to maintain, to the greatest extent possible, private
sector involvement; ensuring that risk transferred to the
Commonwealth is appropriately priced
- allowing the re-emergence of the commercial markets for
terrorism risk cover, and
- global solutions.(7)
Calls for a government sponsored scheme were
also accompanied by reference to several overseas examples of where
foreign governments have provided reinsurance when the market was
unable to do so.(8)
In the UK, a pool reinsurance company, Pool Re,
was established in 1993 to ensure the continued availability of
insurance cover for damage and loss caused by terrorist actions,
which had become largely unavailable after a spate of IRA
In France, since December 2001, the state-owned
Caisse Centrale de Reassurance under government guarantee, covers
physical and property damages caused by terrorism attacks above an
annual 1.5 billion euros ceiling. Under this amount, the insurance
and reinsurance markets cover the risks. Other countries that also
have special mechanisms to deal with terrorism risks include Spain,
South Africa and Israel.(10)
The United States Congress, following the 11
September attacks, also considered a scheme to address the risk of
a shrinkage of affordable insurance. Congress finally passed the US
Federal Terrorism Insurance Act in November 2002 which makes it
compulsory for insurers to offer terrorism coverage. However
organisations then have an option whether to accept the coverage -
for an additional premium.(11)
On 25 October 2002(12), the Treasurer
announced the detail of a scheme for replacement terrorism
insurance. The main features of that scheme are:
- It would cover commercial property and infrastructure
facilities, and include associated business interruption and public
- It would compel insurance companies to provide cover for
terrorism risk on all policies in all classes of insurance included
under the Scheme. Insurance companies would be able, but not
obliged, to reinsure their terrorism risk exposure with the
- It would provide a pool of funds (initially planned to
accumulate to about $300 million) funded by premiums.
- The level of insurance cover and excess for terrorism risks
would match the level of coverage and excess otherwise provided
under the policy.
- In the event of a terrorist incident, the insurance industry
would bear the first $10 million of claims, subject to an
individual company exposure limit of $1 million per annum. After
that the Government scheme would operate to pay claims. The
Government scheme would pay claims from 3 tiers:
- The pools funds up to the limit of $300 million
- Up to $1 billion in excess of the pool funds from a commercial
loan facility guaranteed by the Federal government, then
- Up to $9 billion in excess of the commercial loan facility from
'reinsurance' (in effect a government indemnity) provided by the
- To manage the scheme the Government would establish a new
statutory authority called the Australian Reinsurance Pool
- The scheme would cover damage caused by terrorist activity,
including causes such as fire, flood, explosion, aircraft impact,
biological and chemical, but not nuclear causes.
- A Commonwealth minister or senior official would make a
declaration as to whether an event falls within the scheme in order
to facilitate rapid claims settlement and avoid legal disputes over
- In the event of a terrorism claim which depletes the fund,
rates would be reviewed in order to repay the commercial loan and
the reinsurance facility, and to replenish the pool funds over a
number of years.
- The Australian Reinsurance Pool Corporation under direction
from the Treasurer would set premiums payable by insurers for the
reinsurance contracts. Premiums would depend on the risk of insured
properties and facilities, and would be expected to cost from
around 2 per cent of underlying base premium, with surcharges of 10
per cent and 2 per cent applying to properties located in capital
city CBDs and other urban areas respectively.
- The Scheme would operate from 1 July 2003, subject to passage
of the relevant legislation.(13)
The Terrorism Insurance Bill 2002 proposes to
implement this scheme.
Media reports suggest the Government's scheme
has the support of the banking and real estate industries which had
claimed that insurers' unwillingness to cover terrorist attacks was
stopping commercial development.
Property Council of Australia chief executive
Peter Verwer was reported as saying that developers could now
proceed with confidence.
The financial community was threatening to
withdraw funds from new projects and to finance sales. This ends
all of the uncertainty.(14)
The Treasurer's announcement was also welcomed
by the Insurance Council of Australia (ICA).(15) ICA
Executive Director Alan Mason stated:
Terrorism insurance has required a Federal
resolution since the international reinsurance market withdrew from
providing terrorism cover. [ ]
The Government's pool proposal will provide
cover to business that is currently unavailable. By spreading the
cost over the entire insuring community it will make cover more
affordable and widely available.
ICA did however state that it would be seeking
further clarification in relation to the potential exposure to
terrorism risk not covered by the scheme, particularly the
requirement that insurers will bear the first $1 million per
insurer or $10 million per incident.(16)
The scheme has attracted some criticism from
industry and risk management bodies, in regard to the compulsory
nature of the scheme.(17) Their criticism is that
businesses that neither need nor want terrorism insurance will not
have a choice if they wish to have property, business interruption
and/or public liability cover. While the Explanatory Memorandum
states that rates will vary according to risk factors, many
businesses with virtually no risk of terrorist attack will
nonetheless have to pay a levy to subsidise high risk businesses
and properties. ARIMA argues that the effect of a compulsory levy
is likely to be that those entities which do not want the cover
will self insure those risks, or insure them offshore, or use an
offshore captive insurance company for those risks. Consequently
they will not be participating in insurance arrangements in
Australia which will attract the levy.(18)
The Government on the other hand has defended
the compulsory nature of the scheme saying it is essential to allow
accumulation of a credible funds pool within a reasonable
Universal terrorism insurance is designed to
avoid problems of undiversified risks (for example, insuring only
high risk buildings) and uncertainty as to who will be eligible for
compensation in the event of a terrorist act.(19)
Clause 5 defines a 'terrorist
act' as an act or threat that:
- causes death or serious harm to a person, or
- causes serious damage to property, or
- endangers another's life or creates a serious risk to public
health or safety, or
- seriously interferes with, disrupts or destroys an electronic
system such as a telecommunications system, financial system,
transport system or essential public utility, and
- is done or made with the intention of advancing a political,
religious or ideological cause and with the intention of coercing
or intimidating a Commonwealth, State or Territory Government, a
foreign country, or the general public in either Australia or a
'Advocacy, protest, dissent or industrial
action' are excluded from the definition of a 'terrorist act',
where such actions are not intended to cause serious physical harm
or death, endangerment of life, or serious risk to the health or
safety of the public.
The definition of 'terrorist act' in the Bill is
drafted in almost identical terms to the definition in section
100.1 of the Criminal Code Schedule to the Criminal Code Act
1995. For a discussion of that definition the reader is
referred to the Digest (Bills Digest no. 126, 2000-01) for the
Security Legislation Amendment (Terrorism) Bill 2002 [No. 2].
Clauses 6-8 set out the
framework for the new insurance cover for terrorism risks. In
simple terms clause 6 deals with obligations on
the Minister in declaring whether a particular terrorist act falls
within the scheme, clause 7 defines what types of
insurance contracts will be covered by the scheme and
clause 8 deems that terrorism risk cover will
automatically be included in those contracts.
Clause 6 sets out the
circumstances in which the Minister (or delegate)(20)
must declare that an act constitutes a terrorist incident for the
purposes of this Act. Before making such a declaration the Minister
must seek advice from the Attorney General (subclause
6(1)). The declaration, once published in the
Gazette, cannot be revoked (subclause
To be declared a terrorist incident, the event
must have happened in Australia (subclause 6(1))
and the Minister must be satisfied that it is not an act of war
(subclause 6(2)). If the terrorist act is merely a
threat, then it can only be declared a terrorist incident if the
Minister is satisfied that the threatened action would have
happened in Australia and that the threat has resulted in economic
loss to a person (subclauses 6(3) and (4)).
The Minister may also declare that insurance
companies pay outs in regard to a particular terrorist incident are
reduced by a certain percentage (subclause 6(6)).
In determining whether a reduction percentage is necessary, the
Minister would look to whether the incident might exhaust the
resources available to the Australian Reinsurance Pool Corporation
(subclause 6(7)). Following the initial
declaration, the reduction percentage can be altered, but may only
be made smaller (subclause 6(8)).
Clause 7 sets out which
insurance contracts are covered by the terrorism insurance scheme.
Essentially 'eligible insurance contracts' are contracts that
provide insurance cover for loss or damage to tangible property
located in Australia, either with or without:
- insurance cover for business interruption losses arising from
loss or damage to the property, or
- insurance cover for public liability associated with the
Regulations will further specify the types of
contracts to be covered by the scheme (subclauses 7(2) and
(3)) The Explanatory Memorandum sets out that the types of
insurance coverage that will be excluded through
regulations. These include: insurance for buildings or
infrastructure owned by State or Commonwealth Governments (but not
Government Business Enterprises), domestic policies, insurance for
private residential property, marine insurance, aviation insurance,
motor vehicle insurance, life insurance, health insurance, private
mortgage insurance, medical indemnity insurance, professional
indemnity insurance, and reinsurance.(21)
According to the Explanatory
Memorandum(22) the scheme does not cover workers
compensation and compulsory third party insurance, although the
opportunity for providers of these classes of insurance to reinsure
through the Australian Reinsurance Pool Corporation, will be
discussed with the relevant States and Territories.
Subclause 8(1) deems that
eligible insurance contracts that are in force on or after 30 June
2003 are taken to provide the same amount of terrorism insurance
cover as the contract provides for losses arising from other
causes. If the contract provides different amounts payable and
different excesses for different events or causes of damage, then
the highest of the amounts payable and lowest of excesses applies
to the terrorism losses (subclauses 8(2) and (3)).
The Explanatory Memorandum provides examples of how this would
In general, the terrorism cover will be subject
to the terms of the contract in the same way as other insurance
cover provided by the contract (subclause 8(6)).
However, exclusions or exceptions relating to the cause of a loss
or liability are overridden (subclause 8(5)).
The Explanatory Memorandum states that deemed
terrorism cover does not extend to loss or liability arising from
the hazardous properties (including radioactive, toxic or explosive
properties) of nuclear fuel, nuclear material or nuclear waste.
Subclause 8(7) is a
transitional provision. It provides that for those eligible
contracts in force at the start up date of the scheme (ie 30 June
2003), the Australian Reinsurance Pool Corporation is liable to
compensate the insurer for any liability that arises solely because
of clause 8. If the insurance contract in force at start up time
already included some cover for terrorism, then the obligation on
the Corporation to compensate would only extend to any extra
liability deemed by clause 8.
Clause 9 establishes the
Australian Reinsurance Pool Corporation (the Corporation).
The functions of the Corporation are to
- insurance cover for eligible terrorism losses, and
- any other functions as prescribed by regulations
(clause 10). The Explanatory Memorandum provides
more detail on what functions might be included in
Clause 11 provides that the
Corporation has the power to do all things necessary for the
performance of its functions. Powers include being able to charge
premiums in respect of contracts of insurance, and charging fees
for services (subclause 11(2)).
The Corporation is to be a body corporate with
perpetual succession and is to consist of the Chair and at least
four, but not more than six, other members. (clause
Clauses 13-20 deal with
appointment of members of the Corporation. Amongst other
- Members of the Corporation are to be appointed by the Minister
on a part-time basis for a period of up to 4 years
(subclauses 13(1) and (2)).
- The Minister in making an appointment must be satisfied that
the person has suitable qualifications or experience and is of good
character (subclause 13(3)).
- Members are to hold office according to the terms and
conditions set out in the Act and as determined by the Minister
- The Minister may appoint a member of the Corporation to act as
a Chair when that office is vacant or when the Chair is absent from
duty (clause 14).
- Members of the Corporation are to be paid according to rates
determined by Remuneration Tribunal, or else according to the
prescribed remuneration (clause 17).
- Members may resign by giving a written resignation to the
Minister (clause 19).
- The Minister may terminate the appointment of a member of the
Corporation for reasons such as bankruptcy, absence from meetings
of the Corporation, engagement in paid employment that conflicts
with the performance of duties, and unsatisfactory performance
Clauses 21-23 set out the
requirements regarding meetings and resolutions of the
Clauses 24-31 deal with the
appointment and duties of a full-time Chief Executive. The Chief
Executive is to be appointed by the Corporation to manage its
affairs subject to the directions of, and in accordance with
policies determined by the Corporation (clause
25). The Chief Executive cannot be a member of the
Corporation (subclause 24(3)) and the appointment
may be terminated by the Corporation at any time (clause
Clause 32 deals with the
appointment of employees of the Corporation and clause
33 deals with the engagement of consultants.
The Corporation may delegate its powers or
functions to the Chief Executive or an employee (clause
Clauses 34-37 deal with the
finances of the Corporation. Amongst other things these clauses
- The Corporation's money is to be applied only in payment of
expenses and liabilities incurred in performing its functions, and
in payment of remuneration and allowances payable under the Act
- Surplus money of the Corporation may be invested in accordance
with Division 3 of Part 3 of the Commonwealth Authorities and
Companies Act 1997 (subclause 34(2)).
- The Commonwealth guarantees the due payment of money that may
become payable by the Corporation to any person other than the
Commonwealth up to an amount of $10 billion (clause
- The Corporation is to be exempt from income tax under laws of
the Commonwealth (clause 36).
- The Consolidated Revenue Fund is to be appropriated for payment
of amounts borrowed by the Corporation from the Commonwealth, and
payments under section 35 (clause 37).
Clause 38 proposes that the
Minister may give written directions to the Corporation in relation
to the performance of its functions and the exercise of its powers.
Amongst other things these directions could:
- require the Corporation to pay money to the Commonwealth
- require the Corporation to enter into contracts to borrow money
from the Commonwealth
- require the Corporation to enter into contracts to borrow money
from persons other than the Commonwealth (although such a direction
may not specify a particular person (subclause
- set premiums to be charged for insurance contracts issued by
the Corporation, and
- set out the extent to which risk is to be retained by the
insured under a contract of reinsurance with the Corporation
(proposed paragraphs 38(2)(a) - 38(2)(e)).
Directions relating to premiums and retentions
by insureds must be published by the Minister (subclause
Directions might also be issued by the Minister
to require payments to the Commonwealth in the nature of dividends,
or payments to allow the Corporation to comply with competitive
neutrality principles (subclause 38(3)).
Clause 41 provides that the
Minister is to review the need for the operation of the Act every
Clause 42 provides for the
payment of just compensation by the Commonwealth where the
operation of the Act would result in the acquisition of property
other than on just terms within the meaning of section 51(xxxi) of
the Commonwealth Constitution. Where there is disagreement on the
amount of compensation, the person may institute proceedings in the
Clause 43 enables the Governor
General to make regulations for the purposes of the Act.
The need for some form of Government sponsored
terrorism insurance scheme appears to have bipartisan support.
However it is of note that much of the detail of the scheme
regarding the funding, the types of policies, pricing and coverage
is still to be finalised by regulation. The Government has defended
the lack of detail in the Bill saying that components of the scheme
are deliberately flexible, not being set in legislation, in order
to encourage the reemergence of the commercial
market.(25) The Government s insistence that the scheme
is to be only temporary is also evident in the requirement in the
Bill for three yearly reviews.
However overseas experience might cast some
doubt on the temporary aspect of the scheme. As discussed above,
several OECD governments have long had schemes in place to cover
terrorism risk. Many of those schemes were introduced to deal with
a particular set of political events, which had led to a
re-evaluation of risks and the reduction of coverage. Often they
were thought of as a temporary state response to market failure, in
the expectation that with time, the insurance industry s capacity
would develop and efficient risk-sharing arrangements would be
re-established. The OECD Economic Outlook(26), suggests
that the fact that many of these schemes have endured beyond their
original mandate is an indication that either the market failure
was not temporary or that government intervention crowded out
private sector responses.
- Insurers take out reinsurance to spread their risk and
to protect themselves against catastrophic claims that would
otherwise empty their reserves. The notion behind the benefits of
reinsurance is the same as that behind insurance itself; namely the
law of large numbers implies that the more policies which can be
averaged together, the more accurate the expected claim cost is as
a predictor of the actual average claim cost, and so insurers that
take out reinsurance gain efficient risk protection in just the
same way individuals do when they take out insurance. It has been
suggested that insurance companies shift about a quarter of their
risk by taking out their own insurance policies with reinsurance
companies, although in the case of public liability and
professional indemnity policies that the figure is said to be
around 40%. (Source: 'Crunch time, again, for insurance',
Sydney Morning Herald, 1 May 2002).
- The OECD Economic Outlook, June 2002/1 agrees
that the losses from this event were the highest ever but put the
estimated losses at between $30 billion and $58 billion.
- Treasurer 'Government Response to the Withdrawal of Terrorism
Insurance', Press Release, No. 101, 20 December 2001.
- 'Plea to PM to provide terrorism cover', Australian
Financial Review, 18 April 2002.
- ' September 11 takes its toll on terrorism insurance cover?',
Age, 10 April 2002.
- Treasurer, 'Terrorism Insurance', Press Release, No.
031, 21 May 2002.
- 'Terrorism exclusions should sound alarm', Australian
Financial Review, 27 March 2002.
- Pool Re functions as a reinsurance company for its (voluntary)
members, while the Government provides reinsurance to Pool Re. The
first 100 000 lies with primary companies, with Pool Re intervening
only above that amount. Losses from underwriting activities are
covered by accumulated premia or, if needed, by an additional call
on members (limited to 10 per cent of the annual premium). Beyond
that, claims are met by the Government. This scheme enables
insurers to cover terrorism without the need to restrict the sums
insured, but does not encompass third party liability insurance.
(Source: OECD Economic Outlook June 2002/1, p. 71.)
Shadow Treasure Bob McMullan was reported in the
Financial Review as suggesting that the Government should consider
the UK model as a potential solution for Australia s terrorism
insurance drought. Australian Financial Review 16 July
- OECD Economic Outlook June 2002/1, p. 71.
- Insurers covering property and casualty losses in the US must
now make available coverage for damages resulting from acts of
foreign terrorism on US soil for any commercial line of property
and casualty insurance covered by the Act. Insurers are required to
provide their customers with quotations of costs for the terrorism
The Act encompasses a wide range of commercial
insurance including most lines of financial and professional
liability, property, marine, aviation, general liability and motor
vehicle liability insurance and surety.
Under the Act coverage cannot 'differ
materially' from the terms and limitations applicable to other
events under a policy, but interpretations of this may vary.
However, there is no restriction on the price an insurer may charge
for terrorism coverage.
Source: 'Implications of the new US Federal
Terrorism Insurance Act' Marsh News December 2002. Located
- and perhaps significantly 13 days after the Bali bombings.
- Treasurer, Press Release: Terrorism Insurance, 25
- Terror Levy of 12pc on business Weekend Australian, 26
- ICA, 'Federal Scheme to Provide Terrorism Cover', Media
Release, 25 October 2002.
- ARIMA, Comment on the Terrorism Insurance Bill 2002
(unpublished); Focus (McCullough Robertson lawyers) (www.mccullough.com.au) Also a
report in the Weekend Australian, 26 October, suggested
that a group of 12 companies including Telstra, Shell, Fosters,
Alcoa, Rio Tinto, BHP Billiton, Coles Myer, Orica, Amcor and Fluor,
united to try and overturn the new scheme, believing they would be
forced to subsidise inner-city commercial property owners whose
properties were more at risk than their industrial complexes. The
report suggested that the surcharge of 10 per cent added to the
insurance premiums of inner-city property owners was added as a
concession to this group. Terror levy of 12 pc on business',
Weekend Australia, 26 October 2002.
- ARIMA, Comment on the Terrorism Insurance Bill 2002
- Explanatory Memorandum, p. 1.
- The Minister may delegate his powers in relation to declaring a
terrorist incident to either the Secretary or a SES officer of the
Department of the Treasury (subclause 6(9)).
- Explanatory Memorandum, p. 19.
- ibid., p. 20.
- ibid., p. 22.
- ibid., p. 2.
- June 2002/1.
Mary Anne Neilsen
14 February 2003
Bills Digest Service
Information and Research Services
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