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Terrorism Insurance – Explained

What is the ARPC – the Australian Reinsurance Pool Corporation?

ARPC is a statutory authority established by the Terrorism Insurance Act 2003, to administer the terrorism reinsurance scheme, providing primary insurers with reinsurance for commercial property and associated business interruption losses arising from a declared terrorist incident.

The Scheme

ARPC’s reinsurance scheme was established after discussions with key industry stakeholders, including insurance and reinsurance companies, banks, representatives of property owners, industry associations, insurance brokers and actuaries.

Through the scheme, insurance companies can choose to reinsure the risk of claims for eligible terrorism losses by paying premiums to ARPC. Consequently, holders of eligible insurance contracts will be covered in the event of a declared terrorist incident (DTI), with insurers required to meet these claims in accordance with the other terms and conditions of individual policies.

Claims against the scheme are met once an individual insurance company’s risk retention is exhausted. ARPC’s pool of retained earnings will meet claims until the agreed retrocession deductible is reached. At this point claims are funded by the retrocession program, of which ARPC is a participant through co-reinsurance. Once retrocession is exhausted, claims will continue to be met by the Commonwealth guarantee.

Background

In 2003, in the aftermath of the terrorist attacks in the United States and following the withdrawal of terrorism insurance cover by insurance companies, the Australian Government established a scheme for replacement terrorism reinsurance. The scheme was introduced as a result of calls for the Government to intervene in an area of clear market failure and after discussions with key industry stakeholders.

ARPC is a statutory authority established by the Terrorism Insurance Act 2003 to administer Australia’s terrorism reinsurance scheme and provide terrorism reinsurance for commercial property, associated business interruption losses and public liability claims.

Basis of the Scheme

The Government decided that any intervention should be consistent with the need to:

  • maintain, to the greatest extent possible, private sector provision of insurance;
  • ensure that risk transferred to the Commonwealth is appropriately priced to minimise the impact on the Commonwealth’s financial position;
  • ensure that the Commonwealth is being compensated by those benefitting from the assistance;
  • allow the commercial insurance and reinsurance markets to re-enter the terrorism market when they are able;
  • be compatible with global solutions.

How the Act Works

The Act overrides terrorism exclusion clauses in eligible insurance contracts to the extent the losses excluded are eligible terrorism losses arising from a declared terrorist incident.

The Act makes terrorism exclusion clauses ineffective for all classes of insurance included in the scheme. This requires insurers to meet eligible claims, in accordance with the other terms and conditions of their policies.

The Act applies to all eligible insurance contracts issued by Australian or offshore insurers. Insurance companies may reinsure their terrorism risk exposure with ARPC.

Review of the scheme

The Act requires that a review of the need for the scheme to continue in operation must be undertaken every three years. Reviews were conducted in 2006, 2009 and 2012. The 2012 review made the following recommendations:

  • the Act continue in operation, subject to a further review within three years;
  • premiums continue to be collected at the current rates;
  • industry retention levels remain unchanged;
  • ARPC is to re-examine the issue  of extending the scheme to mixed use, high rise buildings that are not predominantly for commercial use;
  • ARPC pay a dividend to the Commonwealth of $400 million over four years.

What Does This Mean for your Business Insurance Coverage?

A common inclusion on your policy schedule would read as follows:

XYZ Insurance Compnay has determined that this policy (or part of it) is a policy to which the Terrorism Insurance Act 2003 applies. We have reinsured our liability under the Act with the Commonwealth Government reinsurer, the Australian Reinsurance Pool Corporation (ARPC). As a consequence, we are required to pay a premium to the ARPC and that amount (together with the cost of that part of the cover provided by us and administrative costs associated with the  legislation) is reflected in the premium charged to you.

*This is normally included in Base Premium, and might amount to 1% of Base Premium.

TERRORISM EXCLUSION ENDORSEMENT –

This is Overriden by the Insurers Inclusion within the scheme, and for which you are therefore covered :

Notwithstanding anything contained in this Policy or any endorsement attached to the contrary it is agreed that this Policy excludes death, injury, illness, loss, damage, liability, cost or expense directly or indirectly caused by, contributed to by, resulting from or arising out of
or in connection with any act of terrorism, as defined herein, regardless of any other cause or event contributing concurrently or in any other sequence to the loss.

An act of terrorism includes any act, or preparation in respect of action, or threat of action designed to influence the government de jure or de facto of any nation or any political division thereof, or in pursuit of political, religious, ideological or similar purposes to  intimidate the public or a section of the public of any nation by any person or group(s) of persons whether acting alone or on behalf of or in connection with any organisation(s) or government(s) de jure or de facto, and which: 1) involves violence against one or more persons; or 2) involves damage to property; or 3) endangers life other than that of the person committing the action; or 4) creates a risk to health or safety of the public or a section of the public; or 5) is designed to interfere with or to disrupt an electronic system.

This Policy also excludes death, injury, illness, loss, damage, liability, cost or expense directly or indirectly caused by, contributed to by, resulting from, or arising out of or in connection with any action in controlling, preventing, suppressing, retaliating against, or responding to any act of terrorism.