July 22nd, 2009

Global Terror Update: Australia

Posted at 1:00 AM ET

global_cover141x141The Australian government retains a high level of vigilance against the threat of terrorism against the mainland and its territories. The government funds border security measures and provides advice to near neighbors on matters of counter terrorism. The harmony existing between Australia and its neighbors has resulted in the early identification and break up of several planned activities by terrorist cells. Arrests have been made and charges pressed against the individuals caught by authorities under the increased powers available to them under Australian legislation.

Insurance companies are able to reinsure the risk of claims for eligible terrorism losses through the Australian Reinsurance Pool Corporation. Insurance companies pay premiums to the Australian Reinsurance Pool Corporation, which builds up the first layer of funds to AUD300 million/USD240 million) available to cover claims from declared terrorist incidents. The pool is supplemented by a back-up bank line of credit of USD1 billion, underwritten by the Commonwealth, as well as a Commonwealth Government indemnity of USD9 billion, giving aggregate cover of up to AUD10.3 billion (USD8.24 billion).

The definition of a “terrorist act” for the purpose of the scheme, together with the process to determine when an event is a “terrorist act,” is set out in Section 6 of the Act. The legislation requires a declaration from the Treasurer, following consultation with the Attorney General, that an act was a “terrorist act” for the purpose of the scheme.

The Australian Reinsurance Pool Corporation (ARPC) recently arranged AUD2.3 billion of retrocession for the scheme. The retrocession was placed in excess of AUD300 million and cover incepted on December 31, 2008. The retrocession cover will lead to a substantial reduction in the Commonwealth’s level of risk to meet any excess liability under the scheme.

Retrocession contracts have been entered into with reinsurers from the Australian, European, Lloyd’s, and Bermudan markets.

The Australian Government’s intention is that the scheme will operate only while terrorism insurance cover is unavailable commercially on reasonable terms. The decision by ARPC’s Board to arrange retrocession for the scheme was made after a thorough investigation of the availability of terrorism cover in the global reinsurance market. That investigation showed that global capacity is returning for national pooled arrangements, but that there is little capacity at reasonable prices for individual insurance portfolios.

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