Australian Government, Department of the Treasury.

 

  FAQs

The Terrorism Insurance Act 2003

What does the legislation do?

The Terrorism Insurance Act 2003 establishes a scheme for replacement terrorism insurance coverage for commercial property and business interruption.

The legislation overrides terrorism exclusion clauses in eligible insurance contracts.  Eligible insurance contracts have a starting point definition of insurance for loss of or damage to eligible property located in Australia, and associated business interruption and public liability cover. Eligible property is defined as buildings or other structures or works on, in or under land, or tangible property that is located in or on that property. (Back to top)

When does the scheme commence?

The scheme will commence on 1 July 2003. (Back to top)

Why has it been introduced?

The scheme is in response to calls for government intervention in an area of clear market failure as cover for terrorism insurance was withdrawn progressively by insurance and reinsurance companies in the aftermath of the terrorist attacks in the United States on 11 September 2001.  Where cover has still been made available since that time, premiums have been at levels that exceed perceived cost of risk with large excesses and low maximum coverage.

Lack of terrorism insurance creates uncertainty for commercial property investors, lessees and financiers alike.

The scheme has been developed in consultation with key stakeholders including insurance and reinsurance companies, banks, property owners and industry associations, brokers and actuaries.  The Government also received expert advice from Trowbridge Deloitte. (Back to top)

How is the scheme to be funded?

The scheme involves the accumulation of a cash pool of $300 million funded by premiums, backed by a commercial line of credit of $1 billion and a Government indemnity of $9 billion to give a total of $10.3bn available to meet claims. This is expected to provide a sufficient level of certainty and public confidence in coverage available against terrorist risk, with premiums more affordable than currently exist. (Back to top)

What is the role of the Australian Reinsurance Pool Corporation?

The legislation establishes a statutory authority — the Australian Reinsurance Pool Corporation — which will provide reinsurance cover to insurers for losses arising from declared terrorist incidents.

Insurers who seek terrorism reinsurance through the Australian Reinsurance Pool Corporation will retain part of the risk of liability from a declared terrorist incident. The Treasurer will set the retention by issuing directions to the Corporation. Initially the retention will be set at the lesser of $1 million or 4 per cent of gross Fire and Industrial Special Risks (ISR) premium revenue per insurer per annum, and $10 million across the industry per event.

Under the legislation the Treasurer will also be able to direct the Australian Reinsurance Pool Corporation on premiums to be charged (based on underlying base premium) for the reinsurance. These will be paid by insurers to the scheme in order to fund a $300 million pool and to repay any loan required in the event claims exceed the resources of the pool. (Back to top)

Is it compulsory for insurers to reinsure terrorism risk through the ARPC?

It is not compulsory for insurers to reinsure the risk of eligible terrorism losses through the Australian Reinsurance Pool Corporation. (Back to top)

When does insurance coverage for terrorism commence?

From 1 July 2003 insurance companies that issue eligible insurance contracts will be exposed to claims arising from declared terrorist incidents.

For eligible contracts entered into up to 30 September 2003, the Australian Reinsurance Pool Corporation has an obligation to compensate insurers in the event of a declared terrorist incident. However for eligible contracts that become effective from 1 October 2003 insurers reinsure through the Australian reinsurance Pool Corporation, or will need to reinsure the risk through another reinsurer, or retain the risk themselves,

This transition period for eligible insurance contracts entered into before 1 October 2003 is necessary, as terrorism risk coverage will be deemed into existing contracts without any charges for such coverage being levied until the date of renewal. (Back to top)

How long will this scheme operate?

The Government's objective is to operate the scheme only while terrorism insurance cover is unavailable commercially on reasonable terms. Reviews of the scheme and the global terrorism reinsurance market will be conducted every two or three years to assess the state of the market and the possible wind-up strategy of the scheme.

Such regular reviews are necessary given the uncertainty in the market makes it impossible to stipulate on establishment the details of timing of the windup of the scheme and the use of funds accumulated by the scheme. (Back to top)

Why is the scheme compulsory?

The scheme is compulsory to ensure that the cost of any DTI is spread across a broad base to keep the required contribution to a minimum. If it was not compulsory then many may choose not to participate thus increasing the risk retained by the ARPC and forcing up the costs of reinsurance. (Back to top)

What are the Governance arrangements for the ARPC?

The legislation provides for an independent Board consisting of a Chairman and between 4 and 6 members. The CEO cannot be member of the Board. The ARPC will be subject to the requirements of the Commonwealth Authorities and Companies Act. (Back to top)

I have a terrorism sub limit in my policy. What effect does this have?

A terrorism sub-limit is a terrorism exclusion within the meaning of section 8(2) of the TIA.

The effect of the imposition of the sub-limit is that the contract will cover an eligible terrorism loss up to the amount of the sub-limit (i.e. $1m) but not beyond. The policy excludes cover for that part of an eligible terrorism loss that exceeds the sub-limit.

A terrorism sub-limit operates in a way which falls within the ordinary meaning of the words used in section 8(2) of the Act, being: "an exclusion or an exception (however described) for acts that are described using the word "terrorism" or "terrorist" or words of similar effect"

The sub-limit operates to exclude the amount of any loss, damage or liability arising from a terrorist act which exceeds the sub-limit and in that sense it operates as a exclusion in the relevant sense. Also a sub-limit with respect to terrorism constitutes an exception for terrorism because it has the effect that the total sum insured is not available to cover the amount of any loss, damage or liability arising from a terrorist act.

The consequence is that pursuant to section 8(1) the terrorism sub-limit has no effect in relation to a loss or liability to the extent to which the loss or liability is an eligible terrorism loss. (Back to top)

What is meant by "Insurer's Proportion Only" at the top of the Annual Aggregate Report?

This is referring to an insurer's gross proportion of the risk where co-insurance is involved. The insurer should only report their share of the risk. For example, if an insurer has a 35% share of a $100m risk, they should report $35m as their exposure. The reported figure should not be reduced by any facultative or treaty reinsurance because that reinsurance will not reduce the insurer's terrorism exposure. Similarly, the Number of Risks should indicate the aggregate of the insurer's share of each risk. If you insurer 10% of 2 risks in one postcode, the Number of Risks for that postcode would be 0.2. (Back to top)

Do insurers pay terrorism reinsurance premium on the entire original premium of an eligible policy even though part of the policy has been ceded to facultative or treaty reinsurers?

The Tier rates should be applied to the Gross Written Premium of the eligible policy and remitted to the ARPC. Do not remove the reinsurers' share of the original premium before applying Tier rates. (Back to top)

How do I calculate the terrorism reinsurance premium due to the ARPC?

If an insurer decides to pass on the ARPC reinsurance costs without reducing their own premium, they will need to “gross up” their base premium to ensure they charge an adequate amount. If the insurer requires a total of $1,000 insurance premium on an eligible policy, they would have to “gross up” the $1,000 by the applicable ARPC Tier rate. If the eligible policy is located in Tier A (12%) the insurer would need to divide the $1,000 gross base premium by (1-12%) and charge $1,136.36. The ARPC would then receive 12% of $1,136.35, being $136.36 and the insurer would keep the remaining $1,000. Note that, if the insurer multiplies the $1,000 by 12% and charges $1,120, they will only receive $985.60 after paying the 12% ARPC reinsurance costs. Similar calculations would also be made for other eligible risks located in Tier B (4%) and Tier C (2%). (Back to top)

Questions relating to different types of Insurance cover

What forms of insurance are covered by the legislation?

The Government does not wish to be involved in the insurance market in the long term. Any involvement is to be directed at alleviating problems faced by commercial property owners who are unable to obtain terrorist risk insurance.

For this reason other classes of insurance such as private residential property, marine and aviation insurance have not been included in the scheme.  Similarly, coverage will not extend to damage resulting from nuclear causes, farms that do not have business interruption cover, workers compensation insurance and insurance that covers Commonwealth, State and Territory Governments.

Coverage under the scheme will however be available for Commonwealth and State business enterprises as well as Commonwealth-owned airports leased commercially. (Back to top)

I am uninsured am I still covered?

No. To be covered for a DTI you must have an eligible insurance contract. (Back to top)

Does the scheme cover Acts of War?

No. The Treasurer cannot declare an act to be terrorist incident if he is satisfied that it is an act of war. (Back to top)

Are Workers Compensation or CTP Schemes covered?

No. Only eligible insurance contracts are covered. At present workers compensation and CTP scheme products are excluded from the definition of eligible insurance contracts. (Back to top)

Does the scheme apply to insurance taken out with non-resident insurers?

Yes. The scheme applies to all eligible insurance contracts on eligible property irrespective of whether the contract is with an authorised insurer or a foreign insurer.

If you have a policy with an overseas insurer you should confirm they understand their obligation under the legislation. (Back to top)

Does the scheme cover my home or residential property?

No. The scheme only applies to eligible insurance contracts.

Residential property is not included in the scheme. (Back to top)

Are places of Worship and religious  property covered?

Yes. Provided they are insured under an eligible insurance contract. (Back to top)

Will the scheme cover property that is overseas?

No.  The scheme only covers eligible property that is located in Australia. (Back to top)

Is Community property covered?

Yes. Provided it is insured under an eligible insurance contract. Property owned by the Commonwealth, State or Territory governments (except Government Business Enterprises) is not included. (Back to top)

Does the scheme apply to insurance contracts issued by a mutual organisation?

Yes. Provided it is an eligible insurance contract. The scheme does not only cover authorised insurers. (Back to top)

Is terrorism reinsurance payable on non-eligible sections of an otherwise eligible policy?

If the there is a separate non-eligible section of an otherwise eligible policy and you can identify the premium for that non-eligible section, the reinsured will not have to pay us terrorism reinsurance premium for the non-eligible part. For example, a Fire policy that provides cover for both commercial buildings and for motor vehicles could not be split as the cover is only for Fire. However a policy which has separate sections for Fire on commercial buildings and a separate Motor Vehicle insurance cover (which is excluded from the Act) could be split into eligible and non-eligible components. In this case, if the overall character of the policy is “eligible”, the ARPC premium would be payable on the Fire cover only and not on the Motor cover.

We recommend that you must first determine if the overall character of the policy is eligible and that you seek your own legal advice if you are unsure of the eligibility of the policy. (Back to top)

Reinsurance Premium

How are premiums to be determined?

The actual costs to insureds will vary.

The legislation allows the Treasurer to direct the Australian Reinsurance Pool Corporation to set the level of reinsurance premiums. Terrorism risk premiums to be charged by insurers to policyholders will not be set by the Government. Commercial market pressures can be expected to ensure that premiums charged to policyholders should not significantly exceed the charges for reinsurance.

Reinsurance premium levels between 2 and 12 per cent (depending on risk and location) of underlying commercial property insurance premiums have been mandated initially for the scheme.

As potential public liability costs would be difficult to quantify, there is initially no charge for coverage of terrorism risk in this class of insurance. However, premiums may be required for this class of insurance, in the event of a significant claim on the scheme.

Premium levels will be reviewed regularly, assessing the state of the pool and the impact of such premiums on the industry.

Premium structure for reinsurance
Class of insurance Initial rate
(from 1 October 2003)		 Maximum rate
(after an event)
Commercial Property - Tier C 2% 6%
- Tier A 12% 36%
- Tier B 4% 12%
Business Interruption - Tier C 2% 6%
- Tier A 12% 36%
- Tier B 4% 12%
Public Liability - 2%

(Back to top)

Will my premium change immediately from 1 July?

No. Your premium should not change as a result of this legislation until at least 1 October 2003. Until that time the ARPC will be reinsuring insurers free of charge for all eligible insurance contracts written up until that date. (Back to top)

How do I account for Annual Construction Policies?

The ARPC agree to apply our reinsurance tier rates to the insured’s estimate of contracts for the ensuing 12 months on annual construction policies. The previous requirement to adjust the initial reinsurance premium payment after receipt of the 12 month declaration has now been revoked. We would prefer to receive premium based on an estimate of the amount of original gross base premium for each tier but will accept premium based on the tier where the maximum value of work is to be commenced during the 12 month policy period. (Back to top)

Declared Terrorist Incident (DTI) and Claims

How is a ‘terrorist act’ defined in the legislation?

A definition of ‘terrorist act’ for the purpose of this scheme together with the process to determine when an event is a ‘terrorist act’ is set out in the legislation.

For the purpose of the scheme the legislation requires a declaration from the Treasurer, following consultation with the Attorney General, that an act was a ‘terrorist act’. (Back to top)

Who will declare a terrorist act?

The Treasurer after consultation with the Attorney General. (Back to top)

What happens in the event of a loss?

In the event of a loss your insurance company will be responsible for paying your claim in accordance with the policy terms and conditions.

If the loss is as a result of a terrorist act then the Treasurer will be responsible for declaring a terrorist incident. This will then trigger the reinsurance arrangements that your insurance company may have with the ARPC. (Back to top)

What happens if $10.3bn is not enough?

It is expected that the $10.3bn will be sufficient. If it appears that this will be insufficient to meet losses from a series of events then the Treasurer must declare a pro rata (percentage) reduction in claim payments in order to contain the Commonwealth's liability to within the $10.3bn limit. (Back to top)

Definitions

What is an eligible insurance contract?

An eligible insurance contract is defined in the legislation. S7 and associated Regulations set out the definition. (Back to top)

What is eligible insurance property?

Eligible insurance property is defined in the legislation. S3 and associated Regulations set out the definition. (Back to top)

How do I determine if a policy is a contract of Marine insurance and is the policy considered to be an eligible insurance contract?

  1. Clause 19 of the Terrorism Insurance Regulations 2003 (Cth) provides that a contact of marine insurance within the meaning of section 7 of the Marine Insurance Act 1909 (Cth) is not an eligible insurance contract. An insurer seeking to reinsure with APRC must determine for itself whether any of its contract of insurance meet that description. APRC will not provide advice as to whether a particular contract of insurance is a contract of marine insurance.
  2. The Marine Insurance Act 1909 (Cth) applies to contracts of marine insurance, subject to certain exceptions (s 6). A contract of marine insurance is defined as a contract whereby the insurer undertakes to indemnify the assured against marine losses, that is to say, losses incident to a marine adventure (s 7). The definition is elaborated in ss 8 and 9.

A recent case may be of assistance to insurers in analysing wether a policy is a contact of marine insurance within the meaning of section 7 of the MIA Gibbs v Mercantile Mutual Insurance (Australia) Ltd [2003] HCA 39. (Back to top)

Are Aviation policies considered eligible insurance contracts?

It is most likely that you will need to take your own legal advice about whether a contract is an eligible insurance contract for the purposes of the Act.

To determine whether a contract of insurance is an eligible insurance contract the following analysis needs to be undertaken.

A contract of insurance which is covered by section 7(1) of the TIA and is not otherwise excluded by the operation of sections 7(2) and (3) of the TIA is an eligible insurance contract for the purposes of the TIA.

The first question to be addressed is whether the contract of insurance in question is covered by section 7(1) of the Act. Section 7(1) uses the words "to the extent". Accordingly, subject to sections 7(2) and (3) of the TIA a contract of insurance is prima facie an eligible insurance contract to the extent that it provides insurance cover for one or more of the risks described in sub-paragraphs (a), (b) or (c). This means that where the policy of insurance covers a number of risks, including any of the risks described in sub-paragraphs (a), (b) or (c), it is covered by section 7(1).

If the contract of insurance is not covered by section 7(1) then the TIA has no application.

If (and only if) the contract of insurance in question is covered by section 7(1) is it necessary to determine whether that contract is nevertheless excluded by virtue of sections 7(2) and (3). It is only necessary to consider subsection 7(2)(b) which provides that a contract covered by sub-section (1) is not an eligible insurance contract to the extent to which it is "prescribed by the regulations for the purpose of this sub-section". The Terrorism Insurance Regulations 2003 ("TIR") prescribes forty classes of insurance pursuant to sub-section 7(2) of the TIA.

Except for those classes of insurance described in Items 6, 8, 16 and 24 of Schedule 1 of the TIR (all of which refer to a contract of insurance "to the extent that it provides cover"), in determining whether a particular contract of insurance meets the description of a class described in Schedule 1, the problem is to be resolved as one of characterisation, viewing the policy in its entirety.

To reiterate, if the contract of insurance is covered by sub-section 7(1) and is not otherwise excluded by sections 7(2) and (3), then it will be an eligible insurance contract for the purposes of the TIA. The insurer can then seek reinsurance cover from the ARPC in respect of any liability it may have under that contract which arises by virtue of the operation of section 8 of the TIA. (Back to top)

What is a protected contract?

A protected contract must satisfy 2 main features:

  1. must be a eligible insurance contract
  2. must be in force before 1st October 2003

For more information regarding protected contracts refer to section 8 Effect of terrorism exclusions in eligible insurance contracts of the Terrorism Insurance Act 2003. (Back to top)

How do I determine whether or not a building is a residential building?

Residential building means a building used principally and primarily as a place of residence on the site; and

  1. out-buildings used for domestic purposes, being purposes related to the use of the principal residence on the site

The methodology for determining whether a building is residential or not is as follows:

  1. Is the area of usage or intended usage for residential purposes more than 50%? If so, the building is treated as residential unless one or more of the factors below lead to a contrary conclusion;
  2. Consideration of the other factors should be given particularly where the residential percentage use factor is in the range of 40% to 60%.
  3. The other factors are also relevant where a significant portion of the building is unoccupied and is likely to remain unoccupied even though it may ultimately be intended for a particular use.
  4. A residential building does not include a hotel, motel, boarding house, a building under construction, a temporary building or structure or a demountable or moveable structure or a caravan. If the overall character of the building falls within one of these categories, then it is non-residential.
  5. Where further analysis is required, then that analysis should focus upon the degree, extent and intensity of use or intended use of the building for its various purposes. This analysis should be by reference to objectable objective or observable factors. These factors may include the following:
  1. the design and structure of the building;
  2. the manner in which the building is represented or promoted;
  3. whether or not any component of the building is in full-time or part-time use;
  4. the manner in which the building is fitted out and furnished;

Judgment will be required to weigh these factors. However, there must be a reasonable and logical approach to the judgment process.

If in doubt please seek advice from your insurance company. (Back to top)

Are Aged Care Homes considered eligible risks?

Aged Care Homes, where the residents have ownership or a lease of their apartments and have food and basic medical services provided, would not be considered eligible policies under the TIA even though the insurance policy might be on a single ISR format. This is due to the permanent aspect of residency for those living at the facility.

However, this would not be applicable to, for example, a hospital or hospice where the patients have temporary accommodation and the facility is intended to be a hospital business.

It is recommended that insurers seek their own legal advice if they are unsure of the eligibility of a policy. (Back to top)

Are forklift trucks or other mobile equipment excluded from the Act?

The Terrorism Insurance Regulations 2003 refers to the types of insurance contracts which are not eligible, it does not refer to types of property.

We consider that item 18 of the Regulations states that a contract of insurance for a motor vehicle is not eligible (other than moveable machinery or equipment, used in mining or construction activities, that would not ordinarily be registered to travel by road).

The eligibility of forklifts and other mobile equipment would depend upon whether or not those items are registered and insured under a motor vehicle policy. If the forklifts are not registered and are insured under an eligible type policy (eg ISR or Fire policy), it is most likely that they would be considered assets and would be eligible under the Act. If the forklifts or other mobile equipment are registered, they should be insured under a contract of insurance for a motor vehicle and would not be considered eligible under the Act. (Back to top)