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Are you reinsured for terrorism losses in Australia?

Source: Asia Insurance Review | Apr 2014

Dr Christopher Wallace from the Australian Reinsurance Pool Corporation (ARPC) discusses ARPC’s scheme, its retrocession program and the analysis from a three-dimensional blast model for the tier A locations.

Terrorist activities around the world are a constant reminder that terrorist attacks are still occurring. This places importance on insurers covering eligible property in Australia to consider reinsuring their risk with the ARPC.
 
ARPC is a statutory authority established under the Terrorism Insurance Act 2003 (TI Act) that provides terrorism reinsurance cover for eligible policies. ARPC’s role is to establish and subsequently provide ongoing administration of the scheme. 
 
ARPC’s scheme
The TI Act overrides terrorism exclusions in eligible insurance contracts, which includes commercial buildings, infrastructure and construction sites located within Australia, associated business interruption cover and some liability classes, in the event of a declared terrorist incident (DTI).
 
Through this scheme, insurance companies can choose to reinsure the risk of claims for eligible terrorism losses by entering into a reinsurance agreement with ARPC and paying the necessary premium. 
 
The capacity of the scheme now stands at A$13.28 billion (US$12 billion) comprising of a deductible of A$360 million, a retrocession program (including ARPC’s co-reinsurance) of A$3.24 billion and a Commonwealth guarantee of A$10 billion. It has a client base of 230 insurers covering over A$3,000 billion of Australian assets.
 
ARPC’s retrocession program
The scheme structure also illustrates ARPC’s retrocession program, which purchases terrorism reinsurance from the global insurance market to cover risks in Australia. 
 
The retrocession program aims to encourage commercial reinsurers to re-enter the terrorism insurance market, reduce the risk to the Commonwealth and reduce the burden on Australian taxpayers in the event of a declared terrorist incident.
 
Blast model analysed
ARPC commissioned a three-dimensional blast model for the tier A locations and to analyse potential damage from a biological or chemical attack. 
 
The blast model project focussed on Sydney and Melbourne central business districts and will be extended to Brisbane and Adelaide over the next 12 months.
 
ARPC’s modelling demonstrates that if a loss was to occur in the Sydney or Melbourne central business districts from a large blast, ARPC’s pool of funds plus the retrocession program would cover a single event at 99% of the probable locations. There are no locations in any other Australian capital city that could produce a single loss that would not be absorbed by ARPC’s scheme. 
 
ARPC has modelled potential losses from an attack on regional infrastructure such as power stations, mines, gas plants and regional shopping centres including damage at the site plus the upstream and downstream interruption. The report showed that, whilst some loss scenarios are significant, none exceeded the expected large losses from tier A locations.
 
The three-dimensional blast model positions ARPC as a thought leader of central business districts blast modelling and enables ARPC to test the adequacy of the scheme to cater for probable losses. It also actively enables us to negotiate the best terms for our retrocession program, advise the government in the event of a terrorism event and have meaningful discussions with the reinsurance industry on potential loss scenarios. 
 
Review of the Act
When the TI Act was established, it included that the legislation be reviewed every three years to examine its operations in the context of current market trends, including responses to governments globally to the provision of terrorism insurance. 
 
The most recent review reported in 2012 recommended that the TI Act continue for another three years and that the premium rates remain at the 2003 level, in order to continue to encourage the re-emergence of the private market. 
 
A key recommendation of the 2009 review was to explore the effects of extending the scheme to include mixed-use high-rise buildings that are not predominantly for commercial use. Whilst not specifically mentioned in the 2012 terms of reference, many of the stakeholders contacted by the review raised the issue. It could be argued that the level of concern perhaps reflected the increasing prevalence of high-rise residential apartment complexes in most Australian cities’ central business areas in recent years.
 
ARPC is an organisation established to protect Australia from economic losses caused by a terrorism catastrophe. If you issue eligible insurance policies and would like to know more about terrorism reinsurance in Australia, please visit www.arpc.gov.au 
 
Dr Christopher Wallace is the CEO of the Australian Reinsurance Pool Corporation (ARPC). 
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