Explanatory Statement
Issued by the Authority of the Assistant Treasurer
Terrorism Insurance Act 2003
Assistant Treasurer to Australian Reinsurance Pool Corporation (Premiums) Directions 2011
Subparagraph 38(2)(d) of the Terrorism Insurance Act 2003 (the Act) provides that the Minister may give written directions to the Australian Reinsurance Pool Corporation (ARPC) setting premiums that the ARPC is to charge in respect of contracts of insurance. The Act established the ARPC and the framework for the Government’s terrorism insurance scheme. The Act effectively deems terrorism risk cover into eligible insurance contracts by rendering terrorism exclusion clauses void. Insurance companies may then reinsure their additional risk with the ARPC, in which case a premium is payable to the ARPC. The premium payable is calculated according to a system of tiers which are set by reference to postcodes.
Section 41 of the Act requires that a review of the need for the Act to continue in operation must be undertaken at least once every three years after commencement. The most recent review was completed by 30 June 2009 and released by the Treasurer in October 2009. The Government agreed to all of the review’s recommendations.
One of the recommendations was that the Treasury, with the assistance of an outside contractor, update the allocation of individual postcodes to particular tiers to ensure that all postcodes are allocated to the correct tier. This process has been completed. The Assistant Treasurer to Australian Reinsurance Pool Corporation (Premiums) Directions 2011 (“2011 Directions”) formalises the updated allocation of postcodes.
All Australian postcodes are allocated to one of three ‘tiers’ which are broadly representative of risk. Postcodes allocated to tier A are those covering the CBD areas of Australian cities with a population of over one million. Postcodes allocated to tier B are those covering the urban areas of all State capital cities and cities with a population of over 100,000. Postcodes allocated to tier C are those postcodes not allocated to either tier A or B.
Reinsurance premiums are set at 12 per cent, 4 per cent and 2 per cent of the insurer’s underlying premium income, for insured properties in postcodes in tiers A, B and C respectively. These rates have remained unchanged since they were first set by the Treasurer to Australian Reinsurance Pool Corporation (Premiums) Direction 2003 (“2003 Direction”). The 2003 Direction also created the first postcode allocation list to assign each postcode to an appropriate tier. This list has remained largely static since 2003.
The Treasurer to Australian Reinsurance Pool Corporation (Premiums) Direction 2007 (“2007 Direction”) introduced a facility for the ARPC to automatically update the postcode allocation list, but only in limited circumstances: when existing postcodes are partitioned; when the boundaries of postcodes are changed; or when the boundaries of tier A or B ‘population centres’ change.
The 2009 review of the Act found that demographic changes since 2003 have resulted in some postcodes no longer being allocated to the correct tiers, resulting in inequities in the scheme. For instance, increases in population density may necessitate some postcodes being re-assigned to higher tiers. These changes cannot be captured by the automatic update facility introduced in the 2007 Direction.
The 2011 Directions updates the postcode allocation list to ensure that all postcodes are allocated to the correct tiers, in accordance with the methodologies described above, so that appropriate premiums may be charged to reinsure properties in those postcodes. The complete, revised postcode allocation list can be found at Schedule 1 of the 2011 Directions. The 2011 Directions also repeals the 2007 Direction.
Apart from changes to the postcode allocation list and changes in the phrasing of certain clauses to improve clarity, the 2011 Directions does not substantially alter to operation of the scheme.
The 2011 Directions is a legislative instrument for the purposes of the Legislative Instruments Act 2003.
The Treasury consulted with Geoscience Australia in preparing an updated postcode allocation list. Geoscience Australia employed a ‘geoprocessing’ model based on the urban boundary area as defined by the Australian Bureau of Statistics (ABS). The ARPC gave advance notice (in writing) of the proposed changes to the postcode allocation list to all of its clients, and received no adverse feedback from any clients.
The 2011 Directions commence on 1 July 2011.
Overview
The Terrorism Insurance Act 2003 was enacted by the Australian Parliament to provide a framework for the government's terrorism insurance scheme, addressing the gap in insurance coverage for terrorism risks. The Act established the Australian Reinsurance Pool Corporation (ARPC) and effectively made terrorism risk cover mandatory by rendering terrorism exclusion clauses in insurance contracts void. The policy objective of the Act is to ensure that insurance companies can reinsure their additional terrorism risk with the ARPC, thereby protecting the broader insurance market from significant financial impacts due to terrorism. The Assistant Treasurer to Australian Reinsurance Pool Corporation (Premiums) Directions 2011 formalise the updated allocation of postcodes to risk tiers, ensuring that reinsurance premiums charged by the ARPC are appropriate and equitable in light of demographic changes since the Act's initial implementation. This update rectifies inequities that arose from the static nature of the original postcode allocation list established in 2003.
Scope and Application
The Terrorism Insurance Act 2003 applies to insurance companies operating in Australia and the Australian Reinsurance Pool Corporation, governing the provision of terrorism insurance and the reinsurance of terrorism risks. The Act ensures that terrorism risk is covered in eligible insurance contracts by invalidating terrorism exclusion clauses and enabling insurance companies to reinsure their additional risk with the ARPC, for which a premium is payable. The application of the Act is national, as it pertains to entities and conduct across all states and territories of Australia. The Act's scope is further extended through subordinate instruments such as the Assistant Treasurer to Australian Reinsurance Pool Corporation (Premiums) Directions 2011, which formalise the allocation of postcodes to risk tiers and the corresponding reinsurance premiums. These tiers, which are adjusted to reflect changes in population density and urban development, determine the premium rates at 12 per cent, 4 per cent, and 2 per cent of the insurer’s underlying premium income for properties in tiers A, B, and C respectively. The 2011 Directions, which update the postcode allocation list, ensure that premiums charged are equitable and reflective of current risk assessments. This legislative instrument operates under the authority of the Legislative Instruments Act 2003 and commenced on 1 July 2011.
Key Provisions
The Terrorism Insurance Act 2003 (the Act) and the Assistant Treasurer to Australian Reinsurance Pool Corporation (Premiums) Directions 2011 (the 2011 Directions) are critical in establishing the framework for the Australian Government's terrorism insurance scheme. Section 38(2)(d) of the Act allows the Minister to direct the Australian Reinsurance Pool Corporation (ARPC) to set premiums for terrorism insurance, which are then incorporated into eligible insurance contracts. This scheme is designed to ensure that insurance policies provide coverage for terrorism-related risks by making terrorism exclusion clauses void, effectively deeming terrorism risk cover into these contracts (s 38(1), s 40). Insurance companies can reinsure their additional terrorism risk with the ARPC, for which they pay a premium calculated according to a tiered system based on postcodes.
The 2011 Directions update the allocation of Australian postcodes to one of three tiers: A, B, or C. Tier A includes postcodes covering the central business district (CBD) areas of Australian cities with populations over one million; Tier B includes postcodes covering the urban areas of all state capital cities and cities with populations over 100,000; and Tier C includes all other postcodes. The reinsurance premiums are set at 12% of the insurer’s underlying premium income for properties in Tier A postcodes, 4% for properties in Tier B postcodes, and 2% for properties in Tier C postcodes. These premium rates have remained unchanged since the initial setting by the Treasurer in the 2003 Direction. The 2011 Directions also formally update the postcode allocation list to ensure that all postcodes are correctly assigned to their respective tiers, addressing inequities identified in the 2009 review of the Act.
The Act and the 2011 Directions impose several obligations on the ARPC and insurance companies. The ARPC must charge premiums in accordance with the tiers set out in the 2011 Directions and ensure that the allocation of postcodes to tiers is updated to reflect demographic changes. Insurance companies, on the other hand, must reinsure their terrorism risk with the ARPC and pay the applicable premiums based on the updated postcode allocation. Both entities are required to comply with the directions and the Act’s provisions, including any changes to the premium rates or postcode allocations as directed by the Minister.
Failure to comply with the Act or the 2011 Directions can result in civil or criminal consequences. The Act does not specify particular offences or penalties; however, breaches of legislative instruments such as the 2011 Directions can lead to enforcement actions under the Legislative Instruments Act 2003. This may include legal proceedings to enforce compliance, or in severe cases, the imposition of fines or other penalties as prescribed by relevant legislation. The precise penalties would depend on the nature and severity of the breach, as well as the applicable laws governing enforcement of legislative instruments.