TERRORISM INSURANCE ACT 2003
Treasurer to Australian Reinsurance Pool Corporation (Risk Retention) Direction 2003
I, Peter Costello, Treasurer, give this written direction to the Australian Reinsurance Pool Corporation under s.38(2)(e) of the Terrorism Insurance Act 2003 (the Act).
Dated 30 September 2003
PETER COSTELLO
Treasurer
1. Name of Direction
This Direction is the Treasurer to Australian Reinsurance Pool Corporation (Risk Retention) Direction 2003.
2. Commencement
This Direction commences when it is made.
3. Definitions
In this Direction:
APRA means the Australian Prudential Regulation Authority.
Corporation means the Australian Reinsurance Pool Corporation.
Date of Expiry means the date and time at which the Reinsurance Agreement expires, according to the terms of the Agreement.
Reinsurance Agreement means a contract of reinsurance between the Corporation and another person (the Reinsured) relating to terrorism risks.
Reinsurance Period means the period from commencement of a Reinsurance Agreement between the Corporation and the Reinsured until termination of that Reinsurance Agreement, according to the terms of that Reinsurance Agreement.
Retention Period means:
(a) initially, the period from the commencement date of the Reinsurance Agreement between the Corporation and the Reinsured to 30 June 2004;
(b) thereafter, each period of 12 consecutive calendar months during the Reinsurance Period commencing on 1 July 2004;
(c) thereafter, each period of 12 consecutive calendar months commencing on the day following the Date of Expiry.
For the avoidance of doubt, each such period constitutes a separate Retention Period for the purpose of applying the Reinsured's Retention.
Note: Some terms in this Direction, for example, declared terrorist incident, have the same meaning as in the Act.
4. Risk to be retained
The following risk is to be retained by the Reinsured under a Reinsurance Agreement.
A Reinsured’s Retention shall apply in respect of all declared terrorist incidents that happen during the same Retention Period. The Reinsured's Retention shall be fixed for each Retention Period and shall be an amount equal to the lesser of:
(a) $1 million; or
(b) either of the following which is appropriate to the circumstances of the Reinsured:
- 4% of the amount calculated as follows:
The Reinsured's Gross Fire and ISR premium LESS the amount of the Fire Service Levy component of that premium which the insured has remitted. (The figures used for this calculation must be the figures disclosed in the Reinsured's returns to APRA for the 12 months ending 30 June prior to each Retention Period).
OR
B. If the Reinsured does not submit returns to APRA for Fire and ISR premium, or, being a newly formed entity has not submitted a return to APRA for the 12 months ending 30 June prior to the relevant Retention Period, the figures used for this calculation will be an appropriate equivalent to that described in A above as determined by the Corporation in its discretion.
If, however, the sum of the Reinsured's Retention and the retentions of all the Corporation's other reinsureds together total more than $10 million in respect of all eligible terrorism losses caused by a single declared terrorist incident then the amount of the Reinsured's Retention in respect of that declared terrorist incident shall be adjusted on the following basis:
(i) the Corporation will determine the Reinsured's Retention as a percentage of the total retention of all of the Corporation's reinsureds that incur claims caused by that declared terrorist incident (the Reinsured's Proportion);
(ii) the Reinsured's Retention shall be an amount equal to the Reinsured's Proportion of $10 million.
5. Corporation to ensure consistency
The Corporation must ensure that a contract of reinsurance between the Corporation and another person is consistent with this Direction.
Overview
The Terrorism Insurance Act 2003 was enacted to address the problem of ensuring the availability and affordability of insurance in the event of a terrorist attack, which could otherwise lead to a significant gap in the market. This Act was introduced by the Commonwealth Parliament and its policy objective is to provide a mechanism for the retention of a portion of the risk of terrorism by insurers, thereby mitigating the potential impact on the insurance market and ensuring continued availability of insurance. The Treasurer to Australian Reinsurance Pool Corporation (Risk Retention) Direction 2003 is a legislative instrument made under the Act, directing the Australian Reinsurance Pool Corporation to retain a specified amount of terrorism risk. This Direction sets out the terms for the retention of risk by the Reinsured, ensuring that a consistent approach is taken across all reinsurance agreements and that the risk retention is applied in a manner that aligns with the objectives of the Act.
Scope and Application
The Terrorism Insurance Act 2003 applies to entities involved in the insurance industry, specifically those that are subject to the oversight of the Australian Prudential Regulation Authority (APRA). The Act mandates the establishment of a reinsurance pool to manage terrorism risks, with the Treasurer having the authority to issue directions to the Australian Reinsurance Pool Corporation (Corporation) under the Act. The Treasurer to Australian Reinsurance Pool Corporation (Risk Retention) Direction 2003 is one such direction, outlining the specifics of risk retention by the reinsured entities during specified retention periods. This Direction applies to reinsurance agreements between the Corporation and the reinsured, setting forth the terms for the retention of terrorism risks, including the calculation of the reinsured's retention based on either a fixed amount or a percentage of their gross premiums. The Direction specifies the commencement and duration of the retention periods, as well as the maximum aggregate retention across all reinsureds for a single declared terrorist incident, which is capped at $10 million. The Corporation is required to ensure that all reinsurance contracts align with the provisions of this Direction. The geographic scope of the Act and this Direction is national, impacting all entities within Australia that fall under APRA’s jurisdiction.
Key Provisions
The main operative sections of the Treasurer to Australian Reinsurance Pool Corporation (Risk Retention) Direction 2003 (the Direction) include the definition of key terms (section 3), the specification of the risk to be retained by the reinsured under a Reinsurance Agreement (section 4), and the obligation on the Corporation to ensure consistency in contracts of reinsurance (section 5). Section 3 provides definitions for terms such as APRA, Corporation, Date of Expiry, Reinsurance Agreement, Reinsurance Period, and Retention Period. Section 4 outlines the risk retention requirements, stating that the Reinsured's Retention must apply to all declared terrorist incidents during each Retention Period and must be the lesser of $1 million or a percentage of the Reinsured's Gross Fire and ISR premium, as calculated. Section 5 mandates that the Corporation ensure that all reinsurance contracts are consistent with the Direction.
The Direction imposes several obligations and requirements on the parties governed by it. The Corporation, as the Australian Reinsurance Pool Corporation, must ensure that any reinsurance agreements are consistent with the Direction, specifically in terms of the risk retention requirements outlined in section 4. Reinsured entities are required to submit their Gross Fire and ISR premium figures to APRA for the calculation of their Retention. If the reinsured does not submit these figures, the Corporation may determine an appropriate equivalent in its discretion. Additionally, the Direction mandates that the Reinsured's Retention be adjusted if the total retention of all the Corporation's reinsureds exceeds $10 million in respect of all eligible terrorism losses caused by a single declared terrorist incident.
The Direction does not explicitly state any offences, penalties, or civil/criminal consequences for breach. However, failure to comply with the Direction’s requirements could potentially lead to disputes or claims under the reinsurance agreements, as well as regulatory scrutiny from APRA and the Corporation. The consequences of non-compliance might include financial penalties or the need to renegotiate reinsurance terms to ensure compliance. Given the nature of the Direction as a legislative instrument under the Terrorism Insurance Act 2003, it is likely that any significant breaches could result in enforcement actions by relevant authorities, although specific penalties are not detailed within the Direction itself.