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Wednesday, 26 March 2003
Page: 13626

Mr McARTHUR (6:33 PM) —As other speakers have indicated, the Terrorism Insurance Bill 2002 is a measure to ensure that insurance will be available for projects and for the insurance industry generally when it has become no longer available because of the impact of the events of 11 September 2001. The withdrawal of cover for terrorism has meant that insurance companies would no longer take on risks, and likewise for reinsurance companies.

The 11 September events were the largest insurance events ever recorded. It is estimated that between $35 billion and $75 billion worth of insurance was claimed after those events. That was never contemplated by the insurance industry. The people in the United States and in the UK—even those insurers of Lloyd's—did not anticipate such a catastrophic event. They may have anticipated one building being struck by aircraft or a bomb, but for both buildings to be wiped out was beyond all the realms of possibility. In this case, 60 to 80 per cent of the ultimate losses lies with the reinsurers. Obviously, they have a lot of difficulty in handling that. As a result, cover for terrorism has been removed from all new treaty reinsurance as from January 2002.

If you know something about the insurance industry you would know that it would be reasonable—with the current events in Iraq and terrorism—for insurance companies to be ducking for cover. Interestingly enough, I understand that Lloyd's of London, who have had some difficult times over the last few years in terms of their premium writing and unforeseen events that have taken place, have the highest capacity to underwrite in their history, at 14½ billion—which is a remarkable amount of money.

This legislation provides a safety net by being the insurer of last resort in claims arising from terrorist acts. That is quite reasonable and even members opposite, I think, would agree with that. My good friend the member for Blaxland does not always agree with me, but I think on this occasion he might go along with some commonsense and some understanding because in the longer run he may be in government and this particular problem may emerge under his jurisdiction. That will be some time in arriving, I know—it might be another 15 years—and I am encouraged that he will be on the backbench for that length of time.

As I was saying, it was impossible to get terrorism insurance—that is fairly obvious under this set of circumstances—so it was having an impact on projects in Australia as people were not prepared to take the risk. In May 2002 the government made an offer for the remainder insurance losses, above the cover available from insurers, to be put in a pooling arrangement. This ensured that these insurance arrangements were kept in the private sector but allowed the re-emergence of a commercial market for terrorism risks cover. The well-known insurance brokers Marsh Pty Ltd, in their bulletin of December 2002, say:

If the Bill is passed in its current form then, from 30 June 2003, all insurance ... providing coverage for commercial property in Australia, will be required to provide cover for acts of terrorism. Terrorism coverage will include chemical or biological attacks, but exclude nuclear attacks.

Tourism insurance will be compulsory, which contrasts with the United States (US) Terrorism Insurance Act ...

Another overseas example is the UK Pool Reinsurance Company, established after the IRA attacks. In France, the state owned Caisse Centrale de Reassurance, under government guarantee, covers physical and property damage caused by terrorist attacks above an annual 1.5 billion ceiling. There are special terrorism risk mechanisms in Spain, South Africa and Israel—and I guess companies in those countries would need that sort of coverage in view of current events. Under the US terrorism act of November 2002, it is compulsory for insurers to offer terrorism coverage for an additional premium. Obviously, the psychology and attitude in America has been dented by the events of 11 September, and they are taking no risks.

The government here in Australia will compel commercial property owners to purchase terrorism risk cover when ensuring their properties. This is because one cannot predict when terrorism will occur—it might be in country areas; it could occur at any time. It is unpredictable, as recent events have indicated. There has been terrorism in tourist areas. The example of Bali is often quoted and in Australia we live in some apprehension that that might happen here in some of the tourist areas where there may be foreign nationals.

There is a need for a reasonable fund pool of at least $300 million to start the ball rolling, and to do this the terrorism surcharge will increase premiums by between only two per cent and four per cent, for smaller businesses. According to the insurance broker Marsh Pty Ltd, reinsurance premiums will vary between two per cent and 12 per cent depending on location, but average about five per cent. That seems fairly reasonable given the possibilities of a major catastrophic event and the sensitivity and concern that insurance companies have about this whole matter in the current international circumstances.

As Trowbridge Consultinghave said, voluntary participation in a scheme would be unworkable; so this bill has come in to ensure a practical solution to the whole problem of terrorism insurance. The bill proposes to cover commercial property infrastructure facilities and include associated business interruption and public liability cover. It would compel insurance companies to provide cover for terrorism on all policies. Companies may reinsure their terrorism risk and exposure under the proposed scheme. The pool of funds is planned originally to accumulate $300 million funded by the premiums. The first $10 million worth of claims would be borne by the insurer and claims above that would be borne by the government. To quote from the description by McCulloch Robertson lawyers of 5 December 2002:

[The legislation] will make it compulsory for insurers issuing commercial policies for property damage, business interruption and public liability to include statutory terrorism cover in the policy and to collect a premium to be remitted into the pool of funds. The pool will comprise $300 million to be collected at the rate of $100 million over a year, for three years. On the happening of a terrorist event, insurers will meet claims at first instance and then claim reimbursement from the fund, which will pay losses from three tiers:—

I think this is important, because it sets it out very well—

the pool's funds up to a limit of $300 million

up to $1 billion excess of the pool funds from a commercial loan facility guaranteed by the Federal Government then

up to $9 billion in excess of the commercial loan facility for `reinsurance' (in effect a government indemnity) provided by the Federal Government ...

The art indemnity fund—to which I will refer in a minute and on which I did some work as a member of the parliamentary committee—reflects that sort of approach by this government and, to be fair, previous governments.

The bill defines a terrorist act—and I think this is important—as `an act or threat that causes death or serious harm to a person; causes serious damage to property; endangers another's life; creates a serious risk to public health or safety; or seriously interferes with, disrupts or destroys an electronic system such as a telecommunications system, financial system, transport system or essential public utility; and is done or made with the intention of advancing a political, religious or ideological cause and coercing or intimidating a Commonwealth, state or territory government, a foreign country or the general public in either Australia or a foreign territory'. Advocacy, protest and dissent or industrial action will be excluded from the definition of terrorism where such actions are not intended to cause serious physical harm, death, endangerment of life or serious risk to the health or safety of the public.

The Australian Reinsurance Pool Corporation, when created, will have its funds depleted from time to time. The rates will be reviewed in order to repay the commercial loan and the reinsured facility and replenish those funds. So there is a commercial approach whereby, if there is a sudden call upon the funds, the bill allows for a replenishment of these funds from time to time. The scheme would operate from 1 July 2003, and this bill proposes its implementation. I understand that it has the support of the banking and real estate industries. Obviously the insurers have been unwilling to cover terrorist attacks, as they have been unwilling to cover some of the public liability risks associated with normal activity.

I finish by referring to the very good art indemnity scheme run by the Commonwealth and supported by both the Labor Party and the current coalition. I was a member of the Standing Committee on Transport, Communications and the Arts which looked at the very fundamental problem of art indemnity in a way similar to the current proposal before the parliament. I will quote a couple of paragraphs from this, because it demonstrates the ability of government to cover some of these almost uncoverable risks. In the case of art indemnity, there was an interesting argument about who might cover the premium. Fundamentally, art indemnity arranges insurance coverage for high-value works of art that come from international sources to tour Australia. Obviously the question of who covers the insurance is asked.

I will quote the figures from the report so that we get them right. In the year 2002-03, there were exhibitions worth a total of $2.6 billion. Given a financial assessment of that risk, it would cost $1.165 million for the premium. The report says:

Undoubtedly, in the event of a major incident involving damage to works of art, premiums would rise. However, the DCITA—

that is, the department—

stated that at the current premium rates it expected to be able to cover $2 to $3 billion in total exhibitions per year.

The fundamental problem in the case of this reinsurance is whether governments can handle the reinsurance problem and, in the case of art indemnity, cover these works of art. This scheme allows the government to carry the risk. Mr Robert McKay, the current chairman of Art Exhibitions Australia, states:

Our fear is ... that, as it now becomes an item in the department of art's budget, the user-pays principle may cause that premium to bring about a change in government policy. Our fear is that if the government policy of the past 21 years were to change and charges were to be made then we believe that will destroy what has been built up over the last 21 years. The economics of the industry cannot carry the cost.

Without going into detail, I commend the art indemnity scheme supported by both governments for the last 21 years. It does allow, at a reasonable cost, works of very high value to be brought to Australia by aircraft. They are very well protected in the aircraft and are carried by personal courier. The ability of Art Exhibitions to execute the physical transport is of a very high order. The fundamental thesis that the federal government would undertake the cover for no premium is to be commended, given the total aspect of seeking insurance for works of art.

Both these schemes are to be commended. Whilst the federal government may be up for a payment at some future date, that is a matter of risk and a matter of judgment. In both cases it means that Australians can enjoy works of a very high calibre and of outstanding quality, because we have developed that art indemnity scheme. In the case of the Terrorism Insurance Bill before us, it allows Australia to get on with the insurance cover. It allows the government to come in at a later stage in a commercial way to cover unforeseen risks, such as September 11 in the US, and allows the government, as the lender of last resort, to cover this amount of insurance. I commend the legislation to the House and I commend the government for providing a sensible, commercial and national solution to a very complex problem.