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Thursday, 12 December 2002
Page: 10261

Mr COSTELLO (Treasurer) (9:31 AM) —I move:

That this bill be now read a second time.

Since the terrible events in the United States of 11 September 2001, there has been a worldwide withdrawal of commercial insurance coverage for terrorism risk.

In Australia, there is virtually no traditional terrorism risk insurance available for commercial properties and infrastructure. What limited cover is available is generally regarded as too expensive by the market, and remains unsold.

The withdrawal of terrorism insurance results from a market failure—the lack of adequate information to price the risks arising from terrorism. The risks are very difficult to assess for insurance purposes, as terrorist events may be infrequent, but are likely to result in significant consequences.

The Australian Prudential Regulation Authority advises that the potential for a high payout from a low probability event is not a risk that can be managed through increased capital or through increased premiums.

As such, an adequate supply of terrorism risk insurance does not appear likely to return in the short to medium term in either the domestic or global markets.

The government is concerned that this lack of comprehensive insurance cover for commercial property or infrastructure may lead to less financing and investment in the Australian property sector and, consequentially, wider economic impacts.

Commercial property owners, banks, superannuation funds and funds managers have been forced to assume insurance risk as existing policies reached their expiry date and were renewed excluding previously provided terrorism risk cover. These institutions are not set up to manage insurance risk, and in the case of some bodies, notably superannuation funds, are specifically precluded from absorbing such risks.

In addition, the Australian Bankers Association has advised that there is a risk that financiers will be unprepared to provide finance to some large projects or large-scale infrastructure if terrorism cover is withdrawn and the new assets are exposed to an uninsurable risk. In the United States, such risks have already materialised, with one recent survey estimating that $US15.5 billion worth of construction projects have been suspended because of a lack of comprehensive insurance cover.

Until such time as the risks from terrorism are considered sufficiently small that insurers are willing to cover them once again or until the industry develops an appropriate method for pricing those risks, government intervention will be needed to fill the gap.

To ensure comprehensive coverage, terrorism risk cover will also need to be extended to cover business interruption and public liability risks associated with commercial property.

A number of our OECD counterparts have reached this same conclusion. France, Germany and the United States, for example, each recently established government schemes to address the current problem of lack of commercial insurance for risks arising from terrorism.

In establishing this scheme to provide reinsurance for terrorism, the government is mindful of the need also to foster the re-emergence of a commercial insurance market in this area. The government therefore will be closely monitoring developments in the commercial insurance and reinsurance markets both domestically and globally. The government intends to wind down its scheme and ultimately withdraw from the market once adequate commercial provision of terrorism risk insurance has re-emerged.

The government scheme is set out in the bill, which I have just presented to the parliament. I present the explanatory memorandum, and I commend the bill to the House.

Debate (on motion by Mr Zahra) adjourned.