Australian commercial property insurers have been forced to cover declared ‘terrorist incidents’, and some insurance customers are asking whether they’re being gouged by the terrorism levy. Zacharias Szumer investigates.
Are you a commercial property owner in a regional city like Toowoomba or Bendigo kept up at night by the prospect that the Islamic State (IS) group might target your bakery or op shop? If so, your insomnia has probably worsened since the federal government raised the national terrorism threat level from ‘possible’ to ‘probable’.
Well, MWM is here to reassure you that – even if Isis takes issue with your sacrilegious pasties or plants a bomb beneath the blouse rack – your insurer may have to cover you for any damage they do.
That’s because they have to. And there’s also a $14 billion pool of Commonwealth money, which hasn’t been drawn on in 20 years, sitting there to help them pay you out.
Since the pool was set up, there’s only been one declared ‘terrorist incident’, but the Commonwealth didn’t have to chip in to help private insurers.
Terrorism insurance premiums
MWM has talked to one commercial property owner who said he didn’t know anything about terrorism insurance until he looked below the line in his insurance policies.
The property owner – who we’ll call Alex – has shown MWM some of his insurance policy documents, according to which insurers are either collecting hundreds of dollars in terrorism levies from him each year or just not disclosing how much they’re collecting.
The 2024-2025 premium on one of Alex’s properties was $14,700, of which $900 was a terrorism levy. His insurer is AIG Australia and the policy covers public and product liability and fire and other events.
(We have slightly rounded the figures to protect Alex’s privacy.)
Yes to terrorism cover, no to fracking. What’s the farmer (insurance) scam?
In a previous year, the same property was covered by Allianz, and Alex’s premium was around $13,000. However, the below-the-line breakdown doesn’t give a dollar figure for the terrorism levy component.
It simply says that this policy, or part of it, is a policy “to which the Terrorism Insurance Act 2003 applies” and that Allianz “may elect” to reinsure part of its liability with the federal government’s reinsurance corporation, the ARPC (more on that later).
“As a consequence, we may be required to pay a premium to ARPC, and that amount (together with the cost of that part of the cover provided by Us and administrative costs associated with the legislation) is reflected in the premium charged to you.”
What charges, who benefits?
MWM reached out to Allianz to pass on Alex’s question about why it didn’t include terrorism levy figures as AIG does.
“Business packages can cover a broad range of different business activities and circumstances, particularly, the coverage of property that could be covered by the Terrorism Pool,” an Allianz spokesperson said.
“If Allianz did ‘elect’ to reinsure policy under the Act, the amount of the applicable levy would be shown on the policy schedule.”
Alex said he’s reached out to his insurance broker to demand all his insurers pass on information about how large their terrorism levy is but hasn’t received any information so far.
“The punters are getting screwed … why don’t I have the option to opt out?” he questioned, adding that this would make it possible for him to lower the rent for his tenants,
We’re in a part of Australia where there’s “Buckley’s chance” of a terror attack.
MWM media reached out to AIG to ask whether customers can request to be excluded from paying a terrorism levy but received no response before publication.
The ARPC’s $14 billion
In the event of a ministerially declared ‘terrorist incident’, these private insurers would be forced to make payouts, thanks to legislation passed in 2003.
The Terrorism Insurance Act was passed in response to a perceived market failure in the aftermath of the September 11 attacks, which “resulted in global reinsurers refusing to underwrite commercial property damage caused by acts of terror.”
The legislation “overrides “terrorism exclusion clauses in eligible insurance contracts”, which encourages insurers “to seek reinsurance”, a 2021 review of the scheme reads.
Because there wasn’t much of a private reinsurance market for terrorism, the government set up the Australian Reinsurance Pool Corporation (ARPC).
Source: ARPC
The ARPC – which provides terrorism reinsurance cover for Australian commercial and high-value residential property – “is intended to be a temporary measure to allow the re-emergence of an adequate private reinsurance market for terrorism risk”, the 2021 review says.
In 2022-2023, the most recent financial year for which figures are available, the ARPC’s terrorism pool collected $359 million in premium revenue.
It now has a $14.4 billion dollar pool available to cover insurers in the event of a ministerial direction that a declared ‘terrorist incident’ has occurred.
The Lindt café siege
Recent events, such as the Sydney church stabbing – which NSW Police declared to be an act of terrorism – were not declared to be ‘terrorist incidents’ for insurance purposes by the Assistant Treasurer and Minister for Financial Services Stephen Jones.
Since 2003, the ARPC has not had to make a single payout.
However, in its absence, “there would likely be a market failure in the terrorism insurance market with wider economic implications,” the 2021 review argued.
There has been one declared terrorist incident in the history of the scheme: the Lindt Café siege in 2014.
When then treasurer Joe Hockey made this declaration, any terrorism exclusion clauses in the insurance policies of affected businesses were rendered void.
However, insured losses from the incident – $2.3 million over 20 insurers – were “well short of the limit at which the Commonwealth may become liable for payments.”
A screengrab from Monday, Dec. 14, at the Lindt Cafe in Martin Place, Sydney. (AAP Image/Seven News)
Are insurers passing on ARPC rates?
The ARPC charges reinsurance fees based on the geographic location of insured properties.
Tier A properties – those in major CBD areas of Australian cities – attract 16% of an insurer’s gross base premium.
Tier B properties – those in urban areas, including capital city suburbs and places like Newcastle, Cairns and the Gold Coast – are charged 5.3% of an insurer’s gross base premium.
There’s also a Tier C, covering everything that isn’t Tier A or B.
This tiered system was presumably instituted because it would be too difficult to draw clear lines about where terrorism is and isn’t going to occur, and thus totally exclude those areas where there’s “Buckley’s chance”, as Alex put it.
Alex’s properties are Tier B, and AIG is seemingly passing on to Alex the ARPC’s rate, give or take a few decimal percentage points – $900 is roughly 6.1% of $14,700. In the previous year, and at a different property, the terrorism levy made up about 6% of his AIG policy.
MWM asked AIG whether it just passed on ARPC rates but, as mentioned above, we didn’t hear back. The Allianz spokesperson said, “Allianz would simply add the levy set by the ARPC in the same way it adds other government levies such as State Stamp Duty and GST. No other charges are added.”
The ARPC has issued a statement saying that it “notes” the recent raising of the national terrorism threat level but hasn’t clarified what effect that might have on premiums.
MWM understands that the next review of the ARPC’s founding legislation will occur in 2025.
This post was originally published on Michael West.