Terrorism levy adds to the costs
NIBA Backgrounder, July 2006

Commercial insurance clients may notice a “terrorism levy” on their property and business interruption policy invoices. The levy is not compulsory, and is not generally regarded as being one of the “hidden taxes” which are inflating the price of insurance. Sometimes the levy is itemised on the invoice, but often it is just included in the basic premium.

Either way, the terrorism levy is charged before other federal and state charges, thus maximising the tax take in GST and stamp duty.

The terrorist attack on the World Trade Centre in New York on September 11, 2001 caused a major upheaval in the insurance industry that affected most insurers. Because the potential scale of terrorist attacks could not be accurately assessed, insurers globally sought to exclude terrorism coverage from their property and business interruption policies. As a result, some countries established “pools” where funds could be collected to help cover the costs stemming from a future terror attack.

The Federal Government established the Australian Reinsurance Pool Corporation (ARPC) in 2003 to offer reinsurance for terrorism risk in Australia.

The scheme covers insurance for loss of or damage to commercial property that is owned by the insured, insurance for business interruption arising from loss of or damage to or inability to use eligible property, and insurance for liability of the insured arising from ownership or occupation of eligible property. Private residential property is not included in the scheme.

Risk cover is for any declared terrorist incident, except events involving damage from nuclear causes.

Premiums that insurance companies pay for reinsurance to the ARPC are now building up a pool of $300 million, which will be available to cover claims from declared terrorist incidents. The pool will be supplemented by a back-up bank line of credit of $1 billion, underwritten by the Commonwealth, as well as a Federal Government indemnity of $9 billion, giving aggregate cover of up to $10.3 billion when the pool is fully funded.

The premium paid by policyholders will not necessarily equal the reinsurance charge paid by insurers, since insurance companies will need to recoup administrative expenses and separately price the risk of up to $1 million per risk they must retain when reinsuring with the ARPC. In assessing price increases, policyholders should be mindful to the rate charged to insurers by the ARPC.

For commercial property and associated business interruption, an initial premium of 2% of the base premium generally applies, with two levels of surcharges (as much as 10% of basic premium) on properties located in most capital city CBDs and other urban areas.