The Federal Government has set up a national scheme to provide insurance protection against future terrorist attacks. It was hardly a surprise, but it was desperately needed. Treasurer Peter Costello unveiled the new scheme following months of calls, particularly from the property and insurance industries, for the Government to act.

Terrorism cover has been almost universally unobtainable in the wake of September 11, and the recent terrorist attacks in Bali may have also forced the Federal Treasury to focus on the need for action.

The Government’s four-level scheme involves a Government–administered pool – the Australian Reinsurance Pool Corporation. The scheme covers terrorist attacks to commercial property and infrastructure facilities, and will include associated business interruption and public liability insurance. It will cover damage caused by terrorist activity, including fire, flood, explosion, impact of aircraft, biological and chemical causes but not nuclear incidents.

Funding for the estimated $300 million needed for the scheme will come through levies on property premiums. The level of levy will depend on the risk of insured properties and facilities, and cost from around 2% to a maximum of 12% of the related property insurance premiums. $300 million is expected to be reached in three to four years.

The first layer will provide retention of risk by insureds and insurers, who will bear the first $1 million per insurer or $10 million per incident. The second will rely on the premium pool. The third will rely on a commercial loan facility for $1 billion and the fourth will be derived from the Government.

The scheme will operate from July 1 next year. Mr Costello seems relaxed about the prospect of a terrorist attack in Australia before then, saying the Government would “consider appropriate assistance” if that happened.

Legislation to set up the scheme will be introduced into Parliament shortly. It will compel insurance companies to provide cover for terrorism risk on all policies in all classes of insurance included under the scheme. Insurance companies will also be able, but not obliged, to reinsure their terrorism risk exposure with the proposed scheme.

NIBA said yesterday that the levy should be exempt from stamp duty and GST to keep costs to insurance-buyers down. But CEO Noel Pettersen said the measures “seem the most logical way to meet demands of property-owners and developers. It puts some certainty back into the market.”

ICA Executive Director Alan Mason said the proposal to spread the cost over the entire insuring community will make cover “more affordable and widely available”.

In the future the scheme may also extend to underwritten state and territory workers’ compensation and compulsory third party motor vehicle insurance. This would be done to ensure a coordinated approach is taken with these schemes and the terrorism scheme.

Mr Mason said that much of the “technical detail” about the operation of the scheme was yet to be finalised. He also expressed concern about potential exposure to terrorism risk that may not be protected by Government or reinsurance arrangements.