The threat of terrorism remains and the private reinsurance market does not have the capacity to cover all commercial property, according to the Australian Reinsurance Pool Corporation’s (ARPC) latest update.

Chairman Joan Fitzpatrick says the pool “continues to address significant market failure in the reinsurance industry for the provision of cost-effective terrorism insurance cover”.

The ARPC was founded when the private market withdrew cover after the September 11 2001 attacks on the US. The recent Audit Commission report recommends it be abolished, citing a recovery in the reinsurance market.

The corporation sources retrocession and has bought $3 billion of its $13.4 billion capacity from 57 reinsurers, on top of a $10 billion guarantee provided by the Commonwealth.

The update says private sector capacity is insufficient to cover a probable maximum loss.

“The ARPC currently purchases almost all the global capacity available for Australian risks through Standard & Poor’s A- or better rated insurers.

“Some market commentators believe that the private reinsurance market has both capacity and appetite to provide cover at the level required.

“The ARPC’s recent experience in testing market availability demonstrates this is not yet the case for the whole market, and only limited capacity exists for individual risks.”

The National Terrorism Public Alert System rates the risk of a terrorist attack as “medium”.

The ARPC has paid the Government dividends of $325 million for its guarantee and is due to pay another $450 million over the next four years.

An independent analysis this year, as part of the ARPC’s triennial review, will test the capacity of the private reinsurance market.