Addressing market failure

ARPC addresses market failure in the Australian commercial property terrorism insurance market through risk sharing and mitigation.

After 17 years of the Scheme and ARPC’s operation, a whole-of-market, sustainable, alternative provider of terrorism reinsurance does not exist in Australia or the global market, such that partial market failure still exists. The global reinsurance market has insufficient capacity to offer uniform terrorism risk insurance coverage to the Australian market at affordable prices, a situation unlikely to change in the near term.

The 2018 Triennial Review¹ concluded that there continues to be partial market failure and recommended that the Act remain in force and that the scheme remain in place. The Review stated: “In the absence of the Act there would likely be a market failure in the terrorism insurance market with wider economic implications. The estimated global commercial market capacity available for Australian terrorism reinsurance is considered short of the level required to cover against large, but possible, terrorism incidents. Several reinsurers have indicated they would find it difficult to participate in the Australian terrorism insurance market without a mechanism like the ARPC.”

The 2018 Triennial Review report estimates that terrorism risk reinsurance coverage available at reasonable prices to Australian insurers totals around $4 billion, well below the $13.6 billion of reinsurance cover provided by the Scheme in 2018.

_{1 The TI Act is reviewed every three years by The Treasury to assess the level of market failure and the need for ARPC to continue.}

International threat environment

The international threat environment for terrorist events has changed dramatically in recent years. Terrorist attacks in London, Manchester, Paris, Sri Lanka, and Melbourne show an increase in the frequency of terrorism. There has also been a growing trend where perpetrators of terrorist acts are individuals who have not previously been on the authorities’ radar, but who are unstable and susceptible to rapid radicalisation.

Australian threat context

Australia has seen several terrorist incidents prevented, including lone-perpetrator actions, the attempt to load a chemical bomb onto an aircraft departing Sydney, and a plot to use an improvised explosive device to disrupt an electrical substation on the New South Wales south coast.

On 26 November 2015, the Australian Government launched the National Terrorism Threat Advisory System (NTTAS) to inform the public about the likelihood of an act of terrorism occurring in Australia. NTTAS has five levels to indicate the national threat level as shown in Figure: National Terrorism Threat Advisory System (NTTAS).

The 2019-20 NTTAS threat level is Probable, reflecting the intelligence assessment by the National Threat Assessment Centre. Probable means credible intelligence, as assessed by security agencies, indicates individuals or groups have developed the intent and capability to conduct a terrorist attack in Australia. The current level has not been introduced in response to a specific threat.

For more information on the National Terrorism Threat Advisory System and the current level of alert, please visit: www.nationalsecurity.gov.au/Securityandyourcommunity/Pages/National-Terrorism-Threat-Advisory-System.aspx

National Terrorism Threat Advisory System (NTTAS)