Cyclone and Terrorism Reinsurance Pools explained

Some risks are too large for a single insurer to cover at an affordable price, making traditional insurance and reinsurance models insufficient - requiring alternative solutions.

In Australia, cyclone-related damage is one such risk, and terrorism presents a global challenge.

This is why the Australian Government introduced the Cyclone Reinsurance Pool and the Terrorism Reinsurance Pool, which aim to keep insurance for events in these categories affordable and accessible.

Here’s some answers to frequently asked questions.

What is the Cyclone Reinsurance Pool?

The Cyclone Reinsurance Pool is a reinsurance arrangement between insurers and the Australian Government’s Australian Reinsurance Pool Corporation (ARPC).

The ARPC, backed by a $10bn Government guarantee, allows insurers to transfer cyclone-related risks, reducing their exposure and helping keep premiums more affordable.

The Australian Competition and Consumer Commission (ACCC) monitors insurance premiums to ensure savings are being passed to policy holders.

Which insurers are part of the Cyclone Reinsurance Pool?

Previously, participation was required only for certain large insurers with Gross Written Premiums (GWP) of $300 million or more. From 31 December 2024, smaller general insurers offering eligible policies must participate.

How does the Cyclone Reinsurance Pool work with insurers?

The Cyclone Reinsurance Pool is funded by charging reinsurance premiums to insurers. It’s intended to be cost-neutral for the Government, and lower the reinsurance cost for most policies with medium-high exposure to cyclone risk.

The pool is backed by a $10bn government guarantee, renewed annually. If claims exceed this amount in any given year, the government will increase the guarantee to ensure obligations are met.

What does the Cyclone Reinsurance Pool cover?

The Cyclone Reinsurance Pool operates across the country, targeting support to cyclone-prone areas, and providing reinsurance for insurers operating in those areas. It covers losses for cyclone and related flood damage, including wind, rain, rainwater, rainwater runoff, storm surge and riverine flood damage caused by the cyclone, for those holding home, strata and small business insurance policies.

The Cyclone Reinsurance Pool covers:

● residential home and contents, including landlord insurance and farm residential cover.

● residential strata, including mixed-use strata schemes (where 50 per cent or more of floor space is used mainly for residential purposes); and

● commercial property policies with $5 million or less total sum insured across risks covered by the pool (property, contents, and business interruption)

● Small Medium Enterprise (SME) up to a maximum AUD $5 million sum insured limit

The cover is only available for policies issued by participating insurers. Your Gow-Gates insurance broker can confirm if the insurer participates in the pool.

When does the Cyclone Reinsurance Pool come into action?

The ARPC will declare the start and end of a cyclone event, and the Cyclone Reinsurance Pool will cover claims for cyclone and related flood damage from the event. The timeframe for acceptable claims arising runs from the beginning of a cyclone to 48 hours after the cyclone ends.

What does this mean for policy holders?

For policyholders, this cover remains available in cyclone-prone areas, through the pool arrangement, and premiums are more affordable. In the event of a claim, nothing changes – the insured needs to work with their broker and insurer to manage the claim.

What is the Terrorism Reinsurance Pool?

Similar to the Cyclone Reinsurance Pool, the Terrorism Reinsurance Pool is a Government reinsurance pool administered by the ARPC, funded by insurer premiums and guaranteed by the Commonwealth.

The benefits of the terrorism pool include the efficient pooling of risk for terrorism catastrophe.

How long has the Terrorism Reinsurance Pool been active?

The Terrorism Reinsurance Pool has been active for more than 20 years, after the terrorism insurance was withdrawn after global events, particularly 9/11, which saw insurance and reinsurance companies withdraw capacity, leaving significant assets uninsured and causing potentially adverse economic impacts. The Terrorism Reinsurance Pool was originally intended as a short-term measure, but frequent reviews have confirmed its ongoing necessity.

How does the Terrorism Reinsurance Pool work?

It operates by essentially overriding terrorism exclusion clauses in eligible insurance contracts if there is a Declared Terrorism Incident (DTI), obligating insurers to provide coverage against terrorism related losses. Insurers can reinsure the risk with the ARPC, paying the ARPC’s reinsurance premiums. Claims against the terrorism pool are met once an individual insurance company’s retention is exhausted.

This can be confusing for policyholders as they may notice a terrorism exclusion on their policy and could be unaware that their insurer participates in the pool. The Gow-Gates Insurance Broking team can help clarify this for policyholders.

What happens if there is a DTI?

If a Declared Terrorism Incident (DTI) is announced, insurers must disregard terrorism exclusions in eligible policies and pay claims according to the policy’s terms and conditions.

What exclusions apply under the Terrorism Reinsurance Pool?

The Terrorism Reinsurance Pool does not cover:

● loss or liability arising from the hazardous properties of nuclear fuel, material or waste

● residential property not identified as eligible property. (Farms holding business interruption insurance can get cover).

The terrorism scheme primarily covers commercial property, but some mixed-use buildings and high-value residential properties may be included.

In conclusion

The reinsurance pools established by the Government are critically important to enable insurers to continue to provide relatively affordable insurance coverage for incidents that have the potential to cause significant losses.

Understanding these arrangements can be complex, especially when policy documents reference terrorism exclusions and ARPC conditions.

Gow-Gates Insurance Brokers is committed to providing expert, tailored advice to individuals, businesses, and large corporations. If you have any questions about your coverage, our team is ready to assist.

Sources:

Transparency.gov.au

Treasury.gov.au

APRC.gov.au TRP

APRC.gov.au CRP

https://arpc.gov.au/consumers/

General Advice Warning

Any information provided is general in nature and does not consider your personal objectives, financial situation or needs. You should consider whether this information is suitable for you and your personal circumstances. Please contact us on (02) 8267 9999 for further information.

Reliance

This advice is only provided for information purposes only, and no one is entitled to rely and will not rely on any information, comment, conclusion, opinion, or the accuracy or completeness of any information included.