Report on the Review of Part 7, Division 8, Workers Compensation Act 1987, Terrorism Re-insurance Fund

OCTOBER 2005. PAGE 1 of 13 CONTENTS

STATEMENT BY THE MINISTER FOR COMMERCE ...... 3 1 INTRODUCTION ...... 4 1.1 Purpose of the review ...... 4 1.2 Process of review ...... 4 1.3 Consultation ...... 4 2 ORIGINS OF THE TERRORISM RE-INSURANCE FUND ...... 5 2.1 Legislative context ...... 5 2.2 Other jurisdictions ...... 5 3 OBJECTIVES OF THE TERRORISM RE-INSURANCE FUND ...... 6 4 STRUCTURE OF THE SCHEME ESTABLISHING THE TERRORISM RE-INSURANCE FUND ...... 6 4.1 Ministerial responsibility ...... 6 4.2 Summary of provisions of the Terrorism Re-insurance Fund ...... 6 5 APPLICATION OF THE TERRORISM RE-INSURANCE FUND ...... 8 5.1 The establishment of the Fund ...... 8 5.2 Subsequent developments ...... 8 6 REVIEW OF THE CURRENT PROVISIONS ...... 8 6.1 Summary of findings ...... 8 6.2 Validity of Objectives ...... 9 6.3 Appropriateness of the current provisions in meeting objectives ...... 10 7 OPTIONS ...... 10 7.1 Maintain current provisions ...... 10 7.2 Amend current provisions ...... 11 7.3 Repeal current provisions ...... 11 8 CONCLUSION ...... 11

OCTOBER 2005. PAGE 2 of 13 STATEMENT BY THE MINISTER FOR COMMERCE

The Workers Compensation Amendment (Terrorism Insurance Arrangements) Act 2002 commenced in December 2002 amending the Workers Compensation Act 1987 (the Workers Compensation Act), following the terrorist attacks of 11 September 2001. The amendments inserted a new Division 8 into Part 7 of the Workers Compensation Act, which provides for the establishment of a 'Workers Compensation Terrorism Re-insurance Fund' to be activated in the event of a significant terrorism related workers compensation loss in New South Wales.

The provisions assist workers compensation insurers to meet licensing requirements and ensure that individual insurers and self insurers are not exposed to the full cost of significant workers compensation losses in the event of an act of terrorism in New South Wales. Thankfully the Terrorism Re-insurance Fund has not been required to date. However, the possibility of substantial workers compensation liabilities as a result of terrorism action in this State remains a reality.

The statutory review of Division 8 'Terrorism Re-insurance Fund' of the Workers Compensation Act required by section 239AL of the Act, has been completed. The report confirms that the policy objectives of the Division remain valid and that the provisions remain appropriate for securing those objectives.

The process of review involved direct consultation with key stakeholders. All stakeholders were supportive of the current provisions of Division 8 'Terrorism Re­ insurance Fund' as appropriate and adequately reflecting the level of exposure faced by New South Wales insurers and approved of the current scheme.

The report therefore recommends no change to the current Terrorism Re-insurance Fund provisions (Sections 239M -239AL) of the Workers Compensation Act 1987.

John Della Bosca MLC Minister for Commerce

OCTOBER 2005. PAGE 3 of 13 1 INTRODUCTION

Part 7, Division 8, (Sections 239AA -239AL) of the Workers Compensation Act 1987, Terrorism Re-insurance Fund, provides for a New South Wales workers compensation terrorism reinsurance scheme to meet claims of licensed, specialised and self-insurers in the event of an act of terrorism.

1 .1 Purpose of the review

A review of Part 7, Division 8, of the Workers Compensation Act 1987, Terrorism Re-insurance Fund has been conducted in accordance with section 239AL of the Act, which states that the Minister is to conduct a review of the Division to determine whether the policy objectives of the Division remain valid and whether the provisions of the Division remain appropriate for securing those objectives.

1.2 Process of review

The Minister for Commerce requested WorkCover NSW to facilitate the review process. Key stakeholders were approached directly by letter. Written-comment was sought on the availability and cost of terrorism reinsurance in the current environment, the appropriateness of the current pool arrangements and any further issues concerning terrorism insurance arrangements.

Letters were sent by fax and post inviting eleven stakeholders to put forward comment. The closing date for comment was 26 August 2005. A total of seven written responses were received.

1.3 Consultation

In conducting this review of the Terrorism Re-insurance Fund provisions, WorkCover NSW invited comment from the following key stakeholders:

• Catholic Church Insurances Ltd; • Guild Insurance Ltd; • Coal Mines Insurance Pty Ltd; • Racing NSW; • North Insurances Pty Ltd; • StateCover Mutual Ltd; • Insurance Council of Australia; • NSW Workers Compensation Self Insurers Association; • NSW Treasury; l ' • Benfield Greig (Australia) Pty Ltd; and

• AON Re Australia. . '

OCTOBER 2005. PAGE 4 of 13

r i ! i ! 2 ORIGINS OF THE TERRORISM RE-INSURANCE FUND

2.1 Legislative context

Following the terrorist attacks of 11 September 2001, reinsurers worldwide indicated that unlimited cover in relation to claims arising from acts of terrorism may no longer be available. The lack of availability of re-insurance for terrorism-related losses had serious implications for insurers underwriting a range of insurance business across Australia. Specialised workers compensation insurers are required to hold an authority to carry on insurance business under the Commonwealth Insurance Act 1973. In order to obtain an authority, it is necessary to have re-insurance arrangements which have been approved by the Australian Prudential Regulation Authority.

The Workers Compensation Amendment (Terrorism Insurance Arrangements) Act 2002 (Amendment Act) was assented on 16 December 2002 and commenced on 20 December 2002. The Amendment Act aimed to address the potential impact of the lack of availability of workers compensation reinsurance for terrorism related losses.

The Amendment Act inserted a new Division 8 into Part 7 of the Workers Compensation Act which provides for the establishment of the Workers Compensation Terrorism Re-insurance Fund in the event of a significant terrorism related loss in New South Wales. The provisions assist workers compensation insurers to meet licensing requirements and ensure that insurers and self insurers are not exposed to the full cost of significant workers compensation losses in the event of an act of terrorism in New South Wales.

2.2 Other jurisdictions

The Commonwealth Government introduced the Terrorism Insurance Act 2003 which established a scheme for replacement terrorism insurance coverage for commercial property and business interruption but to date, does not include workers compensation coverage.

Other jurisdictions that have introduced similar legislation for workers compensation reinsurance are:

• Western Australia -terrorism arrangements were introduced in 2001 and have been extended to 31 December 2006; • Australian Capital Territory- terrorism arrangements were introduced in June 2002 and extended until 1 April 2009; • Tasmania- legislation was introduced in 2002, and remains current.

OCTOBER 2005. PAGE 5 of 13 While the remaining jurisdictions have not introduced legislative amendments addressing terrorism insurance arrangements, the Northern Territory Government has formally indicated that insurers will be indemnified when claims resulting from terrorist action exceed $1 million. Further, the Victorian Government is currently reviewing its policy position in respect of an act of terrorism that causes death or injuries to the employees of a self insurer.

Q-COMP, the Workers' Compensation Regulatory Authority of Queensland which is responsible for the regulation of self insurers in Queensland, is approving reinsurance policies without terrorism cover. In effect, this requires self insurers to meet the liabilities arising from an act of terrorism themselves.

There is no specific fund in South Australia to cover terrorism liabilities. The South Australian WorkCover requires all self insurers to have a catastrophe insurance policy but it does not require terrorism cover. If an insurer becomes bankrupt the Authority may have to accept liabilities as insurer of last resort and has a backup account if the insurer's financial guarantee is insufficient.

3 OBJECTIVES OF THE TERRORISM RE-INSURANCE FUND

According to the Workers Compensation Amendment (Terrorism Insurance Arrangements) Bill 2002 explanatory notes and the second reading speech, the objectives of the scheme for the Terrorism Re-insurance Fund are to:

• Offer insurers a 'safety net' in the event of significant workers compensation losses caused by an act of terrorism until such time a national approach can be adopted.

• To ensure that no individual insurer or employer will be exposed to the full cost of any workers compensation losses arising out of acts of terrorism.

• Assist insurers in maintaining licensing requirements of authorities such as the Australian Prudential Regulation Authority, as to re-insurance.

4 STRUCTURE OF THE SCHEME ESTABLISHING THE TERRORISM RE-INSURANCE FUND

4.1 Ministerial responsibility

The Minister responsible for the Act is the Minister for Commerce. Responsibility for administration of the Act is vested with WorkCover NSW.

4.2 Summary of provisions of the Terrorism Re-insurance Fund

Section 239AA defines "insurer", "Terrorism Re-insurance Fund" and other words and expressions used in this part of the Act.

OCTOBER 2005. PAGE 6 of 13 Section 239AB defines an "act of terrorism" as an act, having regard to the nature and context in which the act was done, that would be reasonable to characterise as an act of terrorism.

Section 239AC defines the "threshold amount" as the amount of $1 million in total claims in respect of the act of terrorism. It also provides for the threshold amount to be apportioned among the insurers who have a liability in respect of a claim relating to the terrorist act.

Section 239AD provides for the Minister to declare that an act of terrorism has given rise to significant terrorism-related liabilities, when: • an insurer requests the Minister to do so; and • the Minister is satisfied that it occurred after 4pm on 30 June 2002; and • liabilities in total exceed the threshold amount.

Section 239AE provides for the establishment of the Terrorism Re-insurance Fund upon the first declaration under section 239AD and what is to be paid into and out of the Fund. This section also provides for the management and control of the Fund by WorkCover NSW, including the investment and re-investment of monies.

Section 239AF provides WorkCover NSW with power to obtain information from insurers in relation to the terrorist act, including details of claims, details of payment of claims and contractual arrangements for reinsurance.

Section 239AG provides for the determination of the total amount to be paid to the Terrorism Re-insurance Fund and the amount to be contributed by each insurer.

Section 239AH provides for the reimbursement of insurers for claims arising from an act of terrorism out of the Terrorism Re-insurance Fund and the method of calculation of such reimbursement.

Section 239AI provides WorkCover NSW with the ability to offset the amount to be reimbursed to the insurer under section 239AH against the amount determined as a contribution by the insurer to the Terrorism Re-insurance Fund under section 239AG.

Section 239AJ allows WorkCover NSW to be subrogated to the extent of the reimbursement to all the rights and remedies of that insurer against any other person.

Section 239AK provides that regulations may make provisions for or with respect to the Terrorism Re-insurance Fund.

Section 239AL provides for a review of the Division to be conducted as soon as possible after 30 June 2004 and a report on the outcome of the review to be tabled in each House of Parliament as soon as practicable after completion of the review.

OCTOBER 2005. PAGE 7 of 13 5 APPLICATION OF THE TERRORISM RE-INSURANCE FUND

5.1 The establishment of the Fund

The Terrorism Re-insurance Fund is established only in the event of a terrorist act that causes significant terrorism related loss and is activated upon declaration by the Minister. The Minister may not make such a declaration unless an insurer has requested the Minister to do so. The Minister must also be satisfied that an act of terrorism occurred (after 4pm on 30 June 2002) and has given rise to liabilities that exceed the threshold amount of $1 million in total claims against insurers in respect of the act of terrorism.

Since the provisions were introduced, there have been no requests to the Minister to make a declaration.

5.2 Subsequent developments

Since the introduction of the Amendment Act there have been no further amendments to the provisions.

The Commonwealth scheme for replacement terrorism insurance coverage established in 2003 does not include workers compensation cover.

6 REVIEW OF THE CURRENT PROVISIONS

6.1 Summary of findings

Stakeholders indicate that, in relation to their New South Wales operations, appropriate/viable terrorism reinsurance protection remains problematic. Specialised and self insurers generally suggest that costs are prohibitive and availability and therefore choice within the market remains limited. A reinsurer has advised that mechanisms exist to ameliorate pricing, but this does not extend to unlimited cover. This could expose individual insurers to the full cost of any significant terrorism related loss.

Stakeholder advice indicates that the issue of availability and cost of appropriate reinsurance, which resulted in the amendments in 2002, continue to exist in the current environment.

All respondents agree that the current pool arrangements are necessary and appropriate.

No issues were raised that impact on the validity of the objectives of Part 7, Division 8 of the Workers Compensation Act 1987, Terrorism Re-insurance Fund or the appropriateness of the provisions for securing those objectives.

OCTOBER 2005. PAGE 8 of 13 6.2 Validity of Objectives

6.2.1 Offer insurers a 'safety net' in the event of significant workers compensation losses caused by an act of terrorism until such time a national approach can be adopted.

Recent world events indicate that the threat of terrorist action continues to remain at levels similar to that which existed at the time of the introduction of the 'Terrorism Re-insurance Fund' provisions. Further, a national approach in the event of significant workers compensation losses caused by an act of terrorism, which was anticipated at the time of introducing the amendments, has not been achieved as the Commonwealth Government's Terrorism Insurance Act 2003 has not been extended to include workers compensation. In this regard, the 'Terrorism Re-insurance Fund' provisions continue to offer insurers a 'safety net' that would not otherwise exist.

6.2.2 To ensure that no individual insurer or employer will be exposed to the full cost of any workers compensation losses arising out of acts of terrorism.

While varying levels of reinsurance may be found in the market, the provision of unlimited cover continues to be problematic. While insurers may ameliorate their losses, individual insurers or self insured employers would potentially be exposed to unacceptable levels of workers compensation losses arising out of acts of terrorism in the absence of the Fund arrangements.

Stakeholder comment suggests only limited cover is available:

• "Availability and cost are the same state as existed in 2002. Appropriate reinsurance protection is simply not available."

• "There is no ready market that will provide an adequate level of cover at a reasonable price."

• "Market is fragmented with the breadth of cover available inconsistent."

• ''There is no choice of reinsurers as generally they have no appetite, capacity or interest in providing terrorism protection."

6.2.3 Assist insurers in maintaining licensing requirements of authorities such as the Australian Prudential Regulation Authority as to reinsurance.

As insurers would otherwise be potentially exposed to the full cost of any workers compensation losses arising out of acts of terrorism, the current terrorism arrangements continue to assist insurers in maintaining licensing requirements of authorities such as the Australian Prudential Regulation Authority as to reinsurance.

OCTOBER 2005. PAGE9of13 Stakeholders advised the 'Terrorism Re-insurance Fund' provisions:

• "Protects solvency of organisations subject to the Australian Prudential Regulation Authority. If current arrangement was to be withdrawn then the NSW specialised insurers in particular would have their technical solvency, as calculated by Australian Prudential Regulation Authority, under severe pressure."

• "If special licence insurers were obliged to seek reinsurance cover they would either be forced to cease underwriting workers compensation in NSW due to the unavailability of reinsurance, or pass on the high cost of "up front" reinsurance to employers who would be at a cost disadvantage to employers insured through WorkCover."

6.3 Appropriateness of the current provisions in meeting objectives.

Stakeholders have all confirmed that the current provisions are appropriate in meeting their objectives. Comments received suggest that should terrorism­ related liabilities result in the declaration of the Terrorism Re-insurance Fund, the legislative arrangements will work well with potential costs being shared across all insurers.

The following comments highlight stakeholder satisfaction with the legislation:

• "Current arrangements appear to be fair, logical and effective."

• "Support the current arrangement as an appropriate and effective way of insuring against death or injury arising from a terrorist attack."

• "Remain concerned about potentially uncapped liabilities, should the legislated arrangements not be in place."

• "Change is neither necessary nor appropriate."

7 OPTIONS

Three options exist in respect of the provisions in Part 7, Division 8 (Sections 239M -239AL) of the Workers Compensation Act 1987, Terrorism Re­ insurance Fund. The provisions may be maintained, amended or repealed.

7.1 Maintain current provisions

As highlighted above the current environment remains similar to that which required the introduction of the current terrorism insurance arrangements. The availability of unlimited cover for reinsurance continues to be problematic, supporting the need to maintain the current provisions.

OCTOBER 2005. PAGE10of13 Further, the anticipated inclusion of workers compensation under Federal legislation establishing replacement terrorism insurance coverage never eventuated. In this regard the requirement for the provision of a 'safety net' in the event of significant workers compensation losses caused by an act of terrorism continues to be required.

All respondents agree that the current arrangements are appropriate and have not put forward any further issues for consideration.

The maintenance of the arrangements is in line with other jurisdictions with similar terrorism insurance arrangements.

7.2 Amend current provisions

As all respondents agreed that the current arrangements were appropriate and no issues were identified with the current terrorism insurance arrangements, it would be unnecessary and undesirable to amend the current legislative provisions.

7.3 Repeal current provisions

Stakeholders were adverse to the repeal of the provisions. The current potential terrorist threat and limited availability and high cost of workers compensation reinsurance do not favour the removal of these safety net provisions at this time.

8 CONCLUSION

To date the terrorism re-insurance arrangements have not been required. However the threat of substantial liabilities as a result of terrorist action continues to remain at levels similar to that which existed at the time of the introduction of Part 7, Division 8, of the Workers Compensation Act 1987, Terrorism Re-insurance Fund.

This environment has resulted in a lack of options and therefore choice for specialised and self insurers when seeking terrorism reinsurance. While some level of reinsurance is available, unlimited coverage remains problematic, potentially exposing insurers to the full cost of any workers compensation losses arising out of acts of terrorism.

The limited availability of terrorism reinsurance has been compounded by the lack of a national scheme which was anticipated to commence post the introduction of New South Wales' 'Terrorism Re-insurance Fund' provisions. The Commonwealth Government's national scheme for replacement terrorism insurance coverage does not extend to include workers compensation.

OCTOBER 2005. PAGE 11 of 13 Stakeholders are supportive of the current provisions of Division 8 'Terrorism Re-insurance Fund' commenting that the fund arrangements are appropriate and adequately reflect the level of exposure faced by insurers operating in New South Wales.

The submissions, as summarised above, confirm that the policy objectives remain valid and support the retention of the provisions without amendment as being appropriate for securing those objectives. In this regard it is recommended that Division 8 'Terrorism Re-insurance Fund' should be maintained in its current form.

OCTOBER 2005. PAGE12of13 APPENDIX

Comments were received from:

1. Mr Allan Hansell, Manager for NSW and the ACT, Insurance Council of Australia 2. Mr Ian Cunningham, Chairman, NSW Workers Compensation Self Insurers Association 3. Mr Ian Neale, Executive Director, NSW Treasury 4. Mr Peter Rush, General Manager, Catholic Church Insurances Ltd 5. Mr David Brown, General Manager, Guild Insurance Ltd 6. Mr Rod Geer, Managing Director, StateCover Mutual Ltd 7. Mr Paul Mackay, Senior Account Manager- Casualty Focus Group, Aon Re Australia

OCTOBER 2005. PAGE 13 of 13