The cut will only be made if the total level of claims from all bodies holding premiums is not above £50 million in 1995.
Councils renewing policies will have to pay 60% up front with the remainder only being paid if the claims limit is passed. The move could lead to savings of £8m.
The announcement will come as welcome news to councils which saw premiums rocket in 1993 in the wake of major terrorist bombings. Some experienced increases of 400%.
The concession is a result of a relatively low level of claims during 1994 which has resulted from the progress in the Northern Ireland peace process.
Specialist terrorist reinsurance group Pool Re made the decision to introduce the discount over Christmas.
The group is responsible for all terrorist cover in the country and was set up following the St Mary Axe bomb in April 1992 which cost £800m and led to insurance companies withdrawing cover.
Pool Re is backed by the government which agreed to be insurer of last resort to prevent a crisis in the market.
Pool Re chief executive Leslie Lucas said that if claims remained low during 1995 more permanent premium reductions could be made for 1996.
But Mr Lucas said that although a large element of risk had been removed by the IRA ceasefire there was still a threat from Middle Eastern terrorists who were responsible for two bombings in London last year.
David Forster, marketing manager for Zurich Municipal, which collects premiums on behalf of Pool Re, said the discount was 'terrific news'.
'Terrorism cover is a major burden which councils could do without,' Mr Forster said. 'Unfortunately public sector buildings are an obvious target for terrorism and councils have no option but to pay it.'
He said the rebate would mainly benefit larger urban authorities which pay proportionately higher premiums.