Certification

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Primary financial statements

Statement by the Accountable Authority, Chief Executive and Chief Financial Officer

In our opinion, the attached financial statements for the year ended 30 June 2021 comply with subsection 42(2) of the Public Governance, Performance and Accountability Act 2013(PGPA Act), and are based on properly maintained financial records as per subsection 41(2) of the PGPA Act. In our opinion, at the date of this statement, there are reasonable grounds to believe that the Australian Reinsurance Pool Corporation will be able to pay its debts as and when they fall due. This statement is made in accordance with a resolution of the Members. Signed for and on behalf of and in accordance with a resolution of the Members.

Signature supplied Mr Ian Carson AM Chair 21 September 2021

Signature supplied Dr Christopher Wallace Cheif Executive 21 September 2021

Signature supplied Mr John Park Cheif Financial Officer 21 September 2021

Statement of Comprehensive Income for the period ended 30 June 2021

Statement of Financial Position as at 30 June 2021

Statement of Changes in Equity for the period ended 30 June 2021

Accounting Policy Transactions with the Government as owners Pursuant to section 38(3)(a) of the Terrorism Insurance Act 2003 (TI Act), the Minister may give written direction to require ARPC to make payments to the Commonwealth designed to ensure that sections 35 and 36 do not result in a competitive advantage for ARPC. Pursuant to section 38(3)(b) of the TI Act, the Minister may give written direction to require ARPC to make payments to the Commonwealth in the nature of dividends. A direction was given by the Minister on 8 September 2020, to pay to the Commonwealth a sum of $90 million in the nature of a combined fee ($55 million Commonwealth guarantee fee and $35 million capital holding fee) (s.38(3)(a)) and a sum of $10 million as a temporary dividend (s.38(3)(b)). ARPC has made payments to the Commonwealth during 2021 totalling $100 million (2020: $100 million). Reserves The intention of the Government in establishing ARPC was that premiums would be used to fund a reserve pool. The reserve for claims has been created to enable ARPC to build up the required pool.

Cash Flow Statement for the period ended 30 June 2021

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Overview

Objectives of Australian Reinsurance Pool Corporation

Australian Reinsurance Pool Corporation (ARPC) is a Commonwealth corporate entity established under the Terrorism Insurance Act 2003 (TI Act). It is wholly owned by the Commonwealth of Australia (Commonwealth). ARPC’s vision is to be an effective provider of terrorism risk insurance that facilitates private participation, supports national resilience and reduces losses arising from catastrophic events caused by terrorism. ARPC provides commercial property insurers with reinsurance for commercial property and associated business interruption losses arising from a Declared Terrorism Incident (DTI). The TI Act renders terrorism exclusion clauses in eligible insurance contracts ineffective to the extent that the loss or liability is an eligible terrorism loss arising from a DTI. The ARPC Board is the accountable authority for the purposes of the Public Governance,Performance and Accountability Act 2013 (PGPA Act). ARPC has the power to do all things necessary in connection with the performance of its functions. The continued existence of ARPC in its present form and with present programs is dependent upon Government policy.

The basis of preparation

The financial statements are general purpose financial statements and are required by section 42 of the PGPA Act 2013. The financial statements have been prepared in accordance with:

1. Public Governance, Performance and Accountability (Financial Reporting) Rule 2015(FRR); and
2. the Australian Accounting Standards and Interpretations – Reduced Disclosure Requirements issued by the Australian Accounting Standards Board that apply for the reporting period.

The financial statements have been prepared on an accrual basis and in accordance with the historical cost convention, except for certain assets and liabilities at fair value. Except where stated, no allowance is made for the effect of changing prices on the results or the financial position. The financial statements are presented in Australian dollars and values are rounded to the nearest thousand dollars unless otherwise stated. The financial statements have been prepared on the basis that ARPC is a going concern.

New accounting standards

Consistent with Government policy, no accounting standard has been adopted earlier than the application date as stated in the standard. The adoption of new standards and amendments that came into effect for this financial year did not have a significant impact on the financial statements. A number of new and revised Australian Accounting Standards apply to ARPC’s financial statements in later years. ARPC’s assessment of the main effect of these standards on its financial statements is set out below.

AASB 17 – Insurance contracts

In July 2020 the International Accounting Standards Board published the final IFRS 17 standard (IFRS 17 Insurance Contracts), with the final amendments subsequently being adopted into AASB 17. AASB 17 Insurance Contracts will first be applicable to ARPC for the reporting period beginning 1 July 2023 and ending 30 June 2024, and will require comparatives for the period beginning 1 July 2022 and ending 30 June 2023. It replaces the current accounting standard used by ARPC for measuring insurance liabilities, AASB 1023 General Insurance Contracts. At the current time interpretation of the final standard is still ongoing and the full impacts on ARPC are still being determined. AASB 17 will however require the application of new measurement models and extensive changes to the presentation and disclosure of the results of the insurance business. In terms of measurement models there is both a ‘general measurement model’ and a ‘simplified’ model, known as the Premium Allocation Approach (PAA). The PAA has many similarities to the current basis that general insurance contracts are accounted for under AASB 1023. ARPC has completed a ‘gap’ assessment and has concluded it is likely that:

• The contracts issued that provide protection for terrorism insurance will compromise a single portfolio, and all contracts will belong to a single group;
• The contracts purchased that provide retrocession protection for terrorism risk will compromise a single portfolio, and all contracts will belong to a single group;
• Both portfolios will be eligible to be accounted for using the PAA;
• At this stage, there are no facts or circumstances to suggest that segments within the portfolio are onerous;
• The annual financial results and financial position applying AASB 17 are not expected to be materially different to the results under AASB 1023; and
• It is expected there will be substantial changes to the presentation of results and the disclosures.

The requirements of the new accounting standard are complex, and the initial views set out above may change as ARPC continues to analyse and work through implementing the standard.

Impact of COVID-19

ARPC has not been materially impacted from COVID-19. Premium revenue has increased from pre-COVID-19 levels as a result of increases in commercial property insurance premiums in the direct insurance market. This increase in premium revenue has been partially offset by a decrease in investment income on ARPC’s cash and term deposit investment portfolio, as a result of decreased interest rates. During 2020-21, all team members successfully navigated a hybrid working arrangement. During ordinary times, employees balanced their work and personal lives by remote working up to two days a week, with the remaining three days in the office to catch up with colleagues and collaborate on projects. During COVID-19 lockdowns, all employees worked remotely and continued supporting our stakeholders through ARPC’s processes and systems. Our Pandemic Response Plan remained active and the Pandemic Response Team met regularly and updated employees with relevant information and advice. ARPC’s Wellness Committee ran more than 10 types of wellness activities for the ARPC team, and we have regular video meetings for all staff and for small groups. We have continued to keep our staff employed and focused on our corporate plan. ARPC has been able to pivot stakeholder engagement activities online, converting our Terrorism Insurance Seminar and Cyber Research Seminar to webinars, and meeting with stakeholders regularly through video meetings.

Taxation

ARPC is exempt from income tax by virtue of section 36 of the TI Act. ARPC is subject to Fringe Benefits Tax (FBT) and the Goods and Services Tax (GST). Revenues, expenses and assets are recognised net of the amount of GST except:

• where the amount of GST incurred is not recoverable from the Australian Taxation Office (ATO); or
• for receivables and payables.

Insurance

ARPC has insured its operating risks with a number of leading insurers using the brokering services of Aon Risk Services Australia Limited. The insurance coverage includes Directors and Officers Liability, Public and Products Liability, Group Journey Injury Insurance, Corporate Travel Insurance, Cyber Liability Insurance and Business Package Insurance. Workers compensation is insured through Comcare Australia.

Outstanding claims liability

The financial statements have not included a liability for outstanding claims (2020: $0). There were no declared terrorist incidents announced during the reporting period or outstanding claims from incidents in prior periods. Any such declaration must be announced by the Minister after consultation with the Attorney-General. ARPC considers that there are no significant inherent uncertainties in respect of the liability estimate. Accordingly, ARPC has not established a central estimate and has not, therefore, applied a prudential margin in respect of the outstanding claims liability. This is in accordance with AASB 1023 General Insurance Contracts. In the event of a declared terrorist incident, an actuary will be engaged to independently assess the outstanding claims liability at the balance date and a liability will be held if it is estimated that claims are in excess of the primary insurer’s deductible.

Net claims incurred

There were no declared terrorist incidents during the reporting period. Net claims incurred from prior year declared terrorist incidents did not exceed the individual primary insurer’s deductible.

Assets backing general insurance liabilities

With the exception of property, plant and equipment and intangibles, ARPC has determined that all assets are held to back general insurance liabilities.

Events after the reporting period

ARPC is not aware of any significant events that have occurred since reporting date which warrant disclosure in these financial statements. Back to top

Notes to the financial statements

1. Financial performance

This section analyses the financial performance of ARPC for the financial year ended 30 June 2021.

1.1 Revenue

Accounting policy Premium revenue Premium revenue comprises amounts charged to insurers, excluding taxes collected on behalf of third parties. The earned portion of premiums received and receivable, including unclosed business, is recognised as revenue in the Statement of Comprehensive Income. Premiums are recognised as earned based on time from the date of attachment of risk. Premiums not received at reporting date and for the quarter ended 30 June 2021 are recognised as premiums receivable in the Statement of Financial Position. The proportion of premium received or receivable not earned in the Statement of Comprehensive Income at the reporting date is recognised in the Statement of Financial Position as unearned premium. Unearned premiums are determined using the one eighth method, a fractional method of calculation of the balance. This method is driven by the assumption that the risk attached to the revenue ceded expires evenly over each quarter of the financial year. Premiums on unclosed business are brought to account using estimates based on the previous year’s actual unclosed business with due allowance made for any changes in the pattern of new business and renewals and having regard to the premium reported for the current year prior to the signing of the financial statements. Retrocession premium expense Amounts paid to retrocessionaires are recorded as an outwards retrocession premium expense and are recognised in the Statement of Comprehensive Income from the attachment date over the contract indemnity period. This is in accordance with the expected pattern of the incidence of risk ceded. Commonwealth guarantee fee Pursuant to section 38(3)(a) of the TI Act, the Minister may give written direction to require ARPC to make payments to the Commonwealth designed to ensure that sections 35 and 36 do not result in a competitive advantage for ARPC. A direction was given by the Minister on 08 September 2020, to pay to the Commonwealth a sum of $55 million in the nature of a Commonwealth guarantee fee. The Commonwealth guarantee operates as retrocession protection above the private market retrocession layers. The guarantee is an unlimited solvency guarantee, but the reduction percentage mechanism is designed to limit the guarantee to $10 billion. Accounting policy Retrocession commission revenue is recognised in the Statement of Comprehensive Income in accordance with the pattern of retrocession expenses incurred. Accounting policy Interest revenue is recognised using the effective interest method.

1.2 Expenses

Accounting policy Accounting policies for employee related expenses are contained in the People and Relationships section. For the current financial year ARPC paid $105,000 for the provision of external audit services (2020: $105,000). Accounting policy Short-term leases and leases of low-value assets ARPC has elected not to recognise right-of-use assets and lease liabilities for short-term leases that have a lease term of 12 months or less and leases of low-value assets (less than $10,000). ARPC recognises the lease payments associated with these leases as an expense on a straight-line basis over the lease term. Accounting policy Accounting policies for depreciation and amortisation are contained in the non-financial assets section. The above lease disclosures should be read in conjunction with the accompanying notes 1.2C, 2.2A and 2.6A. Accounting policy All finance charges are expensed as incurred. .

2. Financial position

This section analyses ARPC’s assets used to conduct its operations and the operating liabilities incurred as a result. Employee related information is disclosed in the People and Relationships section.

2.1 Financial assets

Accounting policy Cash and cash equivalents includes notes and coins held and any deposits in bank accounts with an original maturity of three months or less and subject to insignificant risk of valuation changes. Cash is recognised at the nominal amount. Credit terms are net 30 days (2020: 30 days). Trade debtors are non-interest bearing. Interest receivable Effective interest rates range from 0.21% to 0.63% (2020: 0.10% to 1.72%) and the frequency of payment is monthly for cash accounts and on maturity for term deposits. Accounting policy Amounts due from policyholders and intermediaries are initially recognised at fair value, being the amounts due. They are subsequently measured at fair value, which is approximated by taking the initially recognised amount and reducing it for impairment, as appropriate. A provision for receivables impairment is established when there is objective evidence that ARPC will not be able to collect all amounts due according to the original terms of the receivables. The provision established is the difference between the asset’s carrying amount and the present value of estimated future cash flows. The discount is calculated using a risk-free rate. The impairment charge is recognised in the Statement of Comprehensive Income. Term deposits at balance date are held with local banks regulated by the Australian Prudential Regulation Authority (APRA). These deposits earn an effective rate of interest of 0.37% (2020: 1.06%). Interest is payable on maturity for all term deposits. Terms are between 91 and 365 days (2020: 91 and 276 days). Accounting Policy Fixed interest deposits are carried at the face value of the amounts deposited. The carrying amounts are an approximate to their fair value. Accounting policy Deferred acquisition costs Acquisition costs are incurred in obtaining and recording policies of insurance. They include legal, advertising, risk assessment and other administrative costs. A portion of acquisition costs relating to unearned premium revenue is deferred in recognition in that it represents future benefits to ARPC, where they can be reliably measured and where it is probable that they will give rise to premium revenue that will be recognised in the Statement of Comprehensive Income in subsequent reporting periods. Deferred acquisition costs are measured at the lower of cost and recoverable amount. These costs are amortised on the same basis as the earning pattern of the corresponding premium revenue. Deferred retrocession premium Deferred retrocession premiums are recognised as part of deferred insurance assets. The amortisation of deferred retrocession premiums is in accordance with the pattern of retrocession benefit received. The amount deferred represents the future economic benefit to be received from the retrocession contracts. Unexpired risk liability ARPC has compared the net present value of the expected future cash flows relating to future claims arising under general insurance contracts with the reported unearned premium liability. There is no deficiency noted or recorded in these financial statements (2020: $0). Accordingly, there has been no write down in ARPC’s deferred acquisition costs and no requirement to establish an unexpired risk liability.

2.2 Non-financial assets

2.2A: Reconciliation of the Opening and Closing Balances of Property, Plant and Equipment and Intangibles Reconciliation of the opening and closing balances of property, plant and equipment and intangibles for 2021 No indicators of impairment were found for property, plant and equipment and intangibles (2020: Nil). No property, plant and equipment and intangibles are expected to be sold or disposed of within the next 12 months. At the time of preparing the prior year financial statements, there were no plans to dispose of assets within the next 12 months. Revaluations of non-financial assets All revaluations were conducted in accordance with the revaluation accounting policy stated below. Accounting policy Assets are recorded at cost on acquisition except as stated below. The cost of acquisition includes the fair value of assets transferred in exchange and liabilities undertaken. Financial assets are initially measured at their fair value plus transaction costs where appropriate. Assets acquired at no cost or for nominal consideration are initially recognised as assets and income at their fair value at the date of acquisition. Asset recognition threshold Purchases of property, plant and equipment are recognised initially at cost in the Statement of Financial Position, except for purchases costing less than $2,000, which are expensed in the year of acquisition (other than where they form part of a group of similar items which are significant in total). The initial cost of an asset includes an estimate of the cost of dismantling and removing the item and restoring the site on which it is located. This is also relevant to make good provisions in property leases taken up by ARPC where there exists an obligation to restore the property back to its original condition. These costs are included in the value of ARPC’s leasehold improvements with a corresponding provision for the make good recognised. Lease Right of Use (ROU) Assets Leased ROU assets are capitalised at the commencement date of the lease and comprise of the initial lease liability amount, initial direct costs incurred when entering into the lease less any lease incentives received. These assets are accounted for by Commonwealth lessees as separate asset classes to corresponding assets owned outright, but included in the same column as where the corresponding underlying assets would be presented if they were owned. On initial adoption of AASB 16 ARPC adjusted the ROU assets at the date of initial application by the amount of any provision for onerous leases recognised immediately before the date of initial application. Following initial application, an impairment review is undertaken for any right of use lease asset that shows indicators of impairment and an impairment loss is recognised against any right of use lease asset that is impaired. Leased ROU assets continue to be measured at cost after initial recognition in ARPC, GGS and Whole of Government financial statements. Revaluations Following initial recognition at cost, property, plant and equipment (excluding ROU assets) are carried at fair value less subsequent accumulated depreciation and accumulated impairment losses. Valuations are conducted with sufficient frequency to ensure that the carrying amounts of assets did not differ materially from the assets’ fair values as at the reporting date. The regularity of independent valuations depended upon the volatility of movements in market values for the relevant assets. Revaluation adjustments are made on a class basis. Any revaluation increment is credited to equity under the heading of asset revaluation reserve except to the extent that it reversed a previous revaluation decrement of the same asset class that was previously recognised in the surplus/deficit. Revaluation decrements for a class of assets are recognised directly in the surplus/deficit except to the extent that they reversed a previous revaluation increment for that class. Any accumulated depreciation as at the revaluation date is eliminated against the gross carrying amount of the asset and the asset restated to the revalued amount. Depreciation is recalculated over the remaining estimated useful life of the asset. Depreciation Depreciable property, plant and equipment assets are written-off to their estimated residual values over their estimated useful lives to ARPC using, in all cases, the straight-line method of depreciation. Depreciation rates (useful lives), residual values and methods are reviewed at each reporting date and necessary adjustments are recognised in the current, or current and future reporting periods, as appropriate. Depreciation rates applying to each class of depreciable asset are based on the following useful lives: The depreciation rates for ROU assets are based on the commencement date to the earlier of the end of the useful life of the ROU asset or the end of the lease term. Impairment All assets were assessed for impairment at 30 June 2021. Where indications of impairment exist, the asset’s recoverable amount is estimated, and an impairment adjustment made if the asset’s recoverable amount is less than its carrying amount. The recoverable amount of an asset is the higher of its fair value less costs of disposal and its value in use. Value in use is the present value of the future cash flows expected to be derived from the asset. Derecognition An item of property, plant and equipment is derecognised upon disposal or when no further future economic benefits are expected from its use or disposal. Intangibles Software development expenditure that meets the criteria as an intangible asset is capitalised in the Statement of Financial Position and amortised over its expected useful life, subject to impairment testing. Costs incurred in researching and evaluating a project up to the point of formal project commitment are treated as research costs and are expensed as incurred. ARPC’s intangibles comprise purchased software for internal use. These assets are carried at cost less accumulated amortisation and accumulated impairment losses. Software is amortised on a straight-line basis over its anticipated useful life. The useful lives of ARPC’s software assets are 4 to 5 years (2020: 4 to 5 years). All software assets were assessed for indications of impairment as at 30 June 2021.

2.3 Unearned liabilities

2.4 Payables

Retrocession payable In accordance with ARPC’s retrocession treaty expiring 31 December 2021, the retrocession premium is paid quarterly in advance. Settlement is made net 30 days. Trade creditors Settlement is made net 30 days. All of ARPC’s liabilities are guaranteed by the Commonwealth by virtue of section 35 of the TI Act. Accounting policy Accounting policies for employee related payables are contained in the People and Relationships section.

2.5 Other provisions

Provisions noted in Other provisions relate to future premium refund payable. ARPC currently has one (2020: one) agreement for the leasing of premises which has a provision requiring ARPC to restore the premise to their original condition at the conclusion of the lease. ARPC has made a provision to reflect the present value of this obligation. The financial statements have not included an outstanding claims liability (2020: nil).

2.6 Interest bearing liabilities

Total cash outflows for leases for the year ended 30 June 2021 was $385,462 (2020: $367,512) The above lease disclosures should be read in conjunction with the accompanying notes 1.2C, 2.2A and 2.6A Accounting policy For all new contracts entered into, ARPC considers whether the contract is, or contains a lease. A lease is defined as ‘a contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration’. Once it has been determined that a contract is, or contains a lease, the lease liability is initially measured at the present value of the lease payments unpaid at the commencement date, discounted using the interest rate implicit in the lease, if that rate is readily determinable, or the department’s incremental borrowing rate. Subsequent to initial measurement, the liability will be reduced for payments made and increased for interest. It is remeasured to reflect any reassessment or modification to the lease. When the lease liability is remeasured, the corresponding adjustment is reflected in the right-of- use asset or profit and loss depending on the nature of the reassessment or modification.

3. People and relationships

This section describes a range of employment and post-employment benefits provided to our people and our relationships with other key people.

3.1 Employee provisions

Accounting policy Liabilities for short-term employee benefits and termination benefits expected within twelve months of the end of reporting period end are measured at their nominal amounts. Other long-term employee benefits are measured as the net total of the present value of the defined benefit obligation at the end of the reporting period. Leave The liability for employee benefits includes provision for annual leave and long service leave. No provision has been made for sick leave, as all sick leave is non-vesting and the average sick leave taken in future years by employees of ARPC is estimated to be less than the annual sick leave entitlement. The leave liabilities are calculated on the basis of employees’ remuneration at the estimated salary rates that will be applied at the time the leave is taken. This includes ARPC’s employer superannuation contribution rates and other employee benefits to the extent that the leave is likely to be taken during service, rather than being paid out on termination. The liability for long service leave is the present value of employee entitlements based on the Australian Government shorthand method as per the Public Governance,Performance and Accountability (Financial Reporting) Rule 2015. The estimate of the present value of the liability takes into account attrition rates and pay increases through promotion and inflation. Superannuation Superannuation guarantee contributions are made by ARPC for employees and Members. The default superannuation scheme is AustralianSuper. The liability for superannuation recognised as at 30 June 2021 represents the outstanding contributions for the final fortnight of the year.

3.2 Key management personnel remuneration

Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of ARPC, directly or indirectly, including any director (whether executive or otherwise) of ARPC. ARPC has determined the key management personnel to be the Portfolio Minister, ARPC’s Board Members, the Chief Executive, the Chief Underwriting Officer, the Chief Operating Officer, the Chief Financial Officer, the Chief Governance Officer and the General Counsel. Key management personnel remuneration is reported in the table below: The total number of key management personnel that are included in the above table are 13 (2020: 12). The above key management personnel remuneration excludes the remuneration and other benefits of the Portfolio Minister. The Portfolio Minister’s remuneration and other benefits are set by the Remuneration Tribunal and are not paid by ARPC.

3.3 Related party disclosures

Members of ARPC at 30 June 2021 were: Mr Ian Carson AM Ms Janet Torney Mr John Peberdy Ms Robin Low Ms Elaine Collins Maria Fernandez PSM Changes in membership during the year:

• Ms Karen Payne’s term expired on 04 October 2020
• Mr John Peberdy’s term expired on 30 June 2021
• Ms Janet Torney’s term expired on 30 June 2021
• Ms Elaine Collins’ term expired on 30 June 2021 and she was re-appointed effective 1 July 2021 for a 3-year term
• Mr Jan van der Schalk was appointed effective 1 July 2021 for a 3-year term
• Ms Julie-anne Schafer was appointed effective 14 September 2021 for a 3-year term.

Other than where noted, Members held their positions for the full year. Key management personnel employed by ARPC at 30 June 2021 were:

• Dr Christopher Wallace – Chief Executive
• Mr Michael Pennell PSM – Chief Underwriting Officer
• Ms Helen Williams – Chief Operating Officer
• Mr John Park – Chief Financial Officer
• Ms Samantha Lawrence – Chief Governance Officer

Related party relations: ARPC is an Australian Government controlled entity established by section 9 of the TI Act. ARPC is only authorised to transact business and carry out functions as provided in the TI Act or as approved or directed by the Minister. ARPC’s liabilities are guaranteed by the Commonwealth by virtue of section 35 of the TI Act. Related parties to ARPC are the Members, Key Management Personnel including the Portfolio Minister and Cabinet, and other Australian Government entities. Transactions with related parties: Given the breadth of Government activities, related parties may transact with the government sector in the same capacity as ordinary citizens. These transactions are disclosed in the table below. Apart from the items disclosed in the table below and in note 3.2 relating to the remuneration and expenses of key management personnel during the year, there were no further related party transactions. The following cash transactions with related parties occurred during the year:

4. Managing uncertainties

This section analyses how ARPC manages risks within its operating environment.

4.1 Risk management

ARPC’s approach to managing risk is consistent with the Australian/New Zealand Standard for Risk Management (AS/NZS IS0 31000:2009). The Board maintains a Risk Appetite and Tolerance Statement, and monitors performance reports against this statement provided by management at each Board meeting. The Board-approved Risk Management Policy outlines the commitment of the Board and senior management to promote a supportive risk culture, set risk objectives, provide training and resources for risk management activities, manage and report risk information, and monitor, review and continually improve. The Risk Management Policy describes the key risk types and the systems and controls to manage these. The broad risk categories discussed below are:

• insurance risk
• operational risk
• ​capital risk, and
• financial risks

Within each of these categories, risks are evaluated before considering the impact of mitigating controls. The existence and effectiveness of such mitigating controls are measured such that residual risks are managed within risk tolerance.

4.1A: Insurance risk

The following outlines how ARPC manages its insurance risks across the underwriting, claims and actuarial disciplines.

Underwriting risks

Section 8 of the TI Act renders terrorism exclusion clauses in all eligible insurance contracts ineffective in the event of a declared terrorist incident. Insurers have the right to reinsure this risk with ARPC. Key aspects of the process established to mitigate risks include:

• ARPC’s underwriting risk is limited to eligible terrorism losses arising in respect of eligible insurance contracts
• ARPC utilises a standard reinsurance agreement for underwriting and accepting insurance risks, with retentions to share risk exposure with each cedant
• ARPC undertakes a cedant review program to verify premium levels; and
• ARPC’s exposure to insurance risk concentrations is mitigated by the fact the TI Act applies to all eligible insurance contracts. The TI Act wording is designed to facilitate concentration risk diversification both geographically and by type of risk.

Claims risk

Claims submitted to ARPC associated with the 2014 DTI did not exceed the retentions of the reinsured. Therefore, no claims expense has been incurred and no liability has been recognised for the payment of claims. ARPC’s mitigation strategies for the claims risks include:

• access to a Commonwealth guarantee for the due payment of money that may become payable by ARPC to any person other than the Commonwealth. If a DTI occurs the Minister must specify a pro rata (percentage) reduction in claims to be paid out by insurers, if, in the absence of such a reduction percentage, the total amounts payable by the Commonwealth might exceed $10 billion;
• the appointment of a claims manager and the development of claims procedures to validate that all claim advices are captured and updated on a timely basis;
• a standing agreement with an actuarial firm to value claims arising from a DTI;
• collecting annual aggregate exposure data from cedants;
• supporting the continued development of blast and plume models estimating terrorism losses to support advice given regarding a reduction percentage and ultimate claim costs;
• the asset mix which ARPC invests in is regulated by section 59 of the PGPA Act. The management of investments is closely monitored to confirm the liquidity of funds to match the cash needs of ARPC; and
• maintaining a claims handling reserve. The purpose of this reserve is to validate that there are sufficient monies set aside to allow ARPC to continue to operate in order to finalise any claims and reinsurance recoveries following the pool cessation or a significant DTI. The claims handling reserve as at 30 June 2021 is $34.65 million (2020: $37.25 million).

4.1B: Operational risk

Operational risk is the risk of loss arising from system failure or inadequacies, human error or external events that do not relate to insurance, capital and financial risks. ARPC manages these risks within the entity’s enterprise wide risk management framework. ARPC’s mitigation strategies for operational risk include:

• effective staff recruitment and retention policies;
• segregation of duties including access controls, delegated authorisation levels and accounting reconciliations controls;
• maintenance and use of sophisticated information systems which provide up to date and reliable data to assist in managing the risk to which the business is exposed to at any point in time; and
• ongoing management of ARPC’s Business Continuity Policy.

4.1C: Capital risk

ARPC’s capital structure to cover claims from declared terrorist incidents is outlined below:

• ARPC has access to its reserve for claims in cash and investments of $561 million (2020: $483 million);
• In the event of a DTI, ARPC would be required to pay $225 million (2020: $250 million) before claiming on its retrocession program;
• ARPC has access to a $3.475 billion retrocession program in excess of the $225 million retention (2020: $3.45 billion retrocession program, in excess of $250 million); and
• ARPC has access to a Commonwealth guarantee for the due payment of money that may become payable by ARPC to any person other than the Commonwealth. If a DTI occurs, the Minister must specify a pro rata (percentage) reduction in claims to be paid out by insurers if, in the absence of such a reduction percentage, the total amounts payable by the Commonwealth might exceed $10 billion (2020: $10 billion).

4.1D Financial risk

ARPC is exposed to financial risks such as market risk, credit risk, and liquidity risk. It seeks to minimise potential adverse effects on its financial performance through its risk management framework. The key objectives are capital stability, accessibility and rate of return.

Market risk

Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market factors. Market risk comprises two types of risk:

• interest rate risk (owing to fluctuations in market interest rates), and
• pricing risk (owing to fluctuations in market prices).

Interest rate risk Interest rate risk refers to the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Financial instruments with floating rate interest expose ARPC to cash flow interest rate risk, whereas fixed interest rate instruments expose ARPC to fair value interest rate risk. ARPC manages the interest rate risk through its investment policy. The policy notes ARPC must comply with the requirements of the PGPA Act. Section 59(1)(b) of the PGPA Act provides that a corporate Commonwealth entity may invest surplus money:

1. on deposit with a bank, including a deposit evidenced by a certificate of deposit; or
2. in securities of, or securities guaranteed by, the Commonwealth, a State or a Territory;or
3. in any other form of investment authorised by the Finance Minister in writing; or
4. in any other form of investment prescribed by the rules; or
5. for a government business enterprise – in any other form of investment that is consistent with sound commercial practice.

ARPC actively manages portfolio duration. The maturity profile of ARPC’s interest bearing financial assets, the exposure to interest rate risk and the effective weighted average interest rate for interest bearing financial assets is listed below. The Department of Finance deemed a 74-basis point change to be reasonably possible and ARPC adopted this when reporting interest rate risk (2020: 9-basis point change). ARPC has considered the implied financial impact of the deemed 74 basis point change. The table below details the interest rate sensitivity analysis of ARPC at the reporting date, holding all other variables constant. Pricing risk Pricing risk is the risk that the fair value of a financial instrument’s future cash flows will fluctuate because of market price changes, other than those arising from interest rate or currency risk. These changes can be caused by factors specific to the individual financial instrument or its issuer, or factors affecting all similar, financial instruments traded on the market. The premium charged for reinsurance is determined by Ministerial Direction. The premiums have been set having regard to the level of risk.

Credit risk

Credit risk is the risk that one party to a financial instrument will cause financial loss to the other party by failing to discharge an obligation. The following policies and procedures are in place to mitigate ARPC’s credit risk:

• premium debtors in respect of credit risk is monitored monthly, and
• an approved investment policy document. Compliance with the policy is monitored and reported monthly

The following table provides information regarding the aggregate credit risk exposure to ARPC in respect of financial assets. The table classifies the assets according to Standard and Poor’s counterparty credit ratings. The carrying amount of the relevant asset classes in the Statement of Financial Position represents the maximum amount of credit exposure. The following table provides information regarding the carrying value of ARPC’s financial assets that have been impaired and the ageing of those that are past due but not impaired at the balance date. Retrocession counterparty risk ARPC purchases retrocession to encourage commercial market reinsurance capacity to return to the terrorism insurance market, control exposure to DTI losses and protect capital. ARPC’s strategy for retrocession selection, approval and monitoring is addressed by:

• placing treaty retrocession in accordance with ARPC’s retrocession management strategy requirements
• regularly reassessing retrocession arrangements based on current exposure information, and
• actively monitoring the credit quality of retrocessionaires

Counterparty exposures and limits are reviewed by management on a regular basis. Retrocession is only placed with counterparties that have a Standard and Poor’s credit rating of A minus and above and concentration risk is managed through counterparty limits. In the event of a DTI, ARPC will receive recognised collateral from non-APRA authorised participants in the program. The following tables provide information about the quality of ARPC’s credit risk exposure in respect of its retrocession program. The analysis classifies the counterparty risk according to counterparty Standard and Poor’s (or equivalent) credit ratings.

Liquidity risk

ARPC’s financial liabilities are payables. Liquidity risk is the risk of encountering difficulty in meeting obligations associated with financial liabilities. ARPC has the internal policies and procedures in place such that there are sufficient resources to meet its financial obligations. ARPC’s liquidity risk is also mitigated through the strategy of short-term investments that provides for ready access to assets. The table below summaries the maturity profile of ARPC’s financial liabilities. All liabilities are measured on an undiscounted cash flow basis given their short-term maturity.

4.2 Contingent assets and liabilities

Quantifiable contingencies

As at 30 June 2021 ARPC had no quantifiable contingencies (2020: Nil).

Unquantifiable contingencies

As at 30 June 2021 ARPC had no unquantifiable contingencies (2020: Nil). Accounting policy Contingent assets and liabilities Contingent assets and liabilities are not recognised in the Statement of Financial Position but are reported in the relevant notes. They may arise from uncertainty as to the existence of a liability or asset or represent an existing liability or asset in respect of which settlement is not probable or the amount cannot be reliably measured. Contingent assets are reported when settlement is probable, but not virtually certain, and contingent liabilities are recognised when settlement is greater than remote.

4.3 Financial instruments

Accounting policy Financial Assets In accordance with AASB 9 Financial Instruments, ARPC classifies its financial assets in the following categories:

1. financial assets at fair value through profit or loss; and
2. financial assets measured at amortised cost.

The classification depends on both ARPC’s business model for managing financial assets and contractual cash flow characteristics at the time of initial recognition. Financial assets are recognised when ARPC becomes a party to the contract and, as a consequence, has a legal right to receive or a legal obligation to pay cash and derecognised when the contractual rights to the cash flows from the financial asset expire or are transferred upon trade date. Comparatives have not been restated on initial application. Financial Assets at Amortised Cost Financial assets included in this category need to meet two criteria:

1. the financial asset is held in order to collect the contractual cash flows; and
2. the cash flows are solely payments of principal and interest (SPPI) on the principal outstanding amount.

Amortised cost is determined using the effective interest method. Effective Interest Method Income is recognised on an effective interest rate basis for financial assets that are recognised at amortised cost. Financial Assets at Fair Value Through Profit or Loss (FVTPL) Financial assets are classified as financial assets at fair value though profit or loss where the financial assets either do not meet the criteria of financial assets held at amortised cost or at financial assets at fair value through other comprehensive income (FVOCI) or may be designated. Financial assets at FVTPL are stated at fair value, with any resultant gain or loss recognised in profit or loss. The net gain or loss recognised in profit or loss incorporates any interest earned on the financial asset. Impairment of Financial Assets Financial assets are assessed for impairment at the end of each reporting period based on Expected Credit Losses, using the general approach which measures the loss allowance based on an amount equal to lifetime expected credit losses where risk has significantly increased, or an amount equal to 12-month expected credit losses if risk has not increased. The simplified approach for trade, contract and lease receivables is used. This approach always measures the loss allowance as the amount equal to the lifetime expected credit losses. A write-off constitutes a derecognition event where the write-off directly reduces the gross carrying amount of the financial asset. Financial liabilities Financial liabilities are classified as financial liabilities measured at amortised cost. Financial liabilities are recognised and derecognised upon ‘trade date’. They represent trade creditors, accruals and leases and are recognised at the amounts at which they are expected to be settled. Financial liabilities are recognised to the extent that the goods or services have been received (irrespective of having been invoiced). All payables are unsecured and are paid within credit terms. .

5. Other information

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