- carry the underwritten risk of terrorism losses following a DTI, or
- reinsure the risk through the commercial reinsurance market, by entering into a reinsurance contract and paying terrorism reinsurance premiums, or
- reinsure the risk with ARPC by entering into a reinsurance contract and paying terrorism reinsurance premiums.
Background to the poolSignificant commercial and financial issues resulted from insurance and reinsurance companies’ withdrawal of coverage for terrorism risk following the events of 11 September 2001. With a large pool of assets uninsured for terrorism risk, financiers and investors faced uncertainty, which could have resulted in adverse economic circumstances, delayed commencement of investment projects and altered portfolio management decisions going forward. For these reasons, the Government’s response was to create the TI Act, which attracted bipartisan support. In July 2003, the TI Act stipulated a pool that provided terrorism cover on eligible insurance contracts (the pool) and established the Australian Reinsurance Pool Corporation (ARPC) to administer it. ARPC’s functions of corporation under section 10 of the TI Act are:
- to provide insurance cover for eligible terrorism losses (whether by entering into contracts or by other means); and
- any other functions that are prescribed by the regulations.
- maintaining, to the greatest extent possible, private sector involvement
- appropriately pricing and compensating the Australian Government for risk transferred to it
- allowing for the re-emergence of commercial markets for terrorism risk cover, and
- responding to global solutions.
Pool coverageThe total capacity of the pool at 30 June 2021 stood at $13.7 billion including all sources of funding. Refer to figure: ARPC funding layers for terrorism claims from all sources as at 30 June 2021. Contracts of insurance covered by the Pool are those that provide insurance for:
- loss of, or damage to, eligible property that is owned by the insured
- business interruption and consequential loss arising from:
- loss of, or damage to, eligible property – that is owned or occupied by the insured, or
- inability to use eligible property, or part of eligible property, that is owned or occupied by the insured, and
- liability of the insured that arises out of the insured being the owner or occupier of eligible property.
- buildings (including fixtures) or other structures or works on, in or under land (roads, tunnels, dams and pipelines are examples of eligible property)
- tangible property located in, or on, such property, and
- property prescribed by regulation.
- loss or liability arising from the hazardous properties of nuclear fuel, material or waste
- residential property or the contents of residential property where the building, or a group of buildings on a single strata policy, has a sum insured less than $50 million
- farms, unless they hold insurance against business interruption
- life insurance policies that fall within the meaning of section 9 of the Life Insurance Act 1995, and
- contracts of insurance to the extent that they provide cover for loss arising from computer crime.
Pool funding capacityAs at 30 June 2021, ARPC provided insurers with an annual claims funding capacity of $13.7 billion in reinsurance capacity, comprising funding of ARPC’s retrocession deductible, the retrocession program and the Commonwealth guarantee. Since 2009, ARPC has placed an annual retrocession program, purchasing more than $3 billion capacity through more than 70 reinsurers rated A- or better by Standard & Poor’s or AM Best, many of which are located overseas. Terrorism claims against the pool are funded in a layered order:
- policyholder deductible (the excess or retention stated in the underlying policy)
- insurer retention (retention stated in ARPC’s reinsurance agreement with insurer customers) up to a maximum industry retention (total retention from all insurer customers involved in one calendar year)
- a $225 million ARPC retrocession deductible
- retrocession capacity of $3.475 billion and
- a Commonwealth guarantee of up to $10 billion.
Reduction percentageA reduction percentage must be specified if the Minister considers that, in the absence of a reduction percentage, the total amounts paid or payable by the Australian Government under section 35 of the TI Act (including amounts not related to the act or acts specified in the declaration) would be more than $10 billion. By notice in the Australian Government Gazette, the Minister may vary the reduction percentage, but only by making it smaller and the percentage may be varied more than once. Once the reduction percentage is applied, insurers covered by ARPC would have no liability for any costs above their retention (regardless of sums insured) and eligible policyholders would receive a reduced claim payment from their insurer. After the reduction percentage figure announcement, the Australian Government can decide to revise this figure (only to decrease it) which would increase claim payments to policyholders. If an insurer is not reinsured with ARPC, that insurer is liable for the full costs of a DTI claim. They will not be protected by the reduction percentage and must pay claims to the limit of the policy sum insured, subject to the policy terms and conditions. Back to top
How the pool is administered
PremiumsARPC’s premium and investment income is used to:
- fund its operations and build a reserve to meet future claims
- pay retrocession premiums
- pay any fees and dividends to the Australian Government for the provision of the Commonwealth guarantee.
Retrocession placementARPC’s retrocession program continues to provide the following benefits:
- increases overall pool capacity
- positions the Commonwealth further away from the risk of terrorism losses under the pool
- reduces the likelihood that a reduction percentage will be required
- facilitates inflow of foreign funds to rebuild Australian assets following a terrorism incident, and
- encourages the return of the commercial terrorism insurance and reinsurance market for Australian risks.
ARPC modelling capabilitiesARPC commissioned and specified the development of world class geospatial catastrophe modelling through its collaboration with both Geoscience Australia (GA), Australia’s public-sector geoscience organisation and Risk Frontiers.
Three-dimensional blast modelARPC uses its insurer customers’ sum insured aggregate figures and building sum insured surveys in the three-dimensional (3D) blast model, developed in collaboration with GA. ARPC’s 3D geospatial blast model is intended to accurately analyse pressure waves and resulting damage from blasts in all Tier A locations. The blast model includes the most built-up CBD areas of Sydney, Melbourne, Brisbane, Adelaide, Perth and Hobart with multi-location analysis conducted in those cities to review expected losses from different sized explosive charges.
Plume modelARPC, in collaboration with GA, maintains its capability to analyse exposure and potential damage from the release of a biological or chemical agent in Sydney and Melbourne CBDs. This capability draws on the expertise of several government agencies including GA, the Bureau of Meteorology, Defence Science and Technology Group and the Australian Federal Police, as well as external consultants. ARPC regularly analyses various plume scenarios including mobile drone delivery systems of selected agents in Sydney and Melbourne. GA forms an integral part of ARPC’s blast and plume analytical capability. ARPC has entered a new three-year maintenance and development program for 2021-24 to keep both models current and to expand the model’s capability to include stochastic analysis in city locations.
Geospatial modelARPC continued to develop the geospatial two-dimensional (2D) blast model that incorporates some three-dimensional attributes covering all mainland locations in Australia and can estimate the business interruption from police exclusion zones applied to attack sites. This geospatial catastrophe model is based on the original 2D blast model developed by Risk Frontiers in 2007 and was commissioned in 2020.
Exposure risk managementA key Australian Government expectation is that ARPC will be able to advise the Minister of the estimated reinsured losses (under the Pool) in the event of a DTI. This estimate will be used to inform the calculation of an appropriate reduction percentage. To address this issue, ARPC implemented a strategy to develop its capability to:
- analyse aggregate sum insured information
- estimate its probable losses in the event of a DTI, and
- provide evidence-based advice to the Minister on an appropriate reduction percentage.
Global terrorism reinsurance poolsMany foreign governments and insurance markets have introduced insurance pools with government participation. Some were created in response to the events of 9/11, while others were established in response to specific terrorist or war threats within each country. Terrorism insurance pools are the global standard approach to providing cost effective reinsurance for terrorism catastrophe. There are 23 pools around the world offering similar arrangements. Terrorism reinsurance pools lists the international terrorism insurance pools in place today. Back to top
Insurer customer review programARPC undertakes insurer customer reviews on a regular basis. These reviews verify that insurer customers are meeting their obligations under ARPC’s reinsurance agreement. The following table details the number of reviews conducted over the past four years. * Includes reviews on Lloyd’s syndicates ** Includes reviews on Singapore-based captive insurers ***The review of Lloyds` syndicates initially scheduled in May 2021 was deferred due to the ongoing impact of COVID-19 and border restriction
Insurer customer review trendsMost insurer customers were found to have high levels of compliance but there were some errors. In recent years, ARPC has observed and addressed the following types of errors in some reviews:
- out-of-date postcode tables
- back-calculation of gross written premium (GWP)
- terrorism exclusion clauses that are ambiguous or which could have unintended consequences
- incorrectly considering insurance contracts which contain a terrorism sub-limit to be ineligible under the TI Act
- not recognising pollution and contamination exclusions as terrorism exclusion clauses for the purposes of the TI Act
- incorrect calculation of premium that contains broker commission which results in over or under payment of premium
- incorrect calculation on premium that contains Withholding Tax (WHT) resulting in over or under payment of premium, and
- staff turnover within the insurer customer, leading to a lack of understanding of ARPC processes.
Active insurer customers’ reinsurance agreementsARPC’s active reinsurance agreements (or treaties) with insurer customers increased to 237 in 2020-21, compared to 227 in 2019/20. The percentage split between each category is illustrated in Active client reinsurance agreements* below: The Gross Written Premium (GWP) trend reported by insurer customers is measured by insurer customer type, premium by tier, premium by state and premium by business class.
Insurance premium reportThe following tables show that GWP by tier, state and business class (between 2017 and 2021) has remained stable, with most premium generated from Tier B. Insurance risk report by underwriting year shows that the annual change in ARPC premium revenue is directly related to changes in insurer customer premium rates, aggregate sum insured and ARPC premium rates. The overall growth is indicative of the market change in premiums for commercial risks over time, while the increase in premium as a percentage of insurer customer GWP shows the impact of the ARPC rate change implemented by Ministerial Direction in early 2016. * The premium revenue for the 2020-21 underwriting year of $258 million is the amount to 30 June 2021 as at 8 August 2021 ** The 2020-21 risk reports are submitted into our RISe platform from July 2021 until September 2021. Therefore this information is not available as at 30 June 2021 Insurance risk report for 2019-20 by tier (as at 30 June 2020) shows the breakdown of premium income and sum insured by tier, indicating that ARPC’s exposure is mostly located within Tier B, followed by Tier C. This is consistent with ARPC’s portfolio being mainly ‘business package’ risks located in suburban areas followed by ISR policies covering major infrastructure in rural areas. Insurance risk report for 2019-2020 by state, as at 30 June 2020 indicates that the vast majority of ARPC’s exposure is in New South Wales, Victoria and Queensland. Much of the premium income is derived from NSW, followed by Victoria, owing to the higher volume of risks located in Tier B.
Aggregate sum insured reportsARPC’s reinsurance agreement requires each insurer customer to provide an annual aggregate sum insured report by 31 August each year. The report summarises the aggregate sums insured amounts at postcode level for all postcodes and at street address level for the five main central business district Tier A locations as at 30 June. The information is uploaded by insurer customers directly into ARPC’s RISe system, which enables ARPC to analyse the distribution of exposure risk across Australia. The analysis includes the ability to report aggregate sum insured exposures. Aggregate sum insured amounts by tier, Percentage of aggregate sum insured held by tier 2019-2020 and Aggregate sum insured by tier 2019-2020 provide an overview of ARPC’s total exposure based on information provided by insurer customers as at 30 June 2020. The exposure report by state allows ARPC to identify the correlation between state exposures and collected premiums and the relative size of assets in each state. Back to top
ARPC supports the Treasury with the 2021 Triennial ReviewThe Terrorism Insurance Act 2003 requires that a review be conducted at least once every three years to test whether market failure for terrorism insurance exists and therefore whether the Act should continue. Previous reviews have also been used as an opportunity to improve the pool. Previous reviews completed in 2006, 2009, 2012, 2015 and 2018 each found there was insufficient terrorism insurance available commercially on reasonable terms, and concluded that the Act should continue in operation, subject to further review, in no more than three years. The terms of reference for the 2021 Triennial Review comprise:
- whether there continues to be market failure in the private sector supply of terrorism insurance, and consequently whether there is a need for the Act to continue
- whether the governance, administration and resourcing of the pool remain appropriate, including interactions between the Cyclone Reinsurance Pool and the Terrorism Reinsurance Pool and
- whether the risk of cyber terrorism causing physical property damage should be included in the pool.