• Email
  • Print
  • Increase Font
  • Decrease Font

2018-19 Chair and CEO Reports

From The Chair

I am delighted to present the 2018-19 Chair Report for Australian Reinsurance Pool Corporation.

It’s been a successful year for ARPC where our performance has been recognised through reviews by the Treasury and the Australian National Audit Office (ANAO).

ARPC’s Board performance was positively assessed by the ANAO in its 2019 report on ARPC as “enabling effective oversight and management of the scheme”.

The ANAO Report on the Management of the Terrorism Reinsurance Scheme noted that ARPC provides effective annual reporting of its performance and has a suitable organisational structure to support the scheme’s operation and appropriate arrangements for engaging and communicating with stakeholders.

This finding reflects ARPC’s vision 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. It also reflects the commitment of ARPC to constantly strive to improve outcomes while meeting the scheme’s objectives.

Following the ANAO Report, ARPC will enhance its performance measure on strategic projects and introduce a performance measure for stakeholder engagement, with both measures included in ARPC’s 2019 Corporate Plan.

ARPC has a committed and engaged Board. In 2018-19, the Board met five times and the Audit and Compliance Committee met four times. There were no Board member changes during the period.

There were strong contributions from each Member and I thank them for their effort and commitment.

The ARPC Board and senior executive team attended the annual strategic planning workshop in Canberra in March 2019. At the workshop, we reviewed our internal and external environment, current and emerging risks and strategic priorities.

The Board approved management recommendations for a possible new ownership model for ARPC and will present these to the Government to inform its next triennial review of the ARPC scheme.

The strategic planning workshop in Canberra was followed by a networking event attended by government and insurance industry stakeholders.

This event followed a Sydney networking function in July 2018 where the Board met and interacted with a wide cross section of government and industry stakeholders. These events will be repeated in 2019 to deepen the engagement between ARPC and key stakeholders.

Board Members also attended the Insurance Council of Australia (ICA) Annual Dinner and the Australian and New Zealand Insurance Industry (ANZIIF) Awards.

This year, the Board has implemented a new process to review and approve a range of policies and procedures.

We commissioned a review of our governance and compliance framework which resulted in recommendations on the frequency of board meetings, policy drafting and review cycles and market intelligence and attestation processes. Implementation of the resulting process improvements are ongoing.

As part of ARPC’s commitment to effective risk management, the Board conducted its annual review and update of the Risk Appetite and Tolerance Statement and monitored performance reports against this statement provided by management at each Board meeting. The Risk Management Policy was also updated to outline the commitment of the Board and senior management to promote a supportive risk aware culture, set risk objectives, provide training and resources for risk management activities, manage and report risk information, and monitor, review and continually improve.

ARPC also continues to monitor governance trends in the public and private sectors.

I am delighted to report that ARPC has received a Bronze award for its first annual report entry into the Australasian Reporting Awards (ARA), where ARPC’s 2017-18 Annual Report proficiently addressed the demanding ARA criteria.

ARPC is well positioned to achieve its purpose, which is to respond efficiently and effectively to a Declared Terrorism Incident (DTI).

Signature supplied

Ian Carson AM

BEc PGDip Professional Accounting FAICD

Chair

27 September 2019

Back to top

From the CEO

Delivering on our purpose

ARPC has delivered excellent operational and financial performance over the year.

ARPC provides an invaluable service by reinsuring Australia’s commercial property insurers against Declared Terrorism Incidents (DTIs). In doing so, ARPC plays an important role in the financial recovery phase following a DTI.

ARPC has 220 insurer customers which insure $3.46 trillion sum insured for commercial property and business interruption policies. During 2018-19, ARPC had funding capacity for claims of $13.6 billion. This capacity was provided through a combination of $461 million ARPC net assets, $3.315 billion retrocession cover purchased from 71 global reinsurers and the $10 billion Commonwealth guarantee.

During 2018-19, ARPC has continued to see commercial insurance premium rate increases in the insurance market, while global capacity available for terrorism risk insurance has remained stable.

Terrorism threat continues

The period was marked by continuing terrorism threats, with major terrorist attacks occurring in the United Kingdom, France, New Zealand and the Middle East. Australia was not immune with an incident in Melbourne’s Bourke Street Mall in December 2018, resulting in the death of an innocent civilian.

As in the previous year, many attacks overseas were conducted by lone perpetrators using weapons such as knives, guns or vehicles.

Increasing private participation

Terrorism insurance pools like ARPC exist in many major countries and are recognised as the most effective way to provide cost effective terrorism reinsurance to the commercial insurance sector. ARPC is considered a best practice global pool by reinsurers owing to its deep expertise in blast and plume loss modelling and strategic use of retrocession, where ARPC purchases reinsurance cover from Australian and global markets.

One of the objectives under the Terrorism Insurance Act 2003 (TI Act) is for ARPC to increase the participation of the private insurance market. The 2019 retrocession placement saw ARPC purchase an additional $250 million of capacity from the private global reinsurance market1. ARPC was able to place the 2019 retrocession program at lower prices and used this saving to contribute to the extra $250 million capacity purchased, further highlighting the value the pool provides to the Australian terrorism risk insurance market.

The 2018 Triennial Review conducted by the Treasury noted that as a ‘centre of expertise’, ARPC has helped global reinsurers make better informed decisions and encouraged them to bring commercial capacity to the Australian market through its retrocession program. ‘Several reinsurers have indicated they would find it difficult to participate in the Australian terrorism insurance market without a mechanism like ARPC,’ the Review report said.

Value for money

The average price of cover for insurers in 2018-19 was 4.9 per cent of premium, and
4.8 per cent in the previous year.

The annual aggregate retentions (the deductible or excess) held by insurers range between a minimum of $100,000 and a maximum of $12.5 million, which is low compared to their natural catastrophe retentions.

Insurers covered by ARPC also benefit from liability capping under the TI Act. This limits insurer liability through a legislated reduction percentage for a loss exceeding ARPC’s capacity2.

Efficiency gains from the cloud

ARPC has continued to benefit from increased efficiencies in day-to-day operations as a result of moving IT systems to a Cloud environment. ARPC complies with the Australian Signals Directorate’s essential mitigation strategies against cyber incidents, monitors key IT operational areas, and has comprehensive mobile device management systems. Moving to the Cloud has allowed greater visibility and monitoring of the IT environment and enabled ARPC to take advantage of technological advancements as they occur. During the period, ARPC was classified as a ‘Digital Continuity Champion’ by the National Archives of Australia, scoring 4.5 out of 5 in its 2018 Survey. This achievement was directly related to ARPC’s move to a Cloud environment.

Thought leadership on terrorism

In November 2018 ARPC hosted its third annual Terrorism Risk Insurance Seminar at NSW Parliament House. The topics covered included: Australia’s counter-terrorism environment; cyber terrorism insurance; the role of private security guard forces in Australia, and other insurance topics. Presenters included the Australian Security Intelligence Organisation (ASIO), the Australian Strategic Policy Institute (ASPI) and the Organisation for Economic Co-operation and Development (OECD), with nearly 90 delegates attending.

Providing property owners with a risk mitigation resource

ARPC is collaborating with Standards Australia to produce the HB-188 Handbook ‘Physical Protective Security Treatments for Buildings’, due for publication in 2020. ARPC is the Project Proponent and Drafting Leader for this new publication which is designed as a quick reference guide, containing commentary and resources on risk mitigation for deliberate acts of physical damage. It references existing approaches from the various security, building and risk insurance industries, to guide informed decision making for commercial property owners and operators in Australia.

Strong relationships with stakeholders

ARPC regularly engages with the responsible Minister, Government agencies, insurers, reinsurers, and industry, creating opportunities for ARPC to gain deeper insights into areas of interest and opportunities for the year ahead. In the upcoming period, ARPC will be under takingits first formal survey of insurer customers.

Global networks

The continued support of the OECD High Level Advisory Board for the Financial Management of Large-scale Catastrophes and the International Forum for Terrorism Risk (Re)Insurance Pools (IFTRIP) has enhanced ARPC’s links with global counterparts.

In the period, ARPC participated in the IFTRIP conference in Moscow and a workshop in London on biological risks organised by the Nuclear Threat Initiative (www.nti.org). These events provided the opportunity to connect with global pools and to gain insights about global threats, such as cyber terrorism and biochemical risks.

Renewal of the Enterprise Agreement

ARPC staff voted in favour of the 2019-22 Enterprise Agreement (EA) which was approved by the Fair Work Commission on 26 April 2019, with an effective date of 3 May 2019.

Staff Engagement

ARPC engages regularly with employees to enhance connections and engagement with ARPC’s purpose and strategic objectives. All employees contribute toward the development and implementation of actions and activities aimed at lifting organisational performance and culture. The 2018-19 engagement survey, conducted using Gallup’s internationally recognised Q12 survey, delivered a result at the 67th percentile, with an overall satisfaction score of 85 per cent.

2018 Triennial Review

The Treasury completed the 2018 Triennial Review in December 2018. The review recommended that the TI Act remain in force and that the scheme remain in place. The Review also considered the appropriate level of compensation that the Government should receive for Government ownership and the Commonwealth guarantee. The Review recommended an additional temporary dividend of $10 million for 2018-19, 2019-20 and 2020-21. It also found that the current scope of the scheme, the approach to declaring a terrorism incident, and the pricing of the scheme continue to be appropriate. The Treasury recommended that cyber terrorism is an emerging risk and there is yet to be a clear and evident market failure in relation to physical property damage from cyber terrorism requiring government intervention through the Act at this time. ARPC is currently conducting a research project in co-operation with Cambridge University’s Centre for Risk Studies and the OECD on cyber terrorism risk and insurance coverage to better inform Government and the insurance market on this emerging risk.

Evaluating feasibility of greater private sector involvement in scheme ownership

With the assistance of consulting firm Pottinger, ARPC undertook a feasibility study exploring an option on future private sector involvement in the ownership of the scheme. ARPC will present this to the Government to inform its next triennial review.

Financial performance was better than forecast for 2018-19

ARPC’s overall financial performance for 2018-19 was better than expected, with the operating result for the year ending 30 June 2019 at $45.4 million, $28.4 million better than forecast.

Figure 0.1 comprises a summary of key financial metrics. Further detail is available in the Annual Performance Statement.

Figure 0.1: Summary of key financial metrics 2018-19

Thanks to Michaela Flanagan

I would like to thank Michaela Flanagan, who was our Chief Operating Officer for the last two and a half years, for her contribution to ARPC. Michaela joined Swiss Re as Head of Branch Operations in early 2019. I wish her all the best in the next phase of her career.

In summary

ARPC achieved strong performance operationally and financially during the year. In the period, the following reviews of the scheme were completed:

  • The 2018 Triennial Review concluded that the TI Act and the scheme should continue.
  • The ANAO Performance Audit concluded ARPC effectively managed the Terrorism Reinsurance Scheme and its governance arrangements enable effective oversight and management of the scheme.

ARPC made solid progress on strategic projects during 2018-19, including the following:

  • cyber terrorism research project;
  • geospatial modelling covering all mainland locations in Australia;
  • Standards Australia Handbook for the Physical Protective Security Treatments for Buildings; and
  • ownership model feasibility study.

These projects will position ARPC well to deliver to customers and stakeholders and respond to a DTI3 event if required.

Signature supplied

Dr Christopher Wallace

BEc (Hons) PhD (Econ) AMP (INSEAD) ANZIIF (Fellow) CIP GAICD

Chief Executive

Back to top

Report of operations declaration

The Members of the Australian Reinsurance Pool Corporation are pleased to present their annual report on the operations of the Corporation for the financial year ended 30 June 2019. This report is made in accordance with a resolution of the Members.

The Members are responsible under section 46 of the PGPA Act for the preparation and content of this report in accordance with the PGPA Rule.

Signed for and on behalf of Members in accordance with the resolution of the Members

Signature supplied

Ian Carson AM

BEc PGDip Professional Accounting FAICD

Chair

27 September 2019

Signature supplied

Janet Torney

BEc (Hons) FAICD FASFA

Member and Chair of the Audit and Compliance Committee

27 September 2019

Back to top

Footnotes

  1. See ‘The Scheme’ for further detail on the Scheme structure
  2. See ‘The Scheme’ for further detail on the Scheme structure
  3. See Section 2 ‘The Scheme’ for a full explanation of coverage

Back to top