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2018-19 Annual Performance Statement

Annual Performance Statement

This annual performance statement is provided for Australian Reinsurance Pool Corporation (ARPC) as required under section 39(1)(a) of the Public Governance, Performance and Accountability Act 2013 (PGPA Act) and other applicable legislation for the 2018-19 financial year.

This annual performance statement accurately presents ARPC’s performance in accordance with section 39 (2) of the PGPA Act and is based on properly maintained records.

As outlined in Chapter 1, this Annual Report has been approved by ARPC Board members in accordance with a Member resolution.

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ENTITY PURPOSE

ARPC remains true to the Scheme’s original policy objectives and is focused on creating value for stakeholders.

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.

Mission

  • Provide confidence to the market, knowing that in the event of a claim, we will pay claims and deliver on our promise
  • Support recovery following a terrorism incident
  • Provide links between government, national security, and the private insurance market to enhance understanding of the risk
  • Address a market failure and provide cover for terrorism where the private market is unable to.
  • Lead international collaboration on terrorism risk insurance.

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FINANCIAL SNAPSHOT

Figure 3.1: ARPC by numbers as at 30 June 2019   $13.6 billion available to pay claims   was protecting over 855,000 eligible insured property assets   had access to $3.315 billion of reinsurance sector funding for claims, protecting the Commonwealth guarantee and encouraging participants from 71 reinsurers   had $461 million in retained net assets sustaining the pool for first losses   operating expenses of 5% per annum of gross written premium, which is cost effective with 22 professional staff   paid $100 million in fees and dividends to the Commonwealth Government, compensating the Government for the provision of the guarantee and dividends for ownership   a premium income of $204 million per annum, providing terrorism reinsurance cover to over 220 customers; and   a solvency guarantee of $10 billion provided by the Australian Government.

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RESULTS

To comply with the PGPA Act, ARPC must remain financially sustainable by managing its public resources in an efficient, effective and ethical manner as it fulfils its purpose.

Performance criteria

ARPC’s performance against the 2018-22 Corporate Plan over the reporting year is measured against four key performance areas :

  • One: Providing reinsurance for eligible terrorism losses;
  • Two: Encouraging private sector participation through retrocession;
  • Three: Compensating the Government; and
  • Four: Maintaining financial sustainability.

Performance statement summary

ARPC met or exceeded all performance criteria for the 2018-19 reporting period. A summary of achievements against the Corporate Plan 2018-22 can be seen in Figure 3.2.

Figure 3.2: Achievements against 2018-22 Corporate Plan objectives

Key
Performance
Area

Description:

Over the period covered by this corporate plan, success for this activity will be measured by:

Measure and source

Result against
performance criterion

1

Providing reinsurance for eligible terrorism losses

ARPC’s total premium income (as per ARPC’s functional obligation as prescribed by section 10 of the TI Act).

Measure 1 – Gross Written Premium income.1

Exceeded

GWP $204.5 million vs target
of $140 million.

ARPC’s scheme capacity and total funding available; and

Level of insurance market involvement.

Measure 2 – Scheme capacity, before the Commonwealth guarantee, per calendar year.2

Exceeded

Retrocession capacity $3.315 billion vs target of $2.5 billion.

2

Encouraging private sector participation through retrocession

The number and quality of retrocessionaires on ARPC’s retrocession program to encourage private sector participation.

Measure 3 – Private sector participation.3

Exceeded

71 reinsurers participated on the 2019 program vs target of 15, and 59.4% of participants are APRA regulated against a target of 50.0%.

3

Compensating
the Government

ARPC is to pay the Australian Government a fee for use of the Commonwealth guarantee.

A capital holding fee is also to be paid to recognise the capital ARPC is holding to fund future claim payments.

An additional temporary dividend of $10 million will be paid for three years – 2018-19, 2019-20 and 2020-21. This additional dividend was a recommendation of the 2018 Triennial Review in December 2018.

Measure 4 – Payments to Government.4

Met

$100.0 million payment by the due date comprising a $10.0 million dividend, a $55.0 million guarantee fee and a $35.0 million capital holding fee.

4

Maintaining financial sustainability and organisational resilience

ARPC must maintain sufficient net assets to support targets within ARPC’s Capital Management Policy.

Measure 5 – Net Assets against ARPC target and minimum capital.5

Exceeded

Net assets at June 2019 – $461.3 million vs a minimum of $345 million and a target of $400-$490 million.

ARPC aims to build capability and knowledge to fulfil its strategic priorities.

Measure 6 – Complete and/or progress major projects according to plan to advance ARPC’s strategic priorities.6

Met

Each major project has been delivered on time and within budget or is on track to be completed on time and within budget.

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PERFORMANCE STATEMENT DETAIL

ONE Providing reinsurance for eligible terrorism losses

Description

This is ARPC’s functional obligation as prescribed by section 10 of the TI Act. Over the period covered by the Corporate Plan, success for this activity is measured by ARPC’s total premium income. The target premium income for the forecast period was $140.0 million per annum.

Measure 1

To improve financial sustainability and achieve higher than target
premium in each plan period.

Source

Measure 1, Gross Written Premium, ARPC Corporate Plan 2018-22, page 29.

Result

Figure 3.3: Gross Written PremiumThis bar graph illustrates ARPC’s actual gross written premium from the 2016-2017 financial year through to the 2018-2019 financial year, and the budget gross written premium for 2019-2020. ARPC’s GWP in 2016-2017 was $159.1 million. This increased by 12.4% to $178.9 million in 2017-2018. Then, there was an increase of 14.3% in the 2018 to 2019 financial year when GWP reached $204.5 million. The budgeted GWP for the 2019-2020 financial year is $180 million.

ARPC’s objective for Measure 1 for 2018-19 was to achieve actual premium income greater than the Corporate Plan target of $140.0 million.

ARPC receives premium income through the reinsurance contracts it establishes with its insurer customers. The level of premium income demonstrates its performance against this measure. Along with a target premium level, ARPC has a financial budget for premium income, set at a higher level, which reflects its forecast performance for the reporting period.

ARPC’s premium income (shown as premium revenue in the financial statements) in 2018-19 was $204.5 million which was $64.5 million better than its Corporate Plan target, and $35.5 million higher than (better than) its financial budget.

ARPC’s gross written premium income is based on market prices for eligible commercial property insurance premiums after applying the applicable tier rate. The primary driver for the result being higher than the previous year was increasing commercial property insurance premiums.

Measure 2

To protect the government from losses through the purchase of greater
than $2.5 billion in retrocession in each program period.

Source

Measure 2, Scheme capacity, before the Commonwealth guarantee, per
calendar year, ARPC Corporate Plan, 2018-22, page 30-31.

Result

Figure 3.4: Scheme capacity before the Commonwealth guarantee – calendar year*This bar graph illustrates ARPC’s actual scheme capacity and funding layers in 2017, 2018 and 2019, and budgeted scheme capacity for 2020 before the Commonwealth guarantee. In 2017, ARPC’s scheme capacity before the Commonwealth guarantee was $3,500 million. This comprised an industry retention of $150 million, ARPC’s retrocession deductible of $350 million, minimum target retrocession capacity of $2,500 million, and additional retrocession capacity of $500 million. In 2018, ARPC’s scheme capacity was $3,550 million an increase of 1.4%. This comprised an industry retention of $200 million, an ARPC retrocession deductible of $285 million, minimum target retrocession capacity of $2,500 million, and additional retrocession capacity of $565 million. In 2019, ARPC’s scheme capacity was $3,800 million. This comprised an industry retention of $200 million, ARPC’s retrocession deductible of $285 million, minimum target retrocession capacity of $2,500 million, and additional retrocession capacity of $815 million.

ARPC’s objective for Measure 2 was to achieve a retrocession program capacity greater than the corporate plan target of $2,500 million ($2.5 billion). ARPC now has in place a $3,315 million ($3.315 billion) retrocession program for the 2019 calendar year.

The target measure supports ARPC’s policy objective to ‘provide insurance cover for eligible terrorism losses (whether by entering into contracts or by other means)’ by increasing funds available for claims. ARPC uses the retrocession program capacity as a significant contributor to the first layers of funding for eligible terrorism losses before the Commonwealth guarantee is drawn upon. This increases ARPC’s capacity to fund losses without drawing on the Commonwealth guarantee and fulfils its purpose of meeting claims through the reinsurance contracts it establishes with its insurer customers. The retrocession program capacity demonstrates ARPC’s performance against this measure. The target represents a threshold or desired program size given the current environment.

ARPC has a financial budget for the premium that it can afford to spend on retrocession program capacity. Its retrocession capacity for the 2019 calendar year was $3.315 billion which was $815 million higher than (better than) its corporate plan target and within ARPC’s Board approved financial budget.

TWO: Encouraging private sector participation through retrocession

Description

Encouraging private sector participation remains a key policy objective for ARPC’s terrorism insurance scheme.

The 2006 Triennial Review recommended that once the pool reached $300 million, ARPC should consider the purchase of retrocession and as such, ARPC purchased reinsurance from the private reinsurance market. ARPC currently has $13.6 billion total funding available for losses arising from a DTI through ARPC’s retention, the retrocession market and the Australian Government guarantee.

Measure 3

The objective is to maximise private sector participation in the retrocession program.

Source

Measure 3, Private reinsurance sector participation, ARPC Corporate Plan 2018-22, page 32.

Result

Figure 3.5: Retrocession program detail*This bar graph illustrates the number of retrocessionaires that have participated in ARPC’s retrocession program each year from 2016 through to 2019. In 2016, 61 reinsurers participated; In 2017, 65 participated, up 6.56%; in 2018, 68 reinsurers participated, up 4.62%; and in 2019, 71 reinsurers participated, a 4.41% leap since 2018. The minimum target number of retrocessionaires is 15. The number of APRA-regulated participants in ARPC’s retrocession program remained relatively steady from 2016 to 2019, with 62% in 2016 and 2017; 61% in 2018; and 59 percent in 2019. The target percentage of capacity from ARPA regulated reinsurers is 50%.*Assumes no change to the current scheme.

Each year, ARPC negotiates and places a retrocession program with major global reinsurers, seeking a placement that provides value for money while encouraging maximum global insurer participation. Participation in ARPC’s retrocession program is restricted to reinsurers who are ARPA regulated or APRA recognised or who hold a Standard & Poors long-term rating of A- (or equivalent) or greater.

ARPC aims to maximise the participation of high credit quality reinsurers in the annual ARPC retrocession program. Each year, ARPC seeks to have more than 15 high credit quality reinsurers participate in the program. ARPC also aims to have more than 50 per cent of retrocession scheme capacity provided by APRA-regulated reinsurers.

To measure success in this activity, ARPC measures the total number of high credit quality reinsurers that participate in the program and the percentage of participants that are APRA regulated reinsurers. In the 2019 period ARPC had 71 participants in the program against a target of 15 and 59.4 per cent of participants were APRA-regulated reinsurers against a target of 50 per cent.

THREE: Compensating the Government

Description

ARPC pays the Australian Government a fee for the use of the Commonwealth guarantee. In addition, a capital holding fee is paid to recognise the capital ARPC is holding to fund future claim payments. The 2018 Triennial Review recommended an additional temporary dividend of $10.0 million for three years.

Measure 4

To meet ARPC’s obligations, the target is to deliver the Government payments in each plan period.

Source

Measure 4, Payments to Government, ARPC Corporate Plan, 2018-22, page 33.

Result

Figure 3.6: ARPC delivered payments to Government totalling $100.0 million in 2018-19This bar graph illustrates ARPC’s payments to Government from 2016-2017 through to the budgeted repayments for the 2019-20 financial year. In 2016-2017 financial year ARPC paid a $57.5 million dividend to the Australian Government, a fee of $55 million for the Commonwealth guarantee, and a fee of $35 million to hold capital. Payments totalled $147.5 million. In 2017-2018, ARPC’s payments to the Government were $147.5 million, the same as in 2016-2017. In 2018-2019, $100 million was paid to Government, a fee of $55 million for the Commonwealth guarantee, and a capital holding fee of $35 million, and a new dividend of $10 million. The budgeted payments for 2019-2020 are the same as the 2018-2019 payments at $100 million.

FOUR: Maintain financial sustainability

Description

To maintain operational effectiveness, ARPC remains financially sustainable by having a governance framework and internal financial controls to manage its net assets.

Key factors impacting ARPC’s financial sustainability, as measured through net assets, are:

  • any claims costs associated with a DTI;
  • premium rates and premium income;
  • the size, structure and timing of fees and dividends payable to the Australian Government;
  • the size and cost of the retrocession program; and
  • ARPC investment returns.

To assess financial sustainability, ARPC measures net assets, which is the final balance after all the above factors.

Measure 5

Net Assets against ARPC target and minimum capital.

Source

Measure 5, Net Assets against ARPC target and minimum capital, ARPC Corporate Plan, 2018-22, page 34.

Result

Figure 3.7: Projected Net AssetsThis graph illustrates ARPC’s actual net assets at 30 June 2019 and the budgeted inflows and outflows impacting net assets for the four years of the Corporate Plan through to 2022-2023. Actual net assets for at year end 2018-2019 were $461 million, within the target zone of $400 million to $490 million. The budgeted inflow for 2019-2020 is $187 million and the budgeted outflow is $171 million. The forecast inflow for 2020-2021 is $195 million and the budgeted outflow is $172 million. The forecast inflow for 2021-2022 is $203 million and the forecast outflow for 2021-2022 is $179 million. The forecast inflow for 2022-2023 is $207 million and the forecast outflow is $181 million. ARPC forecasts that its net assets at 30 June 2023 will be $550 million which is $60 million above the target zone. Projections assume there will be no increase in prices from current rates; that inflows represent premium income, investment income, and retro commission income; and that outflows represent payments to the Commonwealth, retrocession premiums and operating expenses.

Projections assume the following:

  • no increase in prices from current rates
  • Inflows represent premium income, investment income, retro commission income
  • Outflows represent payments to the Commonwealth, retrocession premiums, operating expenses.

As at 30 June 2019, ARPC’s net assets were $461 million, which was slightly higher than target capital and within the target zone.

ARPC’s Capital Management Policy levels include:

  • Minimum Capital is recommended by the Board to be above $345 million. This represents one retrocession retention plus claims handling costs for one DTI claim event and one year’s operating costs.
  • Target Capital is recommended by the Board to be between $400 million and $490 million. This represents one retrocession retention plus claims handling costs for one DTI claim event and one year’s operating costs. There is also a resilience factor of approximately $100 million for environmental factors such as loss of major customers, and/or increases in global retrocession costs.
  • Maximum Capital is recommended by the Board to be $780 million. This represents two retrocession retentions plus claims handling costs for two DTI claims and one year’s operating costs. There is also a resilience factor of $100 million for environmental factors such as loss of major customers, and/or increases in global retrocession costs.

ARPC expects net assets to remain within the target range but not grow significantly under current Australian Government payment directions and the low interest rate environment.

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INFLUENCES ON FUTURE PERFORMANCE

ARPC’s two sources of income are reinsurance premiums and investment income on its pool of assets.

Reinsurance premiums charged by ARPC are expressed as a percentage of the underlying insurer customers’ premiums. ARPC’s premium income is therefore subject to insurance market cycles, as insurer customer premiums rise and fall, even though ARPC reinsurance rates remain stable.

ARPC expects a slight increase in insurance market premium rates in the short to medium term. This combined with the increased underlying insured property value should result in an increase in GWP in the short-to-medium term.

Investment assets

At 30 June 2019, ARPC held $504.1 million in term deposits and $1.1 million in cash (2018: $464.7 million and $1.6 million respectively).

ARPC has determined the following investment return and risk objectives:

  • ARPC’s return objective is to outperform the Reserve Bank of Australia’s cash rate plus 50 basis points over a rolling 12-month period after fees.
  • ARPC’s risk objective is to limit the risk of making negative returns to five per cent (no more than once within a 20-year period).

ARPC’s investment strategy can be summarised as follows:

  • Investments should be highly liquid to meet the retrocession retention in the event of a Declared Terrorism Incident (DTI).
  • The strategy is designed to meet its risk and return objectives.
  • Investments will achieve diversification using all asset classes permitted by the PGPA Act.
  • ARPC’s investment assets are held in cash and term deposits. ARPC managed investments internally in 2018-19. All investments are held in ARPC’s name.

ARPC recognises the need to fund the retrocession retention of $285 million within 90 days based on actuarial analysis conducted. ARPC manages the investment maturity profile to meet this liquidity requirement.

Figure 3.8: Investments by credit rating as at 30 June each yearThis bar chart breaks down ARPC’s investments by credit rating as at 30 June 2018 and 30 June 2019. In 2018, ARPC’s investments were $466.3 million. This was comprised of $1.6 million worth of AAA rated investments; $349.1 million worth of AA- investments; $99.6 million worth of A+ rated investments, and $16 million worth of A rated investments. In 2019, ARPC’s investments were $505.2 million. This was comprised of $1.1 million worth of AAA rated investments; $402.5 million worth of AA- investments; $96.6 million worth of A+ investments; and $5 million worth of A rated investments.
Figure 3.9: Investments by maturity as at 30 June each yearThis bar chart illustrates ARPC’s investments by maturity as at 30 June each year. In 2018, ARPC’s investments sat at $466.3 million. This was comprised of $1.6 million in cash; $374.2 million with 0-90 days maturity; and $90.5 million with 91-180 days maturity. In 2019, ARPC’s investments sat at $505.2 million. This was comprised of $1.1 million in cash; $305.1 million with 0-90 days maturity; $134 million with 91-180 days maturity; and $65 million with 181-270 days maturity.

Investment income

Investment income fell to $13.5 million (2018: $13.7 million) owing to lower interest rates in 2018-19 and the decreased balance of invested assets as retrospective dividend payments were made at the end of 2017-18 financial year. This is consistent with expectations.

Interest rates in Australia are at historic lows, and ARPC expects investment income will reduce over the next year.

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ANALYSIS OF PERFORMANCE AGAINST PURPOSE

During 2018-19, ARPC continued to fulfil its purpose by entering into contracts of reinsurance with insurer customers and managing its premium income and investments, costs, purchase of retrocession and cost of retrocession, while meeting Ministerial Directions to provide payments to the Australian Government. ARPC has met all its obligations and achieved better-than-budget performance across all performance criteria. During the period, the following factors impacted ARPC’s performance.

These are displayed in Figure 3.10:

Figure 3.10: Key factors influencing ARPC’s performance

Influencing factor

Detail

ARPC level
of influence

Impact
(positive/negative)

Property insurance market

The current year has seen commercial property insurance premiums increase after a decade of flat and falling premiums. As ARPC premiums are a percentage of insurer premiums for commercial property insurance, ARPC is subject to price fluctuations and underlying asset values insured in the commercial insurance market. Influence is limited to reviewing postcode allocations between Tiers.

Limited

Moderate (positive)

Global reinsurance market capacity and price

Increases in capacity and slight decrease in price for retrocession. ARPC has managed its purchase of retrocession by using decreased pricing to incrementally increase capacity. In 2019, ARPC purchased an additional layer of $250 million of retrocession in excess of $3.065 billion, bringing total retrocession capacity purchased to $3.315 billion.

Limited

Minor (positive)

Government compensation

Payments to Government in 2018-19 of $100.0 million. This has reduced ARPC’s net assets to a level considered low, but acceptable to the ARPC Board under its revised capital management framework. The 2018 Triennial Review Report recommended an additional temporary dividend of $10.0 million that was not included in the 2018-19 budget.

Limited

Moderate (negative)

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