From the Chair
I am pleased to present the 2019-20 Chair Report for Australian Reinsurance Pool Corporation having been reappointed by the Australian Government as Chair of ARPC for a second three-year term. Member Robin Low was also reappointed for three years, so ARPC will continue to benefit from her significant insurance accounting experience.
Michael Callaghan AM PSM has completed his term as a Member of ARPC in the period. Mike made a significant contribution to ARPC, particularly in guiding development of ARPC strategy and strategic projects and his contributions will be missed.
Maria Fernandez PSM has joined the Board as a new Member and we look forward to benefiting from her deep and distinguished public sector experience with security and intelligence agencies.
ARPC stands in solidarity with our private and public sector stakeholders, who are impacted by the COVID-19 pandemic. Many of us have been touched professionally or personally by this devastating global event. The aftershocks will be with us for some time and we will need to continue to adapt and be resilient.
For ARPC, it’s been a year of consolidation with key strategic projects completed or significantly progressed despite the impact of COVID-19.
In March this year, ARPC was scheduled to launch the findings of ARPC’s 12-month cyber terrorism research project, with our research partners, the Organisation for Economic Co-operation and Development (OECD) and Cambridge Centre for Risk Studies at the Judge Business School, University of Cambridge. The COVID-19 pandemic restrictions unfortunately led to the postponement of the March Seminar until later in the year.
The purpose of the research study, titled ‘Insurance risk assessment of cyber terrorism in Australia’ was to identify and explore current and prospective threats, plausible scenarios as well as the practicalities of extending insurance coverage to include cyber terrorism in Australia. The detailed research report is available via a digital request form on our website.
Business insurance policies and the ARPC scheme currently exclude coverage for acts of computer crime (including cyber terrorism) which affect commercial and high value residential property in Australia.
ARPC anticipates that our research will contribute to informing stakeholders about the systemic risks to the economy and Australian society due to this protection gap. The research findings will be a key input into Treasury’s 2021 Triennial Review of the TI Act. More detail on the research findings can be found in a separate article – ARPC reveals cost of cyber terrorism.
ARPC’s Board performance was strong in the period and included effective stewardship of the organisation through the COVID-19 pandemic. ARPC has a dedicated and engaged Board. In 2019-20, the Board met seven times and the Audit and Compliance Committee met four times. There were valuable contributions from each Member, and I thank them for their commitment.
The ARPC Board and senior executive team attended the annual strategic planning workshop in Canberra in March 2020. The strategic planning workshop included Board engagement with key Government and insurance sector stakeholders. The Board also engaged with a wide range of stakeholders at our Sydney stakeholder event in July 2019. Additionally, Board Members attended the Insurance Council of Australia (ICA) Annual Dinner and the Australian and New Zealand Insurance Industry (ANZIIF) Awards.
ARPC continues to monitor governance trends in the public and private sectors.
I am delighted to report that ARPC has received a Silver Award for its second annual report entry into the Australasian Reporting Awards (ARA), where ARPC’s 2018-19 Annual Report proficiently addressed the demanding ARA criteria. This improves upon the Bronze Award earned for the 2017-18 Annual Report.
ARPC is strongly positioned to achieve its vision, which 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.
Ian Carson AM
BEc PGDip Professional Accounting FAICD
24 September 2020
From the CEO
Delivering on our purpose
ARPC has delivered solid operational and financial performance in 2019-20.
As noted by ARPC’s Chair Ian Carson AM, we stand with our insurer and government stakeholders affected by the COVID-19 pandemic, an event which has dominated headlines and our professional and personal lives here in Australia since March 2020.
During this difficult time, ARPC has engaged with our insurer customers to listen to their concerns, provide information and answer questions. We have regularly engaged with Treasury and offered our insurance expertise
ARPC reinsures Australia’s commercial property insurers against Declared Terrorism Incidents (DTIs). In doing so, ARPC plays a vital role in the financial recovery phase for the Australian economy following a Declared Terrorism Incident (DTI).
ARPC has 227 insurer customers which insure $3.71 trillion sum insured for commercial property and business interruption policies. During 2019-20, ARPC had funding capacity for claims of $13.7 billion. This capacity was provided through a combination of $521 million ARPC net assets, $3.45 billion retrocession cover purchased from 71 global reinsurers and the $10 billion Commonwealth guarantee.
During 2019-20, ARPC has continued to see underlying commercial insurance premium rate increases in the insurance market, while global capacity available for terrorism risk reinsurance has remained stable.
Terrorism threat continues
Australia’s National Terrorism Threat Level remains at Probable. The Australian Government’s Terrorism Threat Advisory System defines this as ‘credible intelligence, assessed by our security agencies, indicates that individuals or groups continue to possess the intent and capability to conduct a terrorist attack in Australia’.
As at 30 June 2020, according to the Department of Home Affairs, since September 2014, when the national terrorism threat level was raised:
- 110 people have been charged as a result of 51 counter terrorism related operations around Australia
- There have been seven attacks and 18 major counter-terrorism disruption operations in response to potential or imminent attack planning in Australia. Two of the disruptions were of individuals with extreme right-wing ideology
Overseas, the period was marked by continuing terrorism threats, with major terrorist attacks occurring overseas. 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 highly regarded by reinsurers owing to its deep expertise in blast and plume catastrophe 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 2020 retrocession placement saw ARPC purchase an additional $135 million of capacity from the private global reinsurance market. ARPC was able to place the 2020 retrocession program at lower prices and used this saving to contribute to the extra $135 million capacity purchased, further highlighting the value the pool provides to the Australian terrorism risk insurance market.
2021 Triennial Review
ARPC is preparing for the 2021 Triennial Review of the ARPC scheme by the Treasury. As you may be aware, this periodic review of the Terrorism Insurance Act 2003 tests the need for the Act and the scheme to continue.
One gap in cover in the scheme is physical damage to property arising from computer crime (including cyber terrorism), and we plan for our research on cyber terrorism to be an input into the 2021 Triennial Review.
Value for money
The average price of ARPC terrorism reinsurance cover for insurers in 2019-20 was 4.9 per cent of premium, and 4.9 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 reinsurance 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 capacity.
Thought leadership on terrorism
In August 2019, ARPC hosted its fourth annual Terrorism Risk Insurance Seminar. Themed The Terrorism Landscape, more than 100 delegates from the insurance industry, government agencies and academia attended. They heard presentations on local and global terrorism threats, espionage and foreign interference, cyber terrorism, the financial loss caused by exclusion zones that follow terror attacks, and CBRN weapons. Keynote speakers represented ASIO’s Counter Espionage and Foreign Interference Division; Control Risks; the Australian Government’s Defence, Science and Technology Group (DSTG); Professor Greg Barton and ARPC.
Providing property owners with a risk mitigation resource
ARPC is collaborating with Standards Australia to produce the HB-188 Handbook, now titled ‘Base Building Physical Security Handbook – Terrorism and Extreme Violence’, due for publication in 2020-21. 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 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 undertaking its first formal survey of insurer customers.
ARPC supports and participates in 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). These engagements have enhanced ARPC’s links with global counterparts and reinsurers.
In the period, ARPC participated in the IFTRIP conference in Brussels. This event provided the opportunity to connect with global pools and to gain insights about global threats, such as cyber terrorism and biochemical risks.
Staff support during COVID 19
ARPC engages regularly with employees to enhance connections and engagement with ARPC’s vision and strategic objectives. All employees contribute toward the development and implementation of actions and activities aimed at lifting organisational performance and culture.
During COVID 19, all team members remote worked successfully and continued supporting our stakeholders through ARPC’s processes and systems. We instigated our Pandemic Response Plan and Pandemic Response Team. We further engaged the ARPC team in response planning through our Pandemic Coordinating Committee comprising a cross-section of staff. ARPC’s Wellness Committee has run 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.
In support of the Government’s direction on wage restraint across the public sector, we have exercised discretion on wage increases, with no discretionary performance bonuses paid to staff or senior executives this year, all discretionary wage increments frozen for staff, and no wage increases for senior executives. I am grateful for the support of our staff, and we will revisit wage indexation as soon as circumstances allow.
Stakeholder support during COVID 19
ARPC has contributed to the business community to support employment and economic recovery through our activities, which have included:
- Supporting our insurer customers where they are deferring premiums for their business customers.
- Continuing our projects with suppliers.
- Continuing our office lease.
- Offering ARPC staff to public sector secondments.
- Offering information and communication technology advice to another Government agency to assist their role in the community.
Supporting Treasury projects and policy development related to insurance and reinsurance markets to assist addressing market failure.
Financial performance was better than forecast for 2019-20
ARPC’s overall financial performance for 2019-20 was better than expected, largely owing to rate rises in underlying commercial insurance premiums, with the operating result for the year ending 30 June 2020 at $69.1 million, $42.5 million better than forecast.
Summary of Key Financial Metrics 2019-20 comprises a summary of key financial metrics. Further detail is available in the Annual Performance Statement.
ARPC achieved strong performance operationally and financially during the year and continues to operate through the pandemic.
ARPC made solid progress on strategic projects during 2019-20, including the following:
- cyber terrorism research project
- geospatial catastrophe modelling covering all mainland locations for commercial property in Australia
- Standards Australia Handbook for the ‘Base Building Physical Security Handbook – Terrorism and Extreme Violence’, and
- ownership model feasibility study.
These projects will position ARPC well to deliver to customers and stakeholders and respond to a DTI event if required.
Dr Christopher Wallace
BEc (Hons) PhD (Econ) AMP (INSEAD)
ANZIIF (Fellow) CIP GAICD
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 2020. 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
Ian Carson AM
BEc PGDip Professional Accounting FAICD
24 September 2020
BEc (Hons) FAICD FASFA
Member and Chair of the Audit and Compliance Committee
24 September 2020