From the Chair
I am pleased to present the 2020-21 Chair Report for Australian Reinsurance Pool Corporation.
Our thoughts are with our stakeholders impacted by the ongoing COVID-19 pandemic. We all continue to adapt in response to this terrible global event.
In November 2020, we farewelled Member Karen Payne and thanked her for her service to ARPC. During her term with ARPC she was also appointed Inspector General of Taxation and Taxation Ombudsman.
In June 2021, Member, Elaine Collins was appointed for an additional three-year term and the Board welcomed the new appointment of Jan van der Schalk as a Member. At this time, Members, Janet Torney and John Peberdy completed their terms for which we gratefully thank them.
Our new Member Jan van der Schalk’s appointment will benefit ARPC as he has deep reinsurance and investment experience.
I sincerely thank John Peberdy and Janet Torney for their significant contributions during their Board terms with ARPC. Janet Torney skillfully chaired ARPC’s Audit & Compliance Committee and contributed investment and governance expertise. John Peberdy assisted with the annual reinsurance program placement and major procurements.
In September 2021, the Minister appointed Julie-Anne Schafer as a Board Member of ARPC. She is a lawyer and brings deep insurance and government experience to ARPC.
Cyclone Reinsurance Pool proposal welcomed
ARPC welcomed the Prime Minister’s May 2021 announcement of the Government’s intention to establish a reinsurance pool for cyclone and cyclone disaster flooding events, which would be administered by ARPC.
The proposed reinsurance pool is intended to improve the affordability and accessibility of insurance in cyclone-prone areas, predominantly located in northern Australia.
ARPC stands ready to support The Treasury as it completes the detailed design of the new pool.
With deep experience running a Government- backed reinsurance pool, ARPC is well positioned to engage with stakeholders in the development of the new pool.
Since the announcement, a Treasury-led Taskforce has worked to develop a proposed final design of the reinsurance pool in consultation with industry, subject to further Government consideration.
More details on the cyclone reinsurance pool can be found in The Terrorism Reinsurance Pool, Cyclone reinsurance pool proposal.
2021 Triennial Review
The 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 (and ARPC) should continue. Previous reviews have also been used as an opportunity to improve the pool.
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 scheme 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 scheme.
ARPC looks forward to this important report and working with Treasury to assist implementing recommendations.
In 2020-21, the Board met eight times comprising four meetings for general business, two-out-of-session meetings and two strategic planning workshops. The Audit and Compliance Committee met four times.
The ARPC Board and senior executive team attended the annual strategic planning workshop in Canberra in March 2021. The workshop included Board engagement with key Government and insurance sector stakeholders.
ARPC wins Gold in annual report awards
Building on last year’s success, ARPC received a coveted Gold Award for its third annual report entry into the Australasian Reporting Awards (ARA), where ARPC’s 2019-20 Annual Report satisfied the demanding ARA criteria.
This improves on the Silver Award earned for the 2018-19 Annual Report and a Bronze Award awarded the prior year.
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
21 September 2021
From the CEO
Delivering on our purpose
ARPC reported excellent financial and operational results in 2020-21.
We continued to engage with insurer customers and government stakeholders including those affected by the COVID-19 pandemic.
We pivoted successfully to working remotely and to undertaking our work online. We also regularly engaged with Treasury to provide insurance and reinsurance expertise as required.
In 2020-21, ARPC had 237 insurer customers which insure $3.9 trillion sum insured for commercial property and business interruption. ARPC had funding capacity for claims of $13.7 billion. This capacity was provided through a combination of $595 million ARPC net assets, $3.475 billion retrocession cover purchased from 73 global reinsurers and the $10 billion Commonwealth guarantee.
During the year, ARPC continued to observe increases in commercial insurance premiums in the private insurance market, while global capacity for terrorism risk reinsurance remained stable.
ARPC’s seminars were converted to webinars. ARPC launched the findings of its cyber terrorism research project titled ‘Insurance risk assessment of cyber terrorism in Australia’ at a Cyber Terrorism Research and Insurance Webinar in September 2020, with 135 attendees.
The scope of the research included identifying and exploring current and prospective threats, plausible scenarios and the practicalities of extending insurance coverage to include cyber terrorism in Australia. ARPC commissioned the Organisation for Economic Co-operation and Development (OECD) and Cambridge Centre for Risk Studies at the University of Cambridge’s Judge Business School (Cambridge), to undertake the research.
The annual ARPC Terrorism Risk Insurance Seminar also took place as a Webinar with more than 200 delegates registered to attend the event on 12 November.
The hybrid combination of in office and remote work did not stop our Declared Terrorism Incident exercises, of which we had four in the financial year.
Cyclone Reinsurance Pool
Furthering comments made by ARPC Chair Ian Carson AM, ARPC remains ready to support the proposed cyclone reinsurance pool which is subject to the Treasury-led Taskforce recommendations and further Government consideration.
Security threat ‘constant, challenging and changing’
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 2021 according to the Department of Home Affairs, since September 2014, when the national terrorism threat level was raised to Probable:
- 135 people have been charged as a result of 63 counter terrorism related operations around Australia.
- There have been nine attacks and 21 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.
In his 2021 Annual Threat Assessment, ASIO Director General Mike Burgess described the Australian security outlook as “complex, challenging and changing”.
He said investigations into ideologically motivated violent extremists such as racists and nationalists were about 40 per cent of ASIO’s Australian counter terrorism cases and growing.
However, religiously motivated extremism, such as that promoted by ISIL, are still Australia’s most serious terrorist threat, he said.
Overseas, the period was marked by persistent terrorism threats. As in the previous year, many attacks were conducted by lone perpetrators using knives, guns or vehicles.
Engaging the private reinsurance market
Terrorism insurance pools like ARPC exist in many major countries and are recognised as an efficient 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. ARPC met online with almost 70 reinsurers in key global markets to negotiate the 2021 retrocession reinsurance program.
For the program, ARPC purchased an additional $25 million layer of reinsurance at the bottom of the program. This reduced ARPC’s deductible from $250 million to $225 million and improved ARPC’s capital strength. The 2021 placement of $3.475 billion of retrocession capacity included approximately $3 billion of capacity written on a multi-year agreement, to reduce retrocession pricing volatility for ARPC.
2021 Triennial Review
ARPC is supporting the 2021 Triennial Review of the ARPC pool by The Treasury. As you may be aware, this periodic review of the TI Act 2003 tests the need for the Act and the pool to continue.
As noted by Ian Carson AM, ARPC Chair, one of the three terms of reference is: whether the risk of cyber terrorism causing physical property damage should be included in the pool.
A gap in pool coverage is physical damage to property arising from computer crime (including cyber terrorism), and ARPC’s research on cyber terrorism is an input to the 2021 Triennial Review.
Value for money
The average price of ARPC terrorism reinsurance cover for insurers in 2020-21 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 2020-21, ARPC participated in key international forums on terrorism and other systemic risk, managed by the OECD and the International Forum of Terrorism Risk (Re) insurance Pools respectively.
I was honoured to provide a presentation to the September 2020 OECD (Insurance and Retirement Savings Roundtable) Webinar on the impact of COVID-19.
In October 2020, I delivered a presentation to an IFTRIP LIVESTREAM Panel session – ‘Terrorism, how do we reinforce the re? How could the design of a terrorism pool be adapted for other systemic risks like pandemic?’
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 late 2021. 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.
Solid 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. According to ARPC’s inaugural annual survey of insurer customers by ORIMA Research, ARPC is delivering on its vision, is a valued partner, a trusted expert and is communicating and engaging well with stakeholders. For more information, refer to the article ARPC is a ‘valued partner’ customer survey finds.
ARPC supports and participates in the OECD High Level Advisory Board for the Financial Management of Large-scale Catastrophes and the IFTRIP. These engagements have enhanced ARPC’s links with global counterparts and reinsurers.
In the period, ARPC participated in IFTRIP LIVESTREAM. This online event provided the opportunity to connect with global pools and to gain insights about global threats, such as cyber terrorism and biochemical risks.
Employee 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 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.
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.
Stakeholder support during COVID 19
ARPC has contributed to the business community during COVID-19 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, and
- supporting Treasury projects and policy development related to insurance and reinsurance markets to assist addressing market failure.
Financial performance was better than forecast for 2020-21
ARPC’s overall financial performance for 2020- 21 was better than expected, largely owing to rate rises in underlying commercial insurance premiums, with the operating result for the year ending 30 June 2021 at $84.9 million, $29.5 million better than forecast.
Summary of Key Financial Metrics 2020-21 comprises a summary of key financial metrics. Further detail is available in Chapter 3, Annual Performance Statement.
ARPC achieved excellent performance operationally and financially during the year. ARPC made good progress on strategic projects during 2020-21, including the following:
- cyber terrorism research project completion and launch to stakeholders
- Standards Australia Handbook for the ‘Base Building Physical Security Handbook – Terrorism and Extreme Violence’, and
- development and Board approval of a risk culture statement as part of the risk management framework re-design.
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 2021. 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
21 September 2021
BCom FCA GAICD
Member and Chair of the Audit, Risk
21 September 2021