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 2020-21 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.
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 (Refer to Vision, Mission and Values ).
ARPC’s performance against the 2020-24 Corporate Plan over the reporting year is measured against five key performance areas:
One: Providing reinsurance for eligible terrorism losses
Two: Encouraging private sector participation through retrocession
Three: Compensating the Government
Four: Maintaining financial sustainability, and
Five: Engaging, understanding, and collaborating with stakeholders.
Performance statement summary
ARPC met or exceeded all performance criteria for the 2020-21 reporting period.
A summary of achievements against the 2020-24 Corporate Plan is shown in Achievements against 2020-24 Corporate Plan objectives.
2 ARPC Corporate Plan 2020-24, page 24 | 5 ARPC Corporate Plan 2020-24, page 27 | 8 ARPC Corporate Plan 2020-24, page 32
3 ARPC Corpora te Plan 2020-24, page 25 | 6 ARPC Corporate Plan 2020-24, page 28-29 | 9 ARPC Corporate Plan 2020-24, page 32
4 ARPC Corporate Plan 2020-24, page 26 | 7 ARPC Corporate Plan 2020-24, page 30-31
Performance statement detail
1. Providing reinsurance for eligible terrorism losses
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.
ARPC’s objective for Measure 1 for 2020-21 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 2020-21 was $258.1 million which was $118.1 million better than its Corporate Plan target, and $38.1 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 underlying commercial property insurance premium rates.
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 $3,475 million ($3.475 billion) (2020: $3.45 billion) retrocession program for the 2021 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 2021 calendar year was $3.475 billion which was $975 million higher than (better than) its corporate plan target and within ARPC’s Board approved financial budget.
2. Encouraging private sector participation through retrocession
Encouraging private sector participation remains a key policy objective for ARPC’s terrorism insurance pool.
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 $13.7 billion total funding available for losses arising from a DTI through ARPC’s retention, the retrocession market and the Commonwealth guarantee.
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 APRA regulated or APRA recognised or who hold a Standard & Poor’s 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 pool 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 2021 period ARPC had 73 participants in the program against a target of 15 and 58.9 per cent of participants were APRA regulated reinsurers versus a target of 50 per cent.
3. Compensating the Government
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.
4. Maintain financial sustainability and organisational resilience
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.
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 2021, ARPC’s net assets were $595 million, which was higher than target capital and above the target zone.
ARPC’s Capital Management Policy levels include:
- Minimum Capital is recommended by the Board to be above $285 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 $345 million and $425 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 $660 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 above the target range and to steadily increase towards maximum capital over the plan period. This is based on the assumption that premium income is not significantly impacted by COVID-19 and any resulting economic recession.
5. Engage, understand and collaborate with stakeholders
High Priority Stakeholder Meetings
In the period, ARPC senior executives and the insurer customer audit team met with about 125 high priority stakeholders across government and the insurance industry. This includes government agencies, insurers, reinsurers, industry associations, global associations and consultants.
Despite the challenges of the COVID-19 pandemic and associated restrictions, ARPC hosted two webinars and a networking dinner. All experienced better than expected attendance and feedback was positive.
Target audience engagement with ARPC grew steadily over the period as shown by the high average engagement rate per post on ARPC’s LinkedIn page and the significant increase in followers.
* Average Engagement Rate is the number of engagement actions (e.g., likes, shares, comments) a post receives relative to your total number of followers. Between 3.5 per cent and 6 per cent is considered a high engagement rate.
** Average impressions per post is the number of times a post was displayed on someone’s social media feed, regardless of whether it was clicked.
ARPC maintained a solid presence in target insurance trade media over the period including Insurance News, Asia Insurance Review, Insurance Business Australia and The Insurer. This comprised coverage of ARPC announcements as well as interviews.
Following the Australian Government announcement of a Cyclone Reinsurance Pool, ARPC attracted greater coverage from mainstream media including the Australian Financial Review and Northern Australian media such as the Cairns Post.
Electronic Direct Mail (eDMs)
ARPC sent 11 eDMs in the period, comprising quarterly newsletters, special issue newsletters and other announcements such as event invitations, customer survey results and insurer customer notices. Target audience engagement with eDMs was higher than average for government and insurance industry sectors as shown in the example below of average open and click rates for our Under the Cover (UTC) Newsletter eDMs.
Website engagement (by monthly users)
The number of new and returning users to the ARPC website has grown over the period,
with spikes in users coinciding with publication of ARPC news and publications.
In December 2020, a short online survey was sent to ARPC’s 225 insurer customers, 36 of which are in Australia and 189 based overseas.
Overall, the survey results indicated that ARPC is delivering on its vision, is a valuable and important partner, a trusted expert and is communicating and engaging well.
The survey design was guided by a senior executive workshop which identified several ‘Big questions’: Are we delivering on our vision? What do our customers think of us? Does ARPC represent value for money? Does ARPC engage effectively with stakeholders?
Key survey findings included that:
- 97 per cent of respondents overall (Australia and overseas) believe ARPC is an effective provider of terrorism risk insurance
- 98 per cent agree ARPC is a trusted expert on terrorism reinsurance
- 96 per cent agree ARPC is easy to deal with and 89 per cent agree ARPC is transparent
- Respondents rated ARPC’s publications and digital business to business communications strongly, particularly Australian respondents
- 80 per cent found the ARPC insurer customer review process very or somewhat useful
This first annual survey of insurer customers formed a baseline measure to assess and report on the effectiveness of stakeholder engagement efforts in future years.
A full article on the findings can be found in ARPC is a ‘valued partner’ customer survey finds.
Influences on future performance
ARPC’s two sources of income are reinsurance premiums from insurer customers 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 has seen increased underlying commercial property premium rates flow through to increased premium revenue.
At 30 June 2021, ARPC held $654.7 million in term deposits and $2.0 million in cash (2020: $571.5 million and $1.8 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 25 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 2020-21. All investments are held in ARPC’s name.
ARPC recognises the need to fund the retrocession retention of $225 million within 90 days based on actuarial analysis conducted. ARPC manages the investment maturity profile to meet this liquidity requirement.
Investment income fell to $3.9 million (2020: $9.7 million) owing to lower interest rates in 2020-21. This is consistent with expectations.
Interest rates in Australia are at historic lows, and ARPC expects investment income to remain low over the next year.
ARPC has increased investment duration to attract slightly higher yields while maintaining the liquidity to fund the retrocession retention within 90 days.
Analysis of performance against purpose
During 2020-21, 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, except commencing the research partnership with University of Queensland. This will commence in 2021-22, as the university has successfully recruited a post-doctoral research fellow. During the period, the following factors impacted ARPC’s performance. These are displayed in Key factors influencing ARPC’s performance