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.
Result – Exceeded ✔✔
ARPC’s objective for Measure 1 for 2019-20 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 2019-20 was $234.3 million which was $94.3 million better than its Corporate Plan target, and $54.3 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.
During the first half of 2019/20, commercial property premium rates rose strongly, resulting in premium income increasing by more than 19 per cent, compared to the previous corresponding period. During the second half of 2019/20, ARPC continued to see increasing premium rates but these were somewhat offset by lower volumes due to COVID-19.
Result – Exceeded ✔✔
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 $3,450 million ($3.45 billion) (2019: $3.315 billion) retrocession program for the 2020 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 2020 calendar year was $3.450 billion which was $950 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 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 $13.7 billion total funding available for losses arising from a DTI through ARPC’s retention, the retrocession market and the Commonwealth guarantee.
Result – Exceeded ✔✔
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 2020 period ARPC had 71 participants in the program against a target of 15 and 59.7 per cent of participants were APRA-regulated reinsurers against 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.
Result – Met ✔
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.
Result – Exceeded ✔✔
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 expense
As at 30 June 2020, ARPC’s net assets were $521 million, which was higher than target capital and slightly above the target zone.
ARPC’s Capital Management Policy levels include:
Minimum Capital is recommended by the Board to be above $310 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 $370 million and $450 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 $710 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.
Result – Met ✔
Strategic project delivery
Geospatial catastrophe modelling
ARPC worked with Risk Frontiers to build a geospatial catastrophe model to cover the entire mainland of Australia.
This model was commissioned on 30 June 2020 after extensive testing and refinement.
Cyber terrorism research project
In late 2018, ARPC commenced a research study on the threat of cyber terrorism in Australia, including the nature and cost of physical damage to commercial property which may be caused by cyber terrorism. ARPC commissioned OECD and Cambridge University’s Centre for Risk Studies to undertake the work in consultation with the Australian insurance and reinsurance industry. Experts were also consulted across property, building management, engineering, construction, IT and law enforcement. The research included coverage available in the global and local insurance market.
The research was published as a compendium in March 2020 and a seminar launch scheduled for the same month with more than 160 registered attendees. Unfortunately, the seminar was postponed due to the COVID-19 pandemic. Instead ARPC scheduled a webinar for 3 September 2020 featuring speakers from OECD and Cambridge, and facilitated by Professor Paula Jarzabkowski, re/insurance expert from the University of Queensland, to formally launch the research. Registrations for the webinar and recordings were more than 200 participants. The research has been provided to Treasury and will be an input into the 2021 Triennial Review.
Ownership model feasibility study
This ARPC-initiated project was completed during the year. The feasibility study included a comprehensive report prepared by consultants Pottinger, and a summary management report. The study will assist future reviews of the scheme.
Risk mitigation project through Standards Australia
In 2018, ARPC submitted a proposal to peak standards development body, Standards Australia, for the development of a handbook to support businesses protect assets against malicious attacks including terrorism.
The draft Handbook was opened for Public Comment for a period of six weeks spanning April and May 2020, which allowed stakeholders to review the draft and provide feedback.
Standards Australia is considering the recommendations and revisions, which will likely extend the review period into late 2020.
The working title of the Handbook has since been updated from Physical Protective Security Treatment for Buildings Handbook to Base-Building Physical Security Handbook – Terrorism and Extreme Violence.
5. Engage, understand and collaborate with stakeholders
Result – Partially Met
An external consultant, ORIMA, has been appointed by ARPC to develop and implement a stakeholder engagement survey of our insurer customers. The survey research strategy and question design has been completed and the survey will be undertaken during FY2020-21. The results from the first survey will form a baseline measure to assess and report on the effectiveness of stakeholder engagement efforts.
The stakeholder survey is designed to provide a benchmark in relation to how ARPC is perceived in the areas of:
Delivering to our vision
Stakeholder sentiment towards ARPC
Providing value for money
Effectiveness of stakeholder engagement
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. ARPC expects to see premium income flatten or slightly decrease owing to the impact of the pandemic during 2020/21.
At 30 June 2020, ARPC held $571.5 million in term deposits and $1.8 million in cash (2019: $504.1 million and $1.1 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 2019-20. All investments are held in ARPC’s name.
ARPC recognises the need to fund the retrocession retention of $250 million within 90 days based on actuarial analysis conducted. ARPC manages the investment maturity profile to meet this liquidity requirement.
Investment income fell to $9.7 million (2019: $13.5 million) owing to lower interest rates in 2019-20. This is consistent with expectations.
Interest rates in Australia are at historic lows, and ARPC expects investment income will reduce over the next year.
Analysis of performance against purpose
During 2019-20, 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 for launching the inaugural stakeholder engagement survey, which will occur in 2020/21. During the period, the following factors impacted ARPC’s performance. These are displayed in Key factors influencing ARPC’s performance.
Key factors influencing ARPC’s performance
Property insurance market
The current year has seen underlying commercial property insurance premiums continue to 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.
Global reinsurance market capacity and price
There were increases in capacity and a slight decrease in price for retrocession. ARPC has managed its purchase of retrocession by using decreased pricing to incrementally increase capacity. In 2020, ARPC purchased an additional layer of $100 million of retrocession in excess of $3.6 billion and decreased the retention by $35 million to $250 million, bringing total retrocession capacity purchased to $3.450 billion.
Payments to Government in 2019-20 of $100.0 million.