Australian Reinsurance Pool Corporation, Australia’s national terrorism insurance scheme, has highlighted the importance of reinsuring critical infrastructure in rural and regional areas, as a terrorism event could cause significant insured losses.
Many insured exposures relate to privately owned gas, water and electricity utilities, port facilities and mining assets. If disrupted by terrorism, there is not only the potential for property damage but also business interruption for industries and communities relying on this infrastructure.
In Australia, the Terrorism Insurance Act 2003 removes any terrorism exclusions from policies when a terrorism incident is declared by the Government.
The key message for insurers is that if your company is insuring critical infrastructure assets, there is a terrorism exposure and your company should ensure these assets are reinsured.
Analysis on rural/regional areas with high value infrastructure assets
Given their importance to the Australian economy, ARPC commissioned analysis on rural and regional areas containing high value infrastructure assets, such as gas, water and electricity utilities, port facilities and mining assets.
This analysis included evaluating the interdependence of high value infrastructure assets and potential economic losses from a terrorist attack at 25 selected regions containing high value assets and other dependent industry. That analysis then formed the basis for a review by insurance experts who converted regional economic losses into insured losses.
The analysis considered areas with the highest regional exposure and those areas that had a strong interdependence to regional areas.
Conversion of economic to insured losses
ARPC then commissioned two major insurance brokers to review the five largest scenarios and convert economic loss figures to insured loss figures based on availability of business interruption products and the purchasing patterns of industrial facilities and expected property losses. This provided a range of potential insured losses for different infrastructure types.
The insured loss was then calculated for each risk type and found to be well within scheme capacity. However, the loss amounts are substantial and should be considered by insurers when determining capital adequacy for retained risk in rural and regional areas.
Analysing risk in Australian CBDs
While critical assets in rural and regional areas was a focus for the research described above, ARPC’s main focus when analysing risk is on Tier A locations.
This segment comprises central business district areas of Australia with a population of more than one million people. This includes Sydney, Melbourne, Brisbane, Perth and Adelaide.
Tier B comprises urban areas of state capital cities with a population of more than 100,000 people. For example, Canberra, Newcastle, Geelong, Gold Coast, Townsville, Hobart and Darwin.
Analysing risk in suburban areas – geospatial modelling
ARPC has also recognised the need to estimate insured losses in all parts of Australia, in particular, suburban areas, and has initiated the development of a geospatial model. This will source and use information from aerial photos, postcode, aggregate exposure information, damage reports and damage curves from different types of buildings and infrastructure.
By combining this information, the new model will allow ARPC to quickly estimate insured losses anywhere in Australia, but particularly suburban shopping centres, industrial centres, sporting facilities and major infrastructure like power stations, mines and ports.
The big picture – Australian Reinsurance Pool Corporation
Current terrorism threat level
Australia’s terrorism threat level is currently “probable”. This means there is credible intelligence, assessed by our security agencies, which indicates that individuals or groups continue to possess the intent and capability to conduct a terrorist attack in Australia. The threat level has been set at “probable” since September 2014.
The primary threat is from lone actors or small groups using simple methodologies. However, the possibility of coordinated attacks against multiple targets cannot be ruled out.
Origins of ARPC
Australian Reinsurance Pool Corporation is a corporate Commonwealth entity established under the Terrorism Insurance Act 2003 (TI Act).
Following the terrorist events that occurred in the United States of America on 11 September 2001, there was a global withdrawal of terrorism insurance. The Australian Government was concerned that the lack of comprehensive insurance cover for commercial property or infrastructure would lead to a reduction in financing and investment in the Australian property sector.
The role of ARPC was to establish and provide ongoing administration of a scheme that would provide insurance cover for eligible terrorism losses, involving commercial property, associated business interruption losses and public liability.
State of play
Commercial property insurance policies still exclude terrorism incidents, and while there is some commercial reinsurance capacity available for terrorism, it remains limited.
If an event in Australia is declared as a Declared Terrorist Incident (DTI) under the Terrorism Insurance Act 2003 (TI Act), the widespread exclusion of terrorism in insurance policies is over-ridden through the TI Act and all businesses with insurance cover have certainty that they can claim against their policies.
As a pool, ARPC offers terrorism reinsurance for losses from eligible risks within Australia in the event of a Declared Terrorist Incident (DTI).
ARPC charges premium to insurers who participate in the scheme and uses it to purchase retrocession to protect the scheme and the Federal Government. In this way, ARPC provides efficient, cost effective cover for the full transfer of terrorism risk for insurers.
ARPC operates on a commercial basis as a Commonwealth Corporate Entity with premium and investment income used to fund its operations, buy retrocession and build the available pool to meet future claims. Insurers which write eligible insurance contracts may reinsure the risk of claims for eligible insurance losses. Premium income has built up ARPC’s first layer of funds available to cover claims from declared terrorist incidents. The pool is supplemented by a Commonwealth Guarantee of A$10 billion (US$7.7 billion).
ARPC recently confirmed its retrocession reinsurance programme for the 2018 calendar year. The new A$3.065 billion retrocession reinsurance programme plus ARPC’s net assets and the A$10 billion Commonwealth guarantee, provides continuing scheme capacity to pay claims of more than A$13.4 billion.
The A$3.065 billion retrocession reinsurance programme covers approximately A$3.5 trillion in Australian-based commercial property sector assets by insured value, up from A$3.4 trillion in 2017.
ARPC also completed more than two-thirds of the programme on a multi-year basis, providing a stability for all stakeholders in terms of the level of cover purchased and price paid.
Chief Underwriting Officer, Michael Pennell and I met with almost 70 reinsurers in key global markets to negotiate the 2018 programme.
Insurers who seek terrorism reinsurance through ARPC retain part of the risk of liability from a Declared Terrorist Incident (DTI).
The minimum annual insurer retention is A$100,000 and the maximum is the lesser of A$12.5 million or 5% of the fire + ISR premiums collected. The maximum industry retention is currently A$150 million per incident.
The ARPC scheme is reviewed every three years by the Treasury. As a result of the 2015 Triennial Review, scheme changes included extending reinsurance coverage to include biochemical terrorist attacks, buildings with mixed use commercial and residential and high value residential buildings.
However, the main recommendation was to confirm the ongoing need for the scheme.
“As the need for the scheme has persisted for more than a decade, the policy framework against which its operation is assessed should no longer be limited to one that conceives of the scheme as a short-term, temporary measure,” the 2015 Review stated.
“While the ongoing need for the scheme should continue to be periodically reviewed, the fact that it has matured into at least a medium-term policy response should be recognised and reflected in decisions about the nature and scope of its operation”.
The next Triennial Review of the scheme takes place later this year. A
Dr Christopher Wallace is Chief Executive at Australian Reinsurance Pool Corporation (ARPC).
The level of exposure for critical assets located in rural areas can be reinsured.