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Apr 2021

Risk-transfer expertise: Pandemic, terrorism, Nat CAT

Source: Asia Insurance Review | Mar 2021

Christopher WallaceThis year will see a continuation of technological, social and business transformation accelerated by the COVID-19 pandemic, says Australian Reinsurance Pool Corporation’s Dr Christopher Wallace.
Expect further debate about systemic risks and ‘wicked problems’ – with no obvious solutions or natural end – such as pandemics, terrorism and natural disasters and the respective roles for risk transfer between insurance, reinsurance and governments in 2021.
Amid this rapidly evolving landscape, Australian Reinsurance Pool Corporation (ARPC) will seek to remain a trusted expert on terrorism risk reinsurance; extend our thought leadership and expertise in terrorism risk insurance through research collaborations with industry and universities; strengthen relationships with valued stakeholders through activity and metrics, while embedding an enhanced risk culture within ARPC.
Strong operational and financial performance
ARPC’s 2019-20 Annual Report showcased strong operational and financial performance during the financial year as our employees successfully switched to full-time remote work in the second half, prompted by a pandemic lockdown.
There were 227 insurer customers covered by ARPC for terrorism risk for commercial property and business interruption policies.
The ARPC Scheme had funding capacity for claims of A$13.7bn ($10.6bn). This capacity was provided through a combination of A$521m ARPC net assets, A$3.45bn retrocession reinsurance cover purchased from 71 global reinsurers and the A$10bn Commonwealth guarantee.
ARPC performed well against the targets set in the 2019-23 Corporate Plan. The financial performance for 2019-20 was better than expected, largely due to rate rises in underlying commercial insurance premiums, with an operating result (surplus) of A$69.1m, A$42.5m better than forecast.
Global stakeholder engagement goes online
During the pandemic, ARPC operated remotely and joined its stakeholders online. Global and local conferences and seminars became webinars, attracting new audiences, while face-to-face meetings became online meetings.
In 2020, I held the rotating presidency of the International Forum of Terrorism Risk (Re)Insurance Pools (IFTRIP). The aim of IFTRIP is to facilitate closer collaboration on thought leadership between global terrorism pools.
Due to COVID travel restrictions, IFTRIP’s Washington DC Conference was reborn as an October online event called IFTRIP LIVESTREAM. I presented on the topic: Beyond Terrorism – How do we reinforce the Re? The presentation outlined some similarities between terrorism and pandemic and explained how the structure/design of a terrorism pool could be adapted for other systemic risks.
At an OECD online forum, I explained how pool structures allow more scope for private insurance market participation by enabling reinsurers to selectively deploy scarce capital to specific geographic regions, thus limiting their capacity (and risk). This may help a reinsurer to participate in a limited way in covering risks that would otherwise be excluded.
Cyber terrorism research findings published
ARPC launched the findings of its cyber terrorism research project titled ‘Insurance risk assessment of cyber terrorism in Australia’ at ARPC’s Cyber Terrorism Research and Insurance Webinar. The Webinar, held in September 2020, had 135 attendees.
The scope of the research included identifying and exploring current and prospective threats, plausible scenarios as well as 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 research confirmed cyber terrorism is not covered by commercial property insurance in Australia, and the terrorism reinsurance scheme administered by ARPC excludes cover for cyber terrorism or acts of war.
ARPC anticipates the research will help inform the Australian Government about the risks faced by the economy due to this protection gap. It will be an input to this year’s triennial (three-yearly) review of the Terrorism Insurance Act 2003 by the Australian Treasury. It is also available as a resource to the re/insurance industry. For more information on the research project visit the ARPC website:
Extending catastrophe modelling and risk mitigation 
ARPC’s geospatial catastrophe modelling project capability was extended and now covers all Australian mainland commercial property assets and locations. Substantial progress was also made on work with Standards Australia on a new handbook HB 188 for terrorism risk mitigation for businesses.
Advancing thought leadership
Identifying gaps in terrorism insurance coverage
In 2020, ARPC formed a two-year partnership with the University of Queensland Business School in Australia to publish a series of thought leadership papers related to terrorism. This aligns with ARPC’s strategic priorities including to ‘extend thought leadership and expertise’. 
The first research paper Analysis of Identified Gaps in Australia’s Terrorism Insurance Environment, published in December, found some losses from terrorism are not covered by existing arrangements or are not covered fully or consistently.
The gaps include: physical property damage caused by cyber terrorism; low business interruption insurance uptake by SMEs; compulsory third-party motor insurance schemes; inconsistencies in workers compensation schemes; inconsistencies in victims of crime schemes and coverage of state and Commonwealth assets. The purpose of this report, in identifying these gaps, is to inform future discussions on insurance coverage, such as what risks should be covered, and by whom within the commercial or public sector. The paper is available on the ARPC website:
The economic impact of exclusion zones 
ARPC, in association with Finity Consulting and FPL Advisory, has produced a paper on the economic impact of exclusion zones set up during events like terrorism incidents or large-scale civil unrest. The paper was inspired by ARPC presentations to Australian state and federal police forces on exclusion zones and ARPC’s modelling capabilities as well as scenarios developed for ARPC employees during regular declared terrorism incident exercises.
The paper outlines industry-accepted exclusion zones and quantifies the potential financial losses in major Australian CBDs, with added implications in the case of biological and chemical attacks and other hypothetical examples.
The work also incorporates outputs from ARPC’s proprietary terrorism catastrophe models to analyse the variation in financial cost due to business interruption of businesses impacted by exclusion zones that are imposed for safety reasons or to assist crime investigation.
The paper, addressed to first responders and industry stakeholders, notes that exclusion zones are a necessary tool which should be used to reduce the risk to the public, stabilise property and assist the post-investigation process. The paper also shows that business interruption losses are extremely sensitive to the size of the exclusion zone set by the emergency responders. A public version of this paper will shortly be available on the ARPC website.
Measuring stakeholder engagement 
A strategic priority for ARPC is to ‘engage, understand and collaborate with stakeholders’. In its 2019 ARPC Performance Audit, the Australian National Audit Office advised ARPC to measure and report on the effectiveness of its ‘substantial stakeholder engagement and communication activities’ better.
In response, ARPC sent its inaugural insurer customer survey to 225 ARPC cedants (insurer customers).
Overall survey results received (this year) were strong and insurer customers said that ARPC was:
  • delivering on its vision as an effective provider of terrorism risk insurance, facilitating private sector terrorism participation and supporting national resilience 
  • a valuable and important partner which supports its customers’ financial strength
  • a trusted expert on terrorism reinsurance, easy to deal with and transparent
  • communicating and engaging well across digital B2B mediums, publications, the website, face-to-face and through the annual seminar. 
Incremental improvements in response to the survey are likely to include more engagement with insurer customers outside of cedant reviews and some website changes to assist overseas cedants.
As an adjunct to that, ARPC commissioned an independent consultant to undertake interviews with industry associations and government contacts to gauge feedback on their understanding of, and interactions with, ARPC. ARPC is also exploring the introduction of brief, but regular customer experience surveys to gauge feedback.
Embedding a risk culture 
Internally ARPC aims to embed a positive risk culture which fosters accountability and encourages employees to speak up about issues which concern them. While a great risk culture already exists, this initiative is intended to grow our risk maturity further by clearly identifying shared behaviours, values and norms that help drive a positive risk culture. ARPC uses the three lines of defence model where management is the first line of defence, risk control and compliance oversight the second line and independent auditors the third line.
The initiative will also see ARPC develop risk culture measures to track progress. A 
Dr Christopher Wallace is the CEO of the Australian Reinsurance Pool Corporation.

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