2021 Triennial Review confirms ARPC’s future
In December, the final report of the 2021 Triennial Review into the Terrorism Insurance Act 2003 (TI Act) by the Treasury recommended ARPC continue to provide terrorism re/insurance covering Australian commercial and high value residential property.
This provides confidence to the Australian business sector, the insurance industry, and broader Australian economy, which would rely on ARPC to financially recover from a Declared Terrorist Incident (DTI).
The TI Act currently requires that a review be conducted once every three years on the need for the ARPC pool to continue. Just like in 2021, previous reviews completed in 2006, 2009, 2012, 2015 and 2018 found there was insufficient terrorism insurance available commercially on reasonable terms and concluded the Act should continue in operation.
We acknowledged the Treasury’s recommendation not to include cyber terrorism in the pool. This is the second time the Treasury considered the inclusion of cyber terrorism in the pool.
The 2021 Review also recommended that Treasury reviews of the scheme take place every five years, instead of three years. The full 2021 Triennial Review report and recommendations
2022 retrocession programme finalised
ARPC recently finalised its retrocession programme for calendar 2022. The A$3.475bn ($2.48bn) retrocession programme, plus ARPC’s net assets and the A$10bn Commonwealth guarantee, provides scheme capacity in the event of a declared terrorism incident against commercial and eligible property assets, of approximately A$14bn.
ARPC’s retrocession programme encourages a mix of global and Australian reinsurers to provide terrorism cover for Australian-based property assets, which transfers the risk and protects the Commonwealth Guarantee and Australian taxpayers.
This year, ARPC worked with our reinsurance adviser Aon to simplify the programme by converting it to a full multi-year arrangement and renewing at expiring terms.
ARPC renewed its A$3.475bn retrocession with a A$225m excess, for the same price as 2021, which is an impressive result.
The A$3.475bn retrocession programme and ARPC’s net assets are the first layers of funding for claims in the event of a terrorism incident.
We met with over 50 reinsurers online in global markets to negotiate the 2022 programme.
Base-building physical security handbook – terrorism and extreme violence HB 188 published
Late last year, ARPC welcomed peak standards development body Standards Australia’s publication of the Base-building physical security handbook – Terrorism and extreme violence (HB-188). ARPC was the Project Proponent for HB-188.
The handbook will help owners and operators of commercial buildings to identify and assess building risks linked to terrorism and other acts of extreme violence, and to apply suitable controls to mitigate the risks.
In 2018, ARPC submitted a proposal to Standards Australia for the development of a handbook to support proactive risk management of large-scale infrastructure (commercial buildings).
The handbook supports ARPC’s strategic priority to extend thought leadership and expertise on terrorism.
Research quantifies cost of business interruption linked to exclusion zones
Innovative research published by ARPC in 2021 found business interruption losses are highly sensitive to the size of an exclusion zone set up by emergency responders after a major disruptive event, such as a terrorism incident or other civil commotion.
The application of exclusion zones can result in up to 10 times the insured loss expected from physical damage to an affected area, due to the impact of business interruption, including lack of access.
The findings are contained in: Exclusion Zones and ARPC’s Interaction with First Responders by ARPC in conjunction with Finity Consulting and FPL Advisory. The research paper draws on ARPC’s terrorism catastrophe models to analyse the economic impact of exclusion zones of various sizes set up after a major disruptive event.
Exclusion zones are a necessary tool to protect the public, stabilise property and assist the post-investigation process, but it’s important to understand that the size of, and duration of, an exclusion zone will impact businesses’ ability to operate.
It is estimated that 70% of small-to-medium enterprises are uninsured for interruption to their businesses from exclusion zones, so business owners could be left to bear these costs if a disruptive incident prevents access to their premises.
ARPC has used this analysis as the basis for many discussions with State and Territory Police over the past two years.
In summary, the paper:
- provides an estimate of physical damage areas for various bomb blasts or biological and chemical attack scenarios and estimates the financial costs of various exclusion zones in terms of their potential business interruption losses.
- outlines several industry-accepted exclusion zone models and analyses these in conjunction with ARPC’s terrorism catastrophe models, to quantify the potential impact on financial losses in major Australian cities.
- does not make recommendations on appropriate sizes for exclusion zones.
Research on definitions of terrorism
Last year, we partnered with the University of Queensland (UQ) Business School for two years to produce a series of research papers on terrorism.
The research paper currently underway explores the evolving experience and meaning of terrorism in Australia and internationally. It will look at how formal definitions of terrorism may evolve as experience with other extremist behaviour and civil unrest emerges.
Attacks such as mass shootings and knife attacks are occurring outside the extremism which underpinned the September 11 attacks in 2001, according to Professor Paula Jarzabkowski, who is leading the UQ research team on the project.
ARPC notes that while newer forms of attack and social unrest do not typically fit existing definitions of terrorism, they may still cause loss of life, disruption to business and society and financial losses and social unrest.
The UQ Business School team on the research project comprises Professor Paula Jarzabkowski and research fellows Dr Corinne Unger and Dr Katie Meissner. A
Dr Christopher Wallace is CEO of Australian Reinsurance Pool Corporation.
| ARPC welcomes Cyclone Reinsurance Pool
In May 2021, ARPC welcomed the Australian Government’s announcement that it intended to establish a reinsurance pool scheme for cyclone and related flood damage, to be administered by ARPC.
In February 2022, the Government finalised the design of the reinsurance pool for cyclone and related flood damage, following Treasury-led consultation on the draft legislation.
- The reinsurance pool is proposed to be backed by a separate A$10bn annually reinstated Commonwealth guarantee and be administered by ARPC from 1 July 2022.
- Over 880,000 residential, strata and small business property insurance policies in northern Australia are expected to be eligible to be covered by the reinsurance pool for the risk of cyclone and related flood damage.
- The pool is expected to reduce insurance premiums for eligible properties in medium and high-risk cyclone areas.
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