The terrorist events of 9/11 had a profound effect on the insurance and reinsurance industry around the world, but one of the more enduring changes was the establishment of various government-sponsored terrorism risk pools. One of the leading pools in the Asia Pacific region is headquartered in Sydney – the Australian Reinsurance Pool Corporation. We caught up with CEO Dr Christopher Wallace to find out how the business has been growing, what lies in the future and why it holds such appeal for reinsurers throughout Asia.
Simply put, Australian Reinsurance Pool Corporation (ARPC) is a public financial corporation established by the Terrorism Insurance Act 2003 to administer a terrorism reinsurance scheme.
The reality is that it would be difficult to have a functioning commercial real estate sector in Australia without ARPC since it provides primary insurers with reinsurance for commercial property and associated business interruption losses arising from declared terrorist incidents.
But to think of ARPC as purely domestic would be to miss the wide scope of its business, which provides reinsurance cover to 220 insurers from all over the region who, in turn, cover more than A$3.7tn ($2.5tn) in sums insured.
During 2018-19, ARPC had funds available for claims of A$13.6bn. This capacity was provided through a combination of ARPC net assets, A$3.315bn of retrocession reinsurance purchased from 71 global reinsurers and the A$10bn Commonwealth of Australia guarantee.
Insurers who enter into a reinsurance contract with ARPC lay off their terrorism liability to the risk pool - while their eligible insurance contracts are protected through ARPC’s net assets, global retrocession programme and the Commonwealth guarantee.
A good year in review
ARPC is led by CEO Dr Christopher Wallace, an insurance executive with experience in general insurance, workers compensation, health insurance and reinsurance who is confident about the pool’s recent performance. “Our financial results are strong,” said Dr Wallace. “Australian commercial insurance market premium rates have been increasing, we’ve seen evidence of a hardening market – and our premiums are a percentage of these premiums.”
ARPC’s overall financial performance for 2018-19 was better than expected, with the operating results for the year ending 30 June 2018 of A$45.4m, A$28.4m better than forecast.
ARPC’s good performance was acknowledged at the start of July by the Australian National Audit Office (ANAO) which published its Performance Audit Report that concluded that ARPC was effective in managing the terrorism reinsurance scheme and that governance arrangements allowed effective oversight and management of the scheme.
The ANAO performance audit report recommended that the Australian Department of the Treasury reviews the options available to rebuild ARPC’s capital following an event leading to significant claims on the scheme, in order to minimise the need for premium increases. This recommendation was agreed to by the Treasury.
Projects for the future
Naturally enough, most of ARPC’s work is forward-looking. “We’re running a number of strategic projects,” said Dr Wallace. “The biggest project at the moment is research on cyber terrorism with the Organisation for Economic Co-operation and Development (OECD) and the Centre for Risk Studies, an insurance-risk research unit associated with the University of Cambridge.”
In October 2018, ARPC started the research study on the threat of cyber terrorism in Australia, including the nature and cost of physical damage to commercial property including business interruption, which may be caused by acts of cyber terrorism.
“Cyber risk is certainly a big one,” said Dr Wallace. “It is difficult to quantify. We’re trying to do this work with Cambridge to quantify it so that people can see how big it is. The problem is that it’s not geographically contained, it’s a global risk. You’ve seen large cyber attacks that are not terrorism, but cyber attacks have impacted companies all over the world and cyber needs to be understood better.”
The study, Insurance risk assessment of cyber terrorism in Australia, is aimed at identifying and exploring current and prospective threats, plausible scenarios as well as the practicalities of extending insurance coverage to include cyber terrorism in Australia.
“Increasingly cyber is a hybrid threat, it’s difficult to establish who the attacker is,” said Dr Wallace. “It could be a combination of nation states, criminal actors and terrorism groups working together. So, in that sort of chain of events, it’s very difficult to attribute.”
“The problem with cyber insurance is that the policies are set up to cover third-party losses and not the physical assets. Where there is physical cover provided in the cyber policy, often it’s sublimated to a very small level.”
Strategic thinking
“We’re also doing a piece of work with the OECD looking at how insurance markets have responded to the risk and they’re also looking at what government policy responses could be to the risk.
“Cambridge Centre for Risk Studies is looking at the nature of the risk, how plausible it is, the financial consequences. So, we’ve got two views. One view is a practical quantification of the exposure and the other is more of a policy thought-piece around what sort of responses would you put in place.”
Both research pieces are scheduled for publication early in 2020 and hint at the robust knowledge base upon which ARPC is built. This thirst for hard data as a means of building a uniquely attractive offering for the market it what keeps ARPC’s thinking fresh.
Importance of research
“We’re also doing a significant project with Standards Australia,” said Dr Wallace. “They’re going to be putting out for public comment a draft handbook called Physical Protective Security Controls for Buildings Handbook. It’s very important because it brings together the guidelines: Where to get information on how to protect a building from attack, whether it’s terrorism or malicious or crime. It’s a world-first and will become available for businesses that will be able to use it in their risk management.”
ARPC is also in a good position to see how the threat of terrorism is evolving and how to respond to it. “The most likely attack continues to be an armed assault,” said Dr Wallace. “However, we can’t rule out a sophisticated attack that’s unexpected. The global trends impact how reinsurers see the risk.”
Attractive for reinsurers
In the grand scheme of things, however, Australia still represents a very low risk relative to the rest of world. “This means that we’re quite an attractive reinsurance market for the risk,” said Dr Wallace. “Reinsurers have a high appetite for the risk through a pooling mechanism because it enables them to take part of the risk - not all of it - and to limit their exposure. They can participate in a pool that’s very broad, it’s not an adverse risk pool. It becomes an attractive reinsurance proposition for an insurance company.”
In large part that is why ARPC holds an attraction for reinsurers in Asia. “We offer relatively low risk to rest of world,” Dr Wallace said. “We offer a diversified pool of risks and we are financially strong. We give reinsurers the ability to participate and to diversify their risk but limit their exposure.” A