The Australian Reinsurance Pool Corporation (ARPC) was originally established following the 9/11 terrorist attacks as many developed countries sought to mitigate the risk to commercial real estate of large-scale damage caused by terrorists.
Since then, ARPC has developed into a sophisticated solution to include other catastrophic risks too – such as cyclone – although its focus on terrorism risk has never wavered.
The terrorism pool?provides insurers with reinsurance for commercial property and associated business interruption losses arising from a declared terrorist incident. The terrorism pool operates differently to the Cyclone Reinsurance Pool and participation is voluntary for insurers.
If a declared terrorist incident occurs, it overrides any terrorism exclusions in insurance policies, requiring insurers to pay claims.
Australia’s national terrorism threat level is currently set at Probable.
This designation is made by the Australian Security Intelligence Organisation (ASIO), which assesses that there is greater than a 50% chance of an onshore attack or attack planning within the next 12 months.
“The key factor influencing this threat level is a trend toward rising extremism. In Australia, this is particularly influenced by global conflicts and amplified by social media,” ARPC CEO Dr Christopher Wallace said.
“If an event were to occur, it would most likely be a low-sophistication or low-cost attack- potentially involving knives, vehicles, explosives, or firearms. The official advice is that such attacks are more likely to result in smaller-scale casualty events,” Dr Wallace said.
ARPC’s terrorism pool is mature and stable.
It is undergoing a review by the Commonwealth Treasury later this year, which will examine the coverage provided.
“The terrorism pool is fulfilling a market need and has been operating for more than 20 years. In fact, we’re seeing modest growth in participation from new insurers over time. There is also a significant volume of assets being transferred into the pool,” Dr Wallace said.
Market response
The terrorism pool operates across two markets.
First, there’s the primary insurance market, where ARPC provides cover to insurers – there are currently 231 participating companies.
Second, ARPC operates in the reinsurance market through a retrocession programme, where additional cover is purchased from the private market.
“At present, we’re working with 45 global reinsurers, and the cover we’ve secured amounts to A$2.15bn ($1.42bn), above a A$350m deductible.”
“So, there is strong support for the terrorism pool both from primary insurers participating in the scheme and from the global reinsurance market through the retrocession cover we place,” Dr Wallace said.
“While there are always challenges, the terrorism product is well-developed and functioning effectively for our customers. We will soon release results from our latest customer satisfaction survey, which shows an 84% satisfaction rating from insurers. In addition to the survey, other feedback mechanisms indicate that insurers, reinsurers and brokers view the terrorism pool as well-established and meeting a clear market need. The response has been overwhelmingly positive,” he said.
Responding to a declared terrorism incident
Dr Wallace explained that when a terrorism event occurs, the Assistant Treasurer – the responsible Minister – must first issue a formal declaration identifying the event as a declared terrorism incident.
“We work closely with the Commonwealth Treasury to support that process. Once the event is officially declared, the terrorism pool is activated and insurers can submit their claims to us for reimbursement of damages,” he said.
There are several layers of funding ARPC uses to pay claims:
- Insurer deductibles: Losses are first covered by the insurers themselves, with deductibles that can reach up to A$$12.5m for large insurers.
- ARPC net assets: After insurer deductibles, claims are paid from our own funds, up to an A$$350m reinsurance deductible.
- Retrocession reinsurance: We then tap into our reinsurance cover of A$$2.15bn purchased from 45 global reinsurers.
- Additional ARPC net assets: Any further claims are covered using remaining ARPC assets.
- Commonwealth guarantee: A further A$$10bn is available for any additional claims.
Retrocession programme
In January this year, ARPC finalised its retrocession of A$$2.15bn, plus ARPC’s net assets and the A$$10bn Commonwealth guarantee, providing approximately A$$14bn in pool capacity in response to a declared terrorism incident affecting commercial and other eligible property assets.
ARPC’s retrocession programme includes Australian and international reinsurer participants which together provide terrorism cover for Australian-based property assets.
“We have slightly reduced our reinsurance purchasing due to two main factors. First, we lowered the limit of reinsurance cover we buy and increased our deductible. This was done to ensure we’re achieving cost-effective risk transfer.”
“It’s a matter of value for money - we assess the cost of transferring risk to the private reinsurance market against our risk appetite, net asset position, and cash flow. Given that ARPC currently holds a strong net asset position, we’re comfortable purchasing a smaller limit and taking on a higher deductible,” he said.
Further to that, ARPC is also carefully assessing the plausible loss events in Australia and tailoring the reinsurance programme accordingly.
“Our decision to reduce the programme has attracted interest from global reinsurers, as it reflects both our financial strength and our evolving appetite for reinsurance,” he said.
ARPC also interacts globally with other terrorism reinsurance pools through an organisation called IFTRIP- the International Forum of Terrorism Risk Insurance Pools.
IFTRIP holds regular meetings with its delegates to share knowledge, evaluate best practices and understand global terrorism risk trends.
It’s a valuable forum, and ARPC actively supports this collaboration.
“Terrorism is a global issue, and the nature of threats is constantly evolving. Maintaining working relationships with our global terrorism pools is important so we can share knowledge, insights and best practice,” Dr Wallace said.
Transitioning from RISE to PACE
“Currently, our focus is on efficiency and effectiveness. We’ve just implemented our new PACE (Protecting Australians for Catastrophic Events) system, so we’re ensuring that all our systems and processes are running smoothly and delivering value to our customers,” Dr Wallace said.
Dr Wallace explained that the previous technology system for the terrorism pool was about 20 years old, in place since around 2003, so it needed modernising.
As such, ARPC developed a new system through the cyclone pool, which uses more current technology and language and eventually migrated the terrorism pool onto this more modern platform.
“We gave our customers a transition period of nine months to switch over, ensuring no disruption to their processes for transferring risk. I’m pleased to say all customers have successfully transitioned without any issues. The process went very smoothly.
In addition to being modern, the new system provides a more secure environment with enhanced security features, which is an added benefit for our customers,” he said.
“The new system allows us to automate more of the checking and verification processes, improving the accuracy of the information flowing through. The enhanced data analytics capabilities mean we can more easily analyse the portfolio, provide better insights and quickly identify any anomalies compared to the older system,” he added.
Outlook
Looking ahead, ARPC’s focus remains on maintaining a strong financial position, ensuring insurers continue to participate in the pool, and that the scheme stays responsive to national security developments.
Overall, the terrorism pool is supported by a strong retrocession program, a $10bn Commonwealth guarantee, and a robust risk modelling framework. This combined support provides certainty to insurers and reinsurers and ultimately helps the economic recovery of businesses impacted by terrorism incidents.
“Our premium income for the past financial year is approximately A$ $400m. The commercial market has been increasing over the past few years but is now showing signs of plateauing,” Dr Wallace said.
As global terrorism threats continue to evolve in complexity and reach, the Australian terrorism insurance pool remains focused on enhancing its preparedness and deepening engagement with reinsurers and insured stakeholders. A