Australian Reinsurance Pool Corporation (ARPC) has come a long way since its formation – and today stands as a valued partner to many insurers and reinsurers throughout Asia. We caught up with ARPC’s Dr Christopher Wallace and Mr Cameron Hick to find out how things are developing.
By Paul McNamara
Australian Reinsurance Pool Corporation (ARPC) was established to administer the Terrorism Reinsurance Pool following the 9/11 terrorist attacks in the US which resulted in the widespread withdrawal of terrorism insurance coverage cover for commercial property and infrastructure risks around the world.
ARPC has evolved and, since 2023, also administers the Cyclone Reinsurance Pool, although its focus on terrorism risk has never wavered. In the process, it has become an increasingly valuable ally for insurers and reinsurers throughout the Asian region.
We spoke to ARPC CEO Christopher Wallace and head of technical underwriting Cameron Hick to find out what’s new at the pool and what the future might hold.
Changing patterns of terrorism
According to Australian Security Intelligence Organisation, since January 2024 there have been eight attacks or disruptions in Australia that involved alleged terrorism or are being investigated as potential terror acts. Additionally, Australia’s national terrorism threat level is currently ‘probable’ – meaning there is a greater than 50% chance of an onshore attack or attack planning in the next 12 months.
It is evident the risk of terrorism has not diminished as the years have gone by – but perhaps it earns fewer headlines and so can recede from the public’s consciousness.
“Terrorism is still an ongoing risk in our landscape. We expect the security environment will continue to change in response to issues and events that arise in Australia and overseas,” said Dr Wallace.
“One of our challenges is that people can be dismissive of the risk sometimes. They have become conditioned to hearing about these sorts of things and become desensitised,” said Mr Hick.
In Australia, terrorism-related activity has manifested itself as individual or ‘lone-wolf’ attacks, rather than mass attacks.
“If you go back five or 10 years, concern focused on an orchestrated, religiously-motivated attack damaging swathes of high value property in urban centres,” said Mr Hick. “That changes the landscape of how the media presents terrorism activity, but also the risk for us as custodians of the terrorism pool. This means there is now a change in the risk profile of terrorism incidents. It’s not big, orchestrated attacks with detonated devices. It’s more around unsophisticated, localised attacks in the sense of the weaponry, harming individuals rather than destroying large amounts of commercial property.”
The terrorism pool remains a bedrock for (re)insurers in Australia as well as a partner for those in Asia – with a third of ARPC’s cedants based in the Asian region.
“The terrorism pool is a voluntary scheme in which insurers elect to participate,” said Dr Wallace. “Having said that, it’s mandatory for them to pay claims to their policyholders. The legislation outlines that if the minister declares a terrorism incident under the Terrorism and Cyclone Insurance Act, that overrides any terrorism exclusions in insurance policies in Australia and makes that a claimable loss for businesses. That covers the building assets, the contents, business interruption and any related public liability exposures,” he said.
Insurers can retain the risk themselves, buy reinsurance elsewhere or transfer it into the pool.
“If they transfer the risk into the pool, we charge a premium for the risk that’s ceded to us. The rates have been unchanged since 2016,” said Dr Wallace. “We provide full coverage on every risk ceded, so insurers don’t have any remaining exposure above their deductible. The pool affords a very substantial amount of cover.
“There is always a risk of terrorism, not only in Australia but all around the world. It’s a global risk and the nature of the threat is shifting. I would always say that the central business districts of our major cities are vulnerable to damage from terrorism incidents,” Dr Wallace said.
ARPC activities in Asia
ARPC is a big buyer of retrocession, particularly in Asia.
“We have a large retrocession programme supported by a number of Asian-based reinsurers, so we are placing risk back into the market as well,” said Dr Wallace. “We’ve got risk coming to us from leading insurers, and we’re placing a substantial amount of cover back into the reinsurance market through the retrocession programme.
“There’s lots of interaction across Asia and in particular, Singapore which is an important market for us. We have 224 cedants for terrorism of whom more than 50 are based in Asia. A lot of captive insurers in Australia are based in Singapore and they often cover large infrastructure. If you’re a large infrastructure owner, terrorism is something that’s on your risk radar,” he said.
Future focused
How is the terrorism pool likely to develop in the near future?
“The next statutory review of the scheme is in 2025,” said Dr Wallace. “The legislation requires a regular review of the scheme. From 2025, the government is changing the cycle to every five years from the previous triennial review. Treasury will conduct an industry consultation on how the scheme is performing and what changes might be needed.
“That helps sets the policy framework for the next five years. This underlines the fact that the pool has to be dynamic all the time. It has to adapt and evolve as the threat shifts and develops,” he said.
Part of the review will consider whether ARPC is still providing appropriate levels of cover and whether it should add additional perils or exposures to the pool.
“One area of limited coverage is cyber terrorism,” said Dr Wallace. “We’ve published several articles on the cyber terrorism ‘gap’. There’s no coverage for that because of an exclusion in our regulations and it’s been examined in the previous two triennial reviews.
“Through the statutory review our scheme stakeholders can engage with the government on whether or not that’s a risk that merits being covered under the terrorism scheme,” he said.
True value of the terrorism pool
The terrorism pool continues to grow with new local and international cedants joining each year.
“It’s voluntary to participate in the terrorism pool,” said Mr Hick. “The relevance of the optionality is the fact that cedants need to see value in it. They need to see that they’re getting good coverage, and they think that the price for that cover is appropriate and then they can sell to their clients,” said Mr Hick.
“Looking at the success of the pool to date, I would take it that insurers believe the coverage and premium deliver a value-for-money proposition.
“Between three and six new cedants sign up each year. More recently there have been a lot of captives. That’s something that’s been popular in this part of the world with the reduced availability and increased cost of insurance - many corporates are setting up their own captives to try and manage that risk.
“Then you get other insurers that are starting to write business in Australia from this part of the world including new start-ups in Asia. For insurers and reinsurers in Asia, the reasons to sign up to the pool are principally based on the fact that if there is an event, they will need to pay any claims from a declared terrorism incident in Australia. However, they have a choice. They can pay the claim themselves or they can cede the risk to the terrorism pool.
“The significant exposures at risk create a vulnerability to large losses so it’s an important area of risk transfer for the market; and we’re participating with both insurers and reinsurers across Asia,” he said.
Protecting Australians for Catastrophic Events
One of the most visible manifestations of the growing sophistication of ARPC is the new underwriting and claims system it introduced in October 2024.
Over the next six months, cedants will be transitioning from the current RISe system to a new online system called Protecting Australians for Catastrophic Events.
“This platform went live in October and cedants can now use the system to submit their premium returns. The RISe system will remain open and run in parallel until March 2025. Cedants will now have a consistent underwriting and claims system for both cyclone risk and terrorism risk,” said Mr Hick.
Terrorism risk insurance seminar
ARPC will hold its Terrorism Risk Insurance Seminar on 20 November 2024 at the Parliament of New South Wales building in Sydney, Australia.
“We hold the seminar annually, and it’s an opportunity to connect our stakeholders with government agencies that work in the terrorism area,” said Dr Wallace. “In the past, we’ve had speakers from security agencies, academics and government entities that have expertise in terrorism risk.
“Over the last three years, we’ve published academic papers on terrorism risk in partnership with the University of Queensland and also published our own research under our remit on cyber terrorism. We share this research with local and international stakeholders to provide our insights on current and emerging terrorism threats and mitigation measures from experts in terrorism and insurance,” he said. A