Australian Reinsurance Pool Corporation (ARPC) chief executive Dr Christopher Wallace has welcomed the performance audit report from Australian National Audit Office (ANAO) following its review of ARPC. The review concluded that ARPC is effective in managing the terrorism reinsurance scheme and that governance arrangements allow effective oversight and management of the scheme.
The ‘Performance Audit Report: Management of the Terrorism Reinsurance Scheme’ was tabled in parliament last month. While ANAO is the national auditor for the Australian government, ARPC is a public financial corporation within the Treasury portfolio which manages the Terrorism Reinsurance Scheme.
Commenting on the review, Dr Wallace said, “This finding reflects ARPC’s vision to be an effective provider of terrorism risk insurance that facilitates private participation, supports national resilience and reduces losses arising from catastrophic events caused by terrorism.”
The audit report also recommended that the Treasury reviews the options available to rebuild ARPC’s capital following an event leading to significant claims on the scheme. This recommendation was agreed by the Treasury and would minimise the need for premium increases.
In a previous interview with Asia Insurance Review, Dr Wallace said, “We have a three year review by the treasury department and they have just published their review. It recommended that the scheme continue. And so there’s no changes for us coming out of that review.
“When all these terrorism schemes were established in 2003, most people thought that it would be a short-term risk. But the reality is that the risk is persistent and unchanging and so now there’s a medium-term outlook on this risk.”
Major conclusions from the report are:
- ARPC is effective in managing the Terrorism Reinsurance Scheme
- ARPC has effective processes for reviewing and collecting premiums as well as assessing whether the scheme’s participation requirements are being met
- ARPC’s governance arrangements enable effective oversight and management of the scheme.
Established in 2003 under the Terrorism Insurance Act 2003 (TI Act), the Terrorism Reinsurance Scheme is designed to ensure that Australia has the necessary cover to mitigate the risk of significant loss and negative impact on the economy in the event of a terrorist attack impacting commercial property.
Through the scheme, insurers can reinsure the risk of terrorism losses by paying premiums to ARPC. Insurers are required to meet any claims initially in accordance with the terms and conditions of individual policies, with claims against the scheme met once an individual insurance company’s threshold has been reached.
The scheme is activated when the responsible minister, after consulting the attorney-general, announces that an event is a ‘declared terrorist incident’ under the TI Act. Since 2003, there has been one declared terrorist incident — the Lindt Café siege in December 2014. This resulted in claims being made by policy holders against their insurers, but no claims were paid out from the scheme as insurers were able to cover the costs from their individual insurance company thresholds.
As at 30 June 2018, the scheme had a large claims funding capacity of A$13.4bn ($9.38bn) which included an A$10bn Commonwealth guarantee. This was funded through A$169.6m in annual premiums paid by the commercial insurance sector.