Source: http://arpc.gov.au/annual-report/2010-11-annual-report/
Timestamp: 2018-05-24 11:42:28
Document Index: 96065497

Matched Legal Cases: ['art 1', 'art 2', 'art 3', 'art 4', 'art 5', 'art 6', 'art 7', 'art 8', 'art 9', 'art 10']

2010-11 Annual Report – Australian Reinsurance Pool Corporation
It gives me a great deal of pleasure to present ARPC’s 2010-11 annual report.
During the year ARPC continued to build on the solid financial, operational and organisational foundations it has established since its inception.
Mr David Matcham joined ARPC at the end of the first quarter as CEO and the Board is pleased with the way in which he has settled into the role.
ARPC’s 2010-11 operating result of $61.386 million reflects a 15.4 per cent increase over the previous year. The main influences in this growth were a strong lift in investment income coming from rising interest rates, the overall growth in the fund and more active investment management. ARPC’s investment income was $36.180 million. Retrocession commission income contributed $8.004 million towards the operating result.
The gross written premium for 2010-11 was $112.555 million, which represents a 7.3 per cent increase on last year. Net written premium of $24.534 was flat as ARPC increased spending on retrocession in line with an increase in cover. ARPC continues to transfer the operating result to the reserves, which have increased to $665.846 million as at 30 June 2011.
ARPC’s retrocession program was renewed on 31 December 2010. At renewal the capacity was increased to $2.75 billion (2009: $2.6 billion). The retrocession program continues to place the Government further from the risk of the Commonwealth guarantee being called on in the event of a declared terrorist incident and lessens the likelihood that a reduction percentage will be required. It is also aimed at encouraging the return of the commercial terrorism insurance market. The program is discussed in more detail in Chapter 2.
ARPC maintains its commitment to developing its loss estimation capabilities and will continue its collaboration with the Attorney-General’s Department and Geoscience Australia to further enhance ARPC’s capabilities in this area.
A high level of cooperation with the insurance industry has enabled ARPC to develop a good understanding of its aggregate exposures and this information has assisted in placing the retrocession program.
As in past years, my fellow Members and I have benefited from the professional support provided by all the staff at ARPC. ARPC continues to enjoy the confidence of both government and industry. I look forward to working with my fellow Members, the CEO and the staff of ARPC to ensure that the regard in which ARPC is held is maintained and developed further. We are committed to working towards achieving the Government’s aim of encouraging the return of the commercial terrorism insurance market.
ARPC has enjoyed a very successful year and I look forward to working with my fellow Members, the CEO and staff of ARPC to ensure 2011-12 is equally successful.
After nine months in the role I am happy to be able to frame my first report in a positive light.
As the rest of this report will show, ARPC has posted a strong result this year and has a growing reserve to meet claims.
After seven years of operation the organisation is very well positioned to respond effectively to a terrorism event.
I can attest to its strong governance and risk management systems. In the past year the risk management systems have been reviewed and upgraded with the assistance of expert advice.
While placement of terrorism risk with ARPC is optional, active promotion of the scheme has resulted in a very high level of participation and it would appear likely that the available risk has, in fact, been transferred to the pool, giving ARPC maximum size.
In 2011 ARPC implemented a more focused investment strategy and has embarked on a program to improve operational efficiency by capitalising on its core systems and the replacement of outsourcing arrangements.
ARPC continues to pursue a conservative strategy, buying retrocession cover to boost the size of the pool. We are continually told by international reinsurers that ARPC has accumulated the best suite of exposure data of any pool and this is supported by a growing appetite for our risk.
The quality of ARPC data is a testament to the cooperation and support of general insurers using the scheme.
In January 2011, ARPC appointed Laurence Daly to the role of Chief Financial Officer. He has brought with him a wealth of knowledge and experience from holding similar roles with large government agencies and from the private sector. Laurence’s first task was to steer ARPC through its 2010-11 financial statements audit. I am extremely pleased with the professionalism that he displayed and I look forward to further developing our close working relationship.
ARPC was pleased to assist the natural disaster insurance review with the secondment of one of its most experienced staff members. Michael Pennell, ARPC’s Client Services Manager, is currently seconded to the review secretariat until the end of September 2011.
I take this opportunity to put on record the achievements of my predecessor and the ARPC team who have welcomed me into the role. I also thank the Chair and Members for their support through my short induction.
The Members of the Australian Reinsurance Pool Corporation are pleased to present their annual report on the operations of the Corporation for the financial year ended 30 June 2011. This report is made in accordance with a resolution of the Members.
ANZIIF Australian and New Zealand Institute of Insurance and Finance
APRA Australia Prudential Regulation Authority
CIPMA Critical Infrastructure Protection Modelling and Analysis program
DTI Declared terrorist incident
OH&S Act Occupational Health and Safety Act 1991
RISe Reinsurance information system, ARPC’s client information management system
TI Act Terrorism Insurance Act 2003
Operating results $61.386 million
Gross written premiums $112.555 million
Investment income $36.180 million
Retrocession expense $84.185 million
Retrocession program Capacity increased to $2.75 billion
Loss estimation model ARPC’s loss estimation capabilities continue to be developed and refined
Internal audit No issues were identified which would have a material impact on ARPC’s processes.
Risk management ARPC undertook a major review of its risk management and realigned its risk register
with key processes to assist with the monitoring and reporting of risks to management
Employment agreements The nominal expiry date of ARPC’s enterprise agreement is 30 June 2012.
Cedant review program The program continues to meet its objective of ensuring cedants comply with the
Carbon footprint ARPC implements strategies designed to minimise waste and conserve energy.
The TI Act establishes a scheme for terrorism insurance coverage for commercial property and associated business interruption. The Act also establishes ARPC as a statutory authority to administer the scheme. Both the scheme and ARPC began operations on 1 July 2003.
The terrorism reinsurance scheme established by the TI Act is the Government’s response to the withdrawal of terrorism insurance cover following terrorist attacks around the world, particularly the events of 11 September 2001 in the United States of America. The scheme was introduced as a result of calls for the Government to intervene in an area of clear market failure and after discussions with key industry stakeholders – including insurance and reinsurance companies, banks, representatives of property owners, industry associations, insurance brokers and actuaries.
Before introducing the scheme, the Government considered the broad economic impacts which could result from a large pool of assets uninsured for terrorism risk. The potential impacts included delaying commencement of investment projects and altering portfolio management decisions as banks and commercial property trusts became concerned with the amount of property without adequate cover. The Government was concerned that the lack of comprehensive insurance cover for commercial property or infrastructure would lead to a reduction in financing and investment in the Australian property sector and that this would have wide economic impacts. These considerations led the Government to conclude that intervention was necessary.
The Act overrides terrorism exclusion clauses in eligible insurance contracts to the extent the losses excluded are eligible terrorism losses arising from a DTI. Insurers may reinsure this additional risk with ARPC.
ARPC may also employ those people it considers necessary for the performance of its functions and the exercise of its powers. As at 30 June 2011, ARPC had 20 employees (including the Chief Executive). Eighteen employees work full-time and two work part-time.
Sixteen employees are located in ARPC’s Canberra office and four employees are located in the Sydney office.
An organisational chart illustrating functional responsibilities is attached (Diagram 2).
Mission: To provide financial protection to the Australian economy in the event of a terrorist incident.
Vision: To be the world’s leading terrorism reinsurance pool.
to be in a position to advise of the likely costs to ARPC in the event of a DTI;
to keep the Government fully informed of its activities and alert the Government of any significant events related to ARPC’s core business in a timely manner;
to be in a position to pay claims efficiently in the event of a DTI;
secure improved efficiency in its operations and demonstrate value for money for the services it delivers;
he TI Act effectively deems terrorism risk cover into eligible insurance contracts by rendering terrorism exclusion clauses void. Insurance companies are able to reinsure the risk of claims for eligible terrorism losses through the ARPC. If they choose to do so, premiums are payable to ARPC.
More specifically, the Act operates by overriding terrorism exclusion clauses in eligible insurance contracts to the extent the losses excluded are eligible terrorism losses arising from a DTI. It makes these clauses ineffective for all classes of insurance included in the scheme, for those risks covered by the policyholder’s insurance. This requires insurers to meet eligible claims in accordance with the other terms and conditions of their policies.
The scheme was established as an interim measure and is intended to operate only while terrorism insurance cover is unavailable commercially on reasonable terms. At the time it was established, the Government also considered that uncertainty in the market made it impossible to stipulate the details or timing of its windup. As a result the Act requires that, at least once every three years after the start-up time, the Minister must prepare a report that reviews the need for the Act to continue in operation.
Reviews were completed in June 2006 and June 2009. The third review is due to report by 30 June 2012.
After consulting with stakeholders and considering international experience, the review concluded that there was still a need for the Act to continue in operation, subject to a further review in no more than three years. The review considered that, while the market for terrorism insurance had recovered somewhat since the scheme was introduced, insufficient terrorism insurance was available commercially on reasonable terms.
The review identified a need to encourage private sector involvement, to the greatest extent possible, to avoid crowding out the market and allow the Government to withdraw once terrorism insurance is commercially available on reasonable terms. It noted that it is important for ARPC to develop its exposure modelling capability to encourage greater private sector involvement in terrorism cover. It also concluded that high rise residential property and discretionary mutual funds should not be included in the scheme.
ARPC be required to continue charging premiums for reinsurance at the current rates, subject to further review in no more than three years;
once the pool reaches $300 million, ARPC have discretion to determine whether to use premiums to build the pool further, purchase reinsurance for the scheme or undertake a combination of the two;
insurer retentions under the scheme be increased in three increments (with effect, respectively, from 1 July 2007, 1 July 2008 and 1 July 2009); and
All recommendations were accepted by Government and all were implemented by ARPC. Reinsurance premiums are unchanged, a reinsurance program was introduced effective from 31 December 2008, insurer retentions were increased in line with the review recommendation and ARPC has altered the way in which premiums on bundled insurance policies are calculated.
The 2009 review considered the need for the Act to continue in the context of the international terrorism insurance market which had been characterised by improvements in the availability and affordability of terrorism insurance, subject to certain limitations. Despite these improvements, the review found that there was still insufficient capacity to meet demand for terrorism insurance at commercially affordable rates. While global capacity for reinsurance of terrorism risk had improved for national pooled arrangements, there was insufficient capacity at reasonable prices for individual risks.
The review recommended that the Act continue in operation, subject to further review in no more than three years, at which time further examination of the availability of commercial reinsurance on reasonable terms be undertaken. The review also supported maintaining, to the greatest extent possible, private sector provision of terrorism insurance
ARPC continue to collect premiums at current rates and investigate the purchase of further retrocession with funds from the pool, and that the relationship between premiums and the pool, and the impact of retrocession on the pool and the scheme more generally, be further considered in the context of the 2012 review;
industry retention levels remain at the levels that took effect on 1 July 2009, noting that the appropriateness of the current levels and structure of retentions should be re examined in the course of the 2012 review;
ARPC not be required to maintain a line of credit facility for the scheme, guaranteed by the Commonwealth, but should investigate purchasing additional retrocession capacity for the scheme;
ARPC examine the effects of extending the scheme to mixed use high rise buildings that are not predominantly for commercial use;
property that is wholly for residential use, including defence force and student accommodation involving commercial property financing, continue to be excluded from the scheme;
Mixed use high rise buildings
As recommended by the 2009 review, ARPC examined the effects of extending the scheme to mixed use high rise residential buildings which are not predominantly for commercial use.
ARPC was required to have regard to the need to maintain, to the greatest extent possible, private sector provision of terrorism insurance and to allow the re-emergence of commercial markets for terrorism risk cover.
ARPC consulted widely during the conduct of the enquiry, including industry bodies, insurers, reinsurers, actuaries and insurance law experts.
Finity Consulting Limited (Finity) was engaged to assist in estimating the additional risk to ARPC by including mixed use buildings alongside commercial risks already covered by ARPC.
While Finity’s actuarial analysis concluded that there were few mixed use high rise buildings in the CBDs of Sydney and Melbourne and their inclusion in the scheme would not have a material effect of ARPC’s exposure, ARPC is of the view that including mixed use high rise buildings in the scheme may restrict the introduction of an industry solution to the unavailability of terrorism insurance. This is unlikely to promote the Government’s objective of operating the scheme only while terrorism insurance cover is unavailable commercially on reasonable terms.
The review is available on the ARPC website (www.arpc.gov.au) under ‘The Act’.
the existing test of predominance be retained, thus continuing to exclude mixed use buildings in accordance with the existing protocol;
ARPC conduct an education campaign with its cedants to raise awareness of the protocol contained in the Insurance Council of Australia General Circular No G1573; and
the existing floor area test be retained.
All recommendations were accepted by Government.
As recommended by the 2009 review, Treasury engaged Geoscience Australia to update the allocation of individual postcodes to particular tiers to ensure that all postcodes are allocated to the correct tier.
As a result of the review by Geoscience Australia:
there were no changes to tier A postcodes; and
36 postcodes were reallocated from tier C to tier B.
The Minister responsible for ARPC, the Assistant Treasurer, The Hon Bill Shorten MP, gave a written direction to ARPC in relation to the re-allocation of postcodes. The direction was received on 28 June 2011 and was effective on 1 July 2011.
The effect of the Ministerial direction is discussed in Chapter 3.
ARPC communicated the outcome of the review to its cedants on 20 January 2011. All cedants moved quickly to implement changes to their processes and reporting to enable to submission of accurate information by the implementation date of 1 July 2011.
Eligible property is the following property that is located in Australia:
buildings (including fixtures) or other structures or works on, in or under land;
tangible property that is located in, or on, such property; and
Cover is also available for all Commonwealth and state and territory public authorities. Farms can also obtain cover if they hold insurance against business interruption.
The scheme covers eligible terrorism losses for any DTI covered by an eligible insurance contract where the insurer has a reinsurance agreement with ARPC. Eligible terrorism losses do not include a loss or liability arising from the hazardous properties of nuclear fuel, material or waste. They do, however, include loss or liability arising from incidents caused by biological and chemical agents.
The Regulations also exclude contracts of insurance which provide cover for, inter alia, workers’ compensation insurance, marine insurance, aviation insurance, motor vehicle insurance, life insurance, health insurance, private mortgage insurance, medical indemnity insurance and professional indemnity insurance.
Insurance companies which write eligible insurance contracts may reinsure with ARPC the risk of claims for eligible terrorism losses. Premium and investment income continue to build ARPC’s funds available to cover claims from a DTI. ARPC’s reserves are supplemented by a $2.75 billion retrocession program and a Commonwealth guarantee which is capped at $10 billion.
Diagram 1 illustrates the scheme structure.
Insurers which reinsure their terrorism risks with ARPC retain part of the risk of liability from a DTI. Retentions are calculated at 4 per cent of fire and industrial special risk premiums collected by the insurer, with a minimum retention of $100,000 and a maximum retention of $10 million.
The scheme effectively provides a layered model that operates from the ground up to spread the cost of any claims. The following illustrates the layers that are now in place.
Layer 7 Possible liability for some risk by policyholder, through the operation of the reduction
percentage or policy limits
Layer 6 Commonwealth guarantee
Layer 5 The balance of ARPC’s reserves
Layer 4 Retrocession program funded from premium income
Layer 3 ARPC’s deductible under its retrocession program
Layer 2 Retention of some risk by insurers
Layer 1 Policyholder’s liability for some risk through a possible excess or deductible
The premium charged for reinsurance is determined by Ministerial direction. The premiums have been set having regard to the level of risk. There are three broad tiers based on geographic location and identified by postcode. The table below demonstrates the breakdown of tiers and the geographical location to which they relate.
A Covering the CBD areas of Australian cities with a population of over one million
(Sydney, Melbourne, Brisbane, Perth and Adelaide)
B Covering the urban areas of all state capital cities and cities with a population
over 100,000 (Sydney, Melbourne, Brisbane, Perth, Adelaide, Gold Coast, Canberra,
Newcastle, Central Coast of New South Wales, Wollongong, Hobart, Geelong, Sunshine
Coast of Queensland, Townsville and Darwin)
C Postcodes not allocated to either tier A or BAny property not on the mainland of Australia or Tasmania, but within the coastal
sea of Australia
Reinsurance premiums are calculated as a percentage of the premium written by the reinsured that is attributable to the eligible insurance contract, in accordance with the following table. At the introduction of the scheme it was acknowledged that reinsurance premiums would be increased in the event of a significant claim on the scheme. This will enable ARPC to finance its liabilities and rebuild the pool.
Initial rate from
Commercial property A 12
Business interruption A 12
Public liability Nil
that comprises two or more distinct insurance covers that have been packaged or bundled together; and
that is offered on the basis that the insured must take out one or more of the number of insurance covers offered; and
in relation to which the premium attributable to each insurance cover the eligible insurance contract comprises is precisely quantifiable; and
some insurance covers, each of which, if provided individually, would be an eligible insurance contract; and
ARPC continues to develop and improve its online reporting system, RISe, which enables secure electronic submission by clients of annual aggregate reports, premium returns and claims. It also allows clients to access basic market share information. The electronic submission of data enhances ARPC’s ability to analyse that data.
During 2010-11 ARPC continued to improve the functionality and usability of RISe by:
updating the RISe interface to be consistent with ARPC’s website;
developing a context sensitive dashboard, which displays information relevant to each user (for example when submissions are due);
allowing for the addition of extra client contacts, including their position;
increased internal reporting capabilities; and
testing the database to establish the maximum number of users who can access the database at one time.
Diagram 2: ARPC organisational chart
Table 4: Financial highlights
$24,534,000 $24,293,000 $66,931,000 $99,944,000 $96,890,000
($609,000) ($603,000) ($599,000) ($452,000) ($412,000)
$8,004,000 $7,551,000 $3,446,000 – –
$36,180,000 $28,351,000 $30,416,000 $29,495,000 $18,803,000
($88,000) ($596,000) ($254,000) – $5,000
($6,635,000) ($6,800,000) ($5,395,000) ($4,353,000) ($3,973,000)
$61,386,000 $53,196,000 $94,545,000 $124,634,000 $111,313,000
$112,555,000 $104,885,000 $106,270,000 $100,659,000 $94,729,000
($84,186,000) ($80,098,000) ($37,440,000) – –
20.49% 26.89% 8.10% – –
4.62% 6.45% 5.19% 4.55% 4.53%
$14,660,000 $41,668,000 $37,467,000 $42,909,000 $91,508,000
$665,648,000 $576,334,000 $529,938,000 $433,000,000 $263,000,000
$665,846,000 $604,460,000 $551,189,000 $456,644,000 $332,010,000
ARPC’s financial performance for 2010-11 shows a continued strengthening of the reserve for claims and ARPC’s ongoing ability to manage costs within acceptable industry levels. In summary the year’s achievements are:
the gross written premium result of $112.555 million (2010: $104.885 million) is consistent with budget expectations for 2011;
ARPC renewed its retrocession program in December 2010. The increase in the cost of the program to $84.186 million (2010: $80.098 million) reflects the increase in cover from $2.60 billion to $2.75 billion;
while ARPC’s investments are managed in a conservative manner in compliance with the framework of the CAC Act, the active return achieved over the RBA official cash rate was 116 basis points (2010: 105 basis points);
the net expense ratio of 20.49 per cent (2010: 26.89 per cent) and gross expense ratio of 4.62 per cent (2010: 6.45 per cent) demonstrates the stability of costs in what is only the second full year experience of ARPC’s retrocession program and remains within budget expectations; and
ARPC’s number of active treaties is 248 (2010: 252).
ARPC’s active treaties decreased during 2010-11 to 248 (2010: 252). The percentage split between each of the categories as outlined in chart 1.
Australian clients represent 21 per cent of the total active treaties and yet continue to represent 87 per cent of the premium received. This has been a consistent outcome over the years of ARPC’s operations.
ARPC’s gross written premium result for 2010-11 is $112.555 million which is an increase of 7.31 per cent over the 2010 result of $104.885 million.
The movement in premiums written is a function of mainly two influences. The first is market activity with regard to asset developments and their associated business risks. Assets are continuously coming on line or being decommissioned. The second is the movement of premium rates in the ‘insurance cycle’. Due to fluid competitive market forces insurance premium rates tend to move up or down over a period known as a cycle.
Chart 2: Gross written premium
ARPC continually monitors and analyses clients’ quarterly premium returns to detect underlying trends. This information is then utilised when making informed judgements on budget and forecast expectations.
Chart 3: Gross written premium by cedant type
The following three tables provide information on the submitted premium by tier, state and business class.
Table 5: Gross written premium by tier
19% 19% 21% 21% 21% 24%
56% 57% 54% 56% 57% 55%
25% 24% 25% 23% 22% 21%
112,555 104,885 106,270 100,659 94,729 103,204
The premium split by tier highlights the trend over the last five years. The minor movements for 2010-11 are the 1 per cent reduction in tier B and the 1 per cent increase in tier C. Tier C has recorded a slight increase over the year to 25 per cent; however has been very stable for the last three years.
Table 6: Gross written premium by state
31% 31% 34% 34% 34% 36%
9% 9% 8% 8% 8% 8%
23% 22% 22% 23% 24% 23%
2% 2% 1% 2% 1% 1%
20% 21% 22% 20% 19% 18%
13% 13% 13% 12% 11% 11%
678,103 565,548 460,663 354,393 253,734 159,005
Table 6 reveals a very stable outcome across the states between 2010 and 2011. The growth experienced in Queensland and Western Australia from 2007 to 2010 appears to have plateaued and stabilised during 2011.
Table 7: Gross written premium by business class
80% 81% 78% 77% 77% 81%
9% 7% 10% 10% 10% 8%
2% 3% 3% 3% 3% 3%
3% 3% 3% 2% 2% 2%
1% 1% 1% 2% 2% 1%
The premium split by business class highlights an upward movement of 2 per cent for the classes of contract works and a downward movement of 1 per cent for fire, industrial special risk and business interruption and miscellaneous accident. All other classes have remained stable between years.
Retrocession placement
ARPC’s significant retrocession program was renewed at midnight on 31 December 2010. The placement was for $2.75 billion (2010: $2.60 billion) in terrorism exposure cover and almost 60 reinsurers participate in the program. All of the participants have a credit rating between AAA and A-. Detailed information regarding the retrocession placement is provided later in this chapter.
The retrocession expense is recognised using the 365th method with the expense incurred for the 12 months to 30 June 2011 totalling $84.185 million (2010: $80.098 million). The total retrocession commission income recognised by ARPC was $8.004 million (2010: $7.551 million).
Chart 4: Retrocession program counterparty credit rating 2011
ARPC manages its investments within a conservative framework. ARPC internally manages its cash deposits, while external fund managers have been appointed to manage the balance of the pool funds in medium term investments.
the pool capital is maintained intact;
the fund is returning a rate of return acceptable to the Members. The planned benchmark return for ARPC is the RBA official cash rate plus 0.5 per cent for internally managed funds; and the UBS 3 year to 5 year Australian Government Bond Index for funds managed by external fund managers.
The investment strategy complies with the CAC Act, with all investments being held in ARPC’s name.
ARPC’s investments are predominately held with financial institutions with an S&P credit rating of either AAA (2.00 per cent) or AA (90.00 per cent).
Chart 5: Investments by credit rating 2011
The following table provides a breakdown of ARPC’s cash and investment balances as at 30 June 2011.
Table 8: Cash and investment balances
$2,763,000 $35,120,000
$367,000,000 $288,975,000
$369,763,000 $324,095,000
$11,897,000 $6,548,000
$285,500,000 $267,000,000
$13,148,000 $20,359,000
$310,545,000 $293,907,000
$680,308,000 $618,002,000
The investment income return for 2010-11 is an excellent result given the low interest rate environment experienced for most of the financial year.
The following table provides a breakdown between internally and externally generated investment income as at 30 June 2011.
Table 9: Investment income
$1,319,000 $1,709,000
$18,119,000 $13,414,000
$19,438,000 $15,123,000
$377,000 $340,000
$15,212,000 $10,716,000
$1,153,000 $2,172,000
$16,742,000 $13,228,000
$36,180,000 $28,351,000
ARPC manages the interest rate yields through actively supervising the duration of its portfolio; internally by management and externally by the fund managers. As at 30 June 2011 ARPC held 7 per cent of its funds at call (floating rates), 83 per cent of funds are maturing in one year or less and 10 per cent of funds are maturing between one and five years.
The maturity spreads contributed to ARPC achieving an active return on the total portfolio for the 2010-11 year of 116 basis points (2009-10: 105 basis points) over the weighted average RBA official cash rate.
The weighted average interest rate for 2010-11 has increased to 5.82 per cent (2009-10: 5.39 per cent).
Chart 6: Funds held at 30 June 2011 by maturity
0-3 Months 56.2%
3-6 Months 17.8%
6-12 Months 16.8%
12-24 Months 6.6%
> 24 Months 0.4$
ARPC’s expense ratio for 2010-11 has reduced to 20.49 per cent (2010: 26.89 per cent) due to a decrease in underwriting expenses to $5.026 million (2010: $6.800 million).
ARPC’s gross expense ratio (which excludes the retrocession program) is 4.62 per cent (2010: 6.45 per cent).
The movements in ARPC’s expenses are mainly attributable to:
a decrease in all underwriting costs (which include direct and indirect underwriting costs) resulting from system process improvements implemented during the financial year 2010-11;
a decrease in the cost of cedant reviews, with the number of reviews undertaken remaining consistent with 2010;
a rescheduling of actuarial work relating to ARPC’s exposure modelling and investment analysis; and
a decrease in the cost of technical underwriting paid to external service providers.
Net premium income collected plus investment income have increased the pool since the inception of ARPC. The reserves now stand at $665.846 million and will continue to grow while there are no declared terrorist incidents.
This reserve is supplemented by the $2.75 billion retrocession program and the $10 billion Commonwealth guarantee.
Chart 7: Reserves
The reinsurance premiums collected by ARPC are a function of not only the underlying premiums charged by its cedants but also the economic development of assets. Any softening of those underlying premiums, along with the addition or decommissioning of assets, will directly affect ARPC’s premium income.
ARPC relies on its cedants to return the correct amount in reinsurance premiums through a self assessment process. To ensure the accurate calculation of premiums ARPC undertakes a cedant review program. This program addresses, inter alia, the identification of eligible insurance contracts for the purpose of ceding terrorism reinsurance premium to ARPC and premium calculation and remittance.
The 2006 review gave the ARPC the discretion, once the pool had reached $300 million, to determine whether to use premiums to build the pool further, purchase retrocession for the scheme or undertake a combination of the two. In 2008, ARPC engaged the services of Guy Carpenter Ltd to investigate the availability of retrocession coverage for the pool, and to determine capacity and pricing. ARPC found that global capacity at a reasonable price was starting to re-emerge, particularly for national, pooled arrangements. In December 2008, ARPC entered into a retrocession program with almost 60 reinsurers. The dual benefits of the program are to encourage the commercial insurance market to offer terrorism cover within Australia and to place the Government further from the risk of the Commonwealth guarantee being called on in the event of a DTI.
The retrocession program was renewed and increased in December 2009 and again in December 2010. The program is supported by the Australian, Lloyd’s, European, Bermudan, USA and Asian markets.
The $2.75 billion 2011 retrocession was placed in excess of $350 million in four layers to optimise market capacity and, therefore, participation in the program.
The revised structure of the scheme, as augmented by the retrocession coverage, is detailed in table 10.
Layer 7 Possible liability for some risk by policyholders through the operation of the reduction percentage or policy limits
Layer 6 Commonwealth guarantee for up to $10 billion
Layer 5 The balance of ARPC’s reserves: $315 million
Layer 4 Retrocession layer 1: $50 million excess of $350 million
Retrocession layer 2: $600 million excess of $400 million
Retrocession layer 3: $1.7 billion excess of $1 billion
Retrocession layer 4: $400 million excess of $2.7 billion
Layer 3 ARPC deductible: $350 million
Layer 2 Retention of some risk by insurers, up to a maximum industry retention per incident of $100 million as of 1 July 2009
Layer 1 Policyholders’ liability for some risk through a possible excess or deductible
The retrocession purchased mirrors the coverage mandated by the scheme; that is, it includes biological and chemical risk.
The wide spread of participants in the program reduces the risk to ARPC in the event of default by any one of the participants. Additionally, program participants must have an S&P rating of A- (or equivalent) or better. A downgrade clause in the retrocession contract gives ARPC the right to reassess its position if a retrocessionaire suffers a ratings downgrade. Guy Carpenter actively monitors the financial stability of ARPC’s retrocession counterparties and will advise ARPC of any concerns.
Together, these measures assist in protecting the financial stability of the retrocession program and, therefore, of the scheme overall.
ARPC’s purchase of retrocession has moved the Commonwealth further from the risk of losses under the scheme. With the retrocession in place, the Commonwealth will be exposed only if losses to the scheme reach $3.1 billion. ARPC’s retrocession placement also reduces the likelihood that a reduction percentage will be required in the event of a DTI.
The retrocession program has the benefit of encouraging the return of the commercial market for terrorism insurance for Australian risks. ARPC intends to continue to encourage this trend through the continued purchase of retrocession for the scheme, subject to market capacity and pricing. The amount of retrocession purchased may vary from year to year, which will subsequently impact on the point at which the Commonwealth, through the guarantee, is exposed to losses under the scheme.
A key expectation of Government is that ARPC should seek to be in a position to advise the responsible Minister of the likely costs to ARPC in the event of a DTI. This estimate will, in turn, inform the calculation of an appropriate reduction percentage.
When ARPC first entered the terrorism reinsurance market in July 2003, it did not have the ability to estimate losses from a potential terrorist attack. To address this issue ARPC implemented a strategy to enable it to develop the capability to estimate its possible exposures in the event of a DTI and provide credible advice to the Minister on an appropriate reduction percentage.
ARPC’s reinsurance agreement requires each cedant to provide an annual aggregate report. The report summarises the cedant’s aggregate exposure amounts at a postcode level by business class. The information is uploaded by cedants directly into ARPC’s RISe database. This exposure information enables ARPC to analyse the distribution of exposure risk across Australia.
The following charts provide an overview of ARPC’s total exposure for 2011 based on information provided by clients.
Chart 8: Aggregate exposure by tier as at 30 June 2011
Tier A 8% (2010: 12%)
Tier B 46% (2010: 50%)
Tier C 46% (2010: 38%)
There is a general correlation between the aggregate exposure by state and the premium collection by state. For example, Victoria cedes 23 per cent of premium and represents 19 per cent of aggregate exposure, while NSW cedes 31 per cent of premium and represents 30 per cent of aggregate exposure.
Chart 9: Aggregate exposure by state as at 30 June 2011
ACT 1% (2010: 1%)
SA 6% (2010: 7%)
NT 2% (2010: 2%)
NSW 30% (2010: 30%)
WA 18% (2010: 18%)
VIC 19% (2010: 19%)
TAS 2% (2010: 2%)
QLD 22% (2010: 22%)
In 2008, ARPC requested AGD to undertake a major review of ARPC’s loss estimation model. This review was undertaken through AGD’s CIPMA program 2, with Geoscience Australia as the technical provider.
In 2009 a contract was entered into between ARPC and AGD to undertake a three year development program to improve ARPC’s loss estimation capabilities. The development program is designed to enhance both the current model and develop a more rigorous underpinning modelling capacity. The program also includes modelling for losses arising from chemical and biological incidents. This work draws on a number of contributions from Australian Government agencies.
The CIPMA project is in its final year with Geoscience Australia expected to complete development of the blast and plume models by 30 June 2012. Work to date has focussed on engineering surveys and the development of blast, plume and ventilation schema and modelling frameworks. The three year program and progress is summarised below.
Year 1 (completed June 2010)
The development centred on enhancing ARPC’s current loss estimation model through a range of measures including further integration and categorisation of data, development of blast damage outcomes to loss translations and development of partial damage cost modules.
Year 2 (completed June 2011)
The development centred on building the tools required to make operational the current CIPMA approach to inform ARPC of probable losses after an event. In the blast area, development has continued in categorising buildings into a number of vulnerability types and mapping those vulnerabilities to the CBDs of Sydney, Brisbane and Adelaide. In the plume area work has involved mapping the building ventilation schema developed in year 1 to the Sydney, Brisbane and Adelaide CBD data. Work has also progressed in plume model preparation and the definition of scenarios to be run in year 3.
Year 3 (in progress 2011-2012)
Development will centre on completing the framework for integrating research work by the Bureau of Meteorology and the Defence Science and Technology Organisation to model the spread of a chemical or biological plume following a CBD release. A key focus in year 3 will centre on making the CIPMA loss model capability operational for blast as well as chemical and biological incidents. The work will include provisional resources for the establishment of a dedicated capability to be hosted by AGD.
Regional loss estimation
ARPC has also engaged AGD to undertake additional work to provide it and reinsurers with a better understanding of risks outside the CBD areas. This work comprises a preliminary threat assessment and economic impact assessment to gain an understanding of the potential losses from possible terrorist threats in regional areas.
ARPC will continue to communicate its offer of reinsurance to the market by giving presentations to local bodies such as: the Insurance Council of Australia, Reinsurance Discussion Group, ANZIIF and at other forums it considers appropriate. Contact with foreign insurers and captives have been made by way of industry advertisements and presentations given to overseas markets and brokers.
There have been no developments since the end of the 2010-11 financial year which have significantly affected or may significantly affect:
ARPC has a part-time non-executive Chair and six other part-time non-executive Members. All Members are appointed by the Minister.
Mr Gersh was appointed to the position of part-time Chair on 1 July 2003. His current term expires on 30 June 2012.
Mr Gersh has extensive experience in law and commerce, and was a senior partner with Arnold Bloch Leibler from 1982 until his retirement from that position in 1999. He is the Executive Chairman of Gersh Investment Partners Limited and currently has a range of directorships, including the Payments System Board of the Reserve Bank of Australia.
Ms Azarias was appointed to the position of part-time Member on 22 April 2008. Her current term expires on 24 April 2014.
Ms Azarias is an economist with expertise in infrastructure planning and financing, financial management and corporate governance. Recent positions held by Ms Azarias include Regional General Manager, Business and Organisation Performance at the National Australia Bank and Director, Internal Audit Division, United Nations. She has also held senior positions in the NSW Premier’s Department and NSW Department of Transport. Ms Azarias is a non-executive director on the SBS Board, Co-Chair of the Risk and Audit Committee of the NSW Director of Public Prosecutions, Deputy Chair of the NSW Community Relations Commission and a member of the Council of the University of Technology, Sydney.
Ms Bowe was appointed to the position of part-time Member on 1 July 2009. Her current term expires on 30 June 2012.
Ms Bowe has held senior positions in the financial services sector in both insurance and banking. She has a strong background in general management and has held a number of senior roles in Suncorp-Metway, the Commonwealth Bank and Rio Tinto. Ms Bowe currently combines her role as a strategy consultant with a portfolio of Board appointments. Ms Bowe holds an MBA from the Melbourne Business School.
Mr Karp was appointed to the position of part-time Member on 29 August 2008. His current term expires on 28 February 2012.
Mr Karp is an actuary and, in June 2008, retired as the Executive General Manager, Supervisory Support, at APRA. Prior to joining APRA, Mr Karp was with the Insurance and Superannuation Commission and was heavily involved in establishing APRA and its initial infrastructure. From 1999 to 2007 he was active as a senior member of the International Association of Insurance supervisors. Mr Karp is a member of the Institute of Actuaries of Australia’s Professional Standards Committee and represents the Institute at the International Actuarial Association.
Ms Micalizzi was appointed to the position of part-time Member on 1 July 2003. Her current term expires on 30 June 2012.
Ms Micalizzi is a chartered accountant with over 20 years experience, a company director and a consultant in both the public and private sector. She is a former partner of PricewaterhouseCoopers (until 2000) having been admitted as a partner of the predecessor firm in 1986. Ms Micalizzi is a member of the Queensland Treasury Corporation, Public Service Commission and the Corporations and Markets Advisory Committee. She sits on a number of boards, including the Independent Investment Committee of Queensland Development Fund and SunSuper Audit Committee. She has also recently been appointed as a governor of WWF Australia.
Mr Murphy was appointed to the position of part-time Member on 1 July 2003. His current term expires on 24 April 2014.
Mr Murphy is the Executive Director, Markets Group in the Treasury. He has extensive experience with the Commonwealth Government. He was awarded a Public Service Medal in 2011.
Mr Vogt was appointed to the position of part time Member on 29 August 2005. His current term expires on 28 February 2012.
Mr Vogt has extensive experience in the financial services and insurance industries. He is the inaugural CEO of the Industry Leaders Fund, a private sector fully funded body which provides up to $50,000 for traineeships for potential leaders of industry. He was previously Chief Executive Officer of the Motor Accident Commission in South Australia, a statutory authority which has responsibility for the monopoly compulsory third party insurance scheme in that State. Mr Vogt is a director on a number of boards and is a member of CPA Australia, an Associate of the ANZIIF, a Fellow of the Australian Institute of Company Directors, a Fellow of Chartered Secretaries Australia and a Senior Fellow of the Financial Services Institute of Australasia.
Mr Vogt is a member of the Audit and Compliance Committee.
Mr David Matcham was appointed to the position of Chief Executive of ARPC on 5 October 2010.
Mr Matcham joined ARPC with over 30 years of experience in the insurance industry. He began his employment at Lumley in 1977 and worked in various positions across all business lines. He was appointed Managing Director in 1999 and Chief Executive Officer in 2003. He held that position until his retirement in 2009. Mr Matcham is currently the Chairman of the CREATE Foundation, the peak body which advocates for children in care, and is a Director of Hollard Insurance. He previously held a position on the Board of the Insurance Council of Australia.
There were six meetings of Members held during 2010-11. The table below sets out the number of meetings attended by each Member.
Table 11: Number of meetings attended by each Member of the Board
Ms Patricia Azarias 6 6
Ms Jan Bowe 6 6
Mr Tom Karp 6 6
Mr Geoffrey Vogt 6 6
ARPC is committed to following corporate governance best practice. It monitors developments in corporate governance from a range of sources, including: APRA, ASIC, ASX and ANAO. While ARPC is not regulated by APRA, it considers that APRA’s standards for general insurers represent better practice and benchmarks itself against those standards.
ARPC uses the ASX’s corporate governance principles as benchmarks against which to evaluate its corporate governance practices.
The board charter and delegations document were reviewed by Members in 2010-11.
The committee has formal terms of reference, which include a requirement for there to be at least three committee members.
ARPC’s annual report is given to the responsible Minister and tabled in both Houses of Parliament in accordance with the provisions of the CAC Act.
ARPC does not have shareholders. However, it maintains good working relationships with its stakeholders (clients, industry associations and government).
ARPC has established two committees, the Audit and Compliance Committee and the Risk Committee. Both committees have terms of reference which were approved and adopted by Members. The terms of reference govern the powers, composition, duties and responsibilities of each committee and the conduct of committee meetings. The terms of reference of each committee are reviewed annually.
comply with ARPC’s statutory obligations; and
In fulfilling its responsibilities the Committee reviewed and approved the internal audit plan, reviewed all reports received from the internal auditor, monitored the implementation of internal audit recommendations, reviewed and accepted the terms of engagement of ANAO and reviewed the financial statements to assist the Board in making the statements required by the FMOs.
Ms Marian Micalizzi (Chair);
Ms Patricia Azarias;
Mr James Murphy; and
Mr Geoffrey Vogt.
There were four meetings of the committee held during 2010-11. The table below sets out the number of meetings attended by each committee member.
Table 12: Number of meetings attended by each member of the Audit and Compliance Committee
Ms Patricia Azarias 4 4
Mr Geoffrey Vogt 4 4
There were two meetings of the committee held during 2010-11. The table below sets out the number of meetings attended by each committee member.
Table 13: Number of meetings attended by each member of the Risk Committee
Ms Jan Bowe 2 2
Mr Tom Karp 2 2
Mr Geoffrey Vogt 2 2
ARPC is committed to promoting an ethical working environment for all staff. Its commitment can be demonstrated by the formal documentation of its values and a code of conduct to which staff are required to adhere. ARPC’s values and code of conduct are reinforced at each staff planning day.
All employees must abide by ARPC’s code of conduct. The consequences of breaching the code are documented and promulgated to staff.
ARPC’s people must:
behave honestly and with integrity in the course of ARPC employment; and
act with care and diligence in the course of ARPC employment;
when acting in the course of ARPC employment, comply with all applicable Australian laws;
comply with any lawful and reasonable direction given by someone in ARPC who has authority to give the direction;
disclose, and take reasonable steps to avoid, any conflict of interest (real or apparent) in connection with ARPC employment;
use Commonwealth and ARPC resources in a proper manner; and
when acting in the course of ARPC employment, treat everyone with respect and courtesy, and without harassment; and
work collaboratively with their own team members and across teams;
jointly strive to achieve ARPC’s goals; and
maintain appropriate confidentiality of ARPC’s information;
deal with clients without bias;
at all times behave in a way that upholds ARPC’s values and the integrity and good reputation of ARPC;
actively seek to update their level of competence and knowledge; and
Ernst & Young provide internal audit services to ARPC under a three year contract from 1 July 2009 to 30 June 2012. The Audit and Compliance Committee review and approve the annual internal audit plan proposed by Ernst & Young and management.
The following reviews were conducted in 2010-11:
mapping key processes, controls and the assurance framework;
a review of the retrocession program;
a review of business continuity management;
a review of administrative functions;
a review of procurement and contract management;
a review of internal investment management;
a review of Littlewoods’ financial control structure; and
a follow up review of Littlewoods’ IT control structure.
The Audit and Compliance Committee actively reviews recommendations made in internal audit reports and monitors their implementation. No issues were identified during any of the reviews which would have a material impact on ARPC’s processes.
The Audit and Compliance Committee has approved the following reviews in 2011-12:
a refresh of the assurance mapping work undertaken in 2010-11 to align the assurance map with ARPC’s updated risk register;
a review of the accounts receivable processes;
an examination of the cedant review program;
a fraud risk assessment and a review of the fraud control plan; and
a compliance review of the RISe software.
During 2010-11 ARPC employed a consultant to conduct a major review of the risk management framework. The review’s terms of reference were wide ranging and included consideration of:
ARPC’s risk tolerance and risk appetite;
risk management practice in the ARPC; and
a comparison with better practice and implementation of the risk management standard AS/NZS/ISO 31000:2009.
The review included several workshops in which ARPC’s risks were identified and analysed. This work formed the basis of a refresh of ARPC’s risk register.
In conjunction with this major review, ARPC took the opportunity to realign the risk register with key processes and develop an improved format for monitoring risks and reporting to management and the Board.
In 2010-11 ARPC continued to refine its approach to business continuity in accordance with better practice and internal policy guidelines. As part of ARPC’s risk-based approach to business continuity, a pandemic plan was developed to ensure ARPC’s resilience and business continuity in the event of a pandemic. Component testing of the BCP was undertaken in relation to key systems including the loss estimation model and RISe.
A review of business continuity was undertaken as part of the 2010-11 internal audit plan. The review confirmed the appropriateness of ARPC’s BCP and the action taken to improve its responsiveness and capability. The review compared the BCP with the new Australian Business Continuity Standard AS/NZS 5050:2010. The Ernst & Young staff who conducted the review presented a training and awareness session for all staff.
ARPC has a current fraud control plan which was developed with assistance from Ernst & Young, and in accordance with the Commonwealth Fraud Control Guidelines (2002). The plan includes policies, procedures and guidelines to advise staff of the steps to be taken if a fraud is suspected or a breach of ARPC’s code of conduct is alleged. The policies include whistleblower protections.
The plan was originally developed in 2005-06 and biennial reviews have been conducted in 2007 and 2009. The current fraud control plan is effective for the period 2009-11.
A fraud risk assessment will be conducted during 2011-12. That assessment will form the basis of the development of an updated fraud control plan. The 2011 fraud control plan will comply with the Commonwealth Fraud Control Guidelines (2011) and the Better Practice Guide Fraud Control in Australia Government Entities published by ANAO in March 2011.
Ethics and fraud awareness training for staff was conducted in September 2011.
ARPC’s management is satisfied that ARPC has appropriate fraud control, prevention, detection, investigation and reporting standards in place.
accurately identify eligible insurance contracts;
accurately calculate premium;
ensure that the correct premium is remitted to ARPC;
submit accurate aggregate exposure information; and
ARPC is in a position to advise clients on many issues to enable them to comply with the terms of the reinsurance agreement;
it contributes greatly to maintaining good relationships with clients; and
it enables clients to provide feedback on various issues which, in turn, will form part of ARPC’s input into the triennial review process.
The Minister responsible for ARPC is the Assistant Treasurer and Minister for Financial Services and Superannuation, the Hon Bill Shorten MP. The Minister appoints ARPC’s Members.
The written direction in respect of premiums given by the Minister during 2006-07, which was effective from 1 July 2007, was in force during 2010-11. During the year ended 30 June 2011 the Minister issued a new direction to ARPC in respect of premiums. The direction was effective from 1 July 2011.
The effect of this direction is to set the premium rates to be charged by ARPC under its reinsurance contracts. The rates are set as a percentage of the premium written by the reinsured that is attributable to the eligible insurance contract according to the postcode tier in which the eligible property is situated. The direction also instructs ARPC to charge reinsurance premiums on only those sections of a bundled insurance policy that exclude terrorism risks.
The new direction effective from 1 July 2011 has the same effect as the direction in force during 2010-11 in respect of premium, tier rates and bundled insurance policies. The only change to the effect of the direction is to move 36 postcodes from tier C to tier B.
The effect of this direction is that for all DTIs which occur during the same financial year, the risk to be retained by a reinsured is an amount equal to the lesser of the default figure, 4 per cent of the gross fire/industrial special risks premium revenue or the minimum retention. If all retentions in respect of a single DTI would otherwise exceed the maximum industry retention, the retentions will be reduced proportionately. The effect of this reduction is to limit the retention for all reinsureds in relation to a single DTI to the maximum industry retention.
The default figure for the period 1 July 2010 to 30 June 2011 was $10 million.
The maximum industry retention for the period 1 July 2010 to 30 June 2011 was $100 million.
The communication strategy aims to be proactive and strategic in its approach in managing who, why, how, what and when we communicate.
ensure ARPC conveys a clear and consistent message to all stakeholders;
improve industry awareness of the terrorism insurance scheme and what ARPC can offer the insurance industry; and
educate current clients of their obligations under their contracts and ensure they understand how ARPC’s systems work.
communicate openly, honestly and consistently with our stakeholders, and with each other;
communication will be produced in plain English and written for its intended audience. It will be unambiguous, timely and of an appropriate quality; and
During 2010-11 the following external communications have been used to engage stakeholders:
media releases to keep stakeholders up to date with developments;
a quarterly external newsletter aimed at cedants and business partners to keep them informed of ARPC movements, submissions and industry news; and
inclusion of an article and advertisement in the Asia Insurance Review.
ARPC maintains a high level of communication amongst staff and encourages an inclusive workplace. Management meetings are held regularly along with teleconferences between Canberra and Sydney staff. Staff are consulted on projects which are being undertaken in other areas, to encourage staff involvement and the generation of new ideas.
‘Lunch and learn’ is an information session held every two months where a particular ARPC related subject is covered. Staff from both the Sydney and Canberra offices are involved in the sessions and they have the opportunity to learn about important projects and ask questions. This has proven to be an effective way to discuss projects and engage other teams within ARPC.
‘We’ve got it covered’ is a monthly internal newsletter which communicates information relevant to ARPC, its activities in the workplace and upcoming training events.
During 2010-11 the communications area also:
published the information publication scheme documents on the website (a requirement of the Freedom of Information Act 1982);
produced ARPC merchandise for marketing purposes;
compiled a communication plan for the business continuity plan; and
continued to brand stationary, documents and reports in accordance with ARPC’s corporate style guide.
ARPC’s human resources area seeks to attract and retain quality staff. We endeavour to providing staff with a workplace culture that promotes performance and commitment.
ARPC’s payroll and OH&S functions are managed by Treasury through a service level agreement. ARPC actively manages and monitors the service level agreement.
As at 30 June 2011, ARPC had 18 full-time permanent employees and two part-time permanent employees. One employee is on maternity leave, one is on secondment to the Office of Financial Management and one is on secondment to the Natural Disaster Insurance Review Secretariat. ARPC’s budget factors in two additional employees to be recruited in early 2012; one for Corporate Governance and the other for Corporate Services.
Chart 10: Breakdown of staff classifications
Admin staff 50%
Executive level 25%
SES 20%
ARPC’s performance management system is a tool to assist the organisation to improve its capabilities. It provides the basis for discussion and feedback between employees and their managers. It also provides a fair and equitable way to recognise and reward staff for their performance and achievements, provides a plan to meet the learning and development needs of staff and assists in the management of cases where performance expectations are not being met.
There is one formal appraisal each year and an informal discussion between formal appraisals. The informal discussion is to consider how the employee is performing against the agreed goals, to identify any impediments to performance and means to overcome those impediments.
In addition to the formal and informal appraisals, managers assist employees by providing regular feedback and coaching and by identifying and encouraging appropriate career development opportunities.
ARPC recognises the value of investing in employees and career development to maximise the performance of ARPC and its attractiveness as an employer. Staff are required to develop a learning and development plan as part of the performance system management each year. Employees agree on their plan with their manager, who encourages them to engage in continuous learning and to periodically assess their development.
ARPC supports and is committed to a range of suitable training and development opportunities for all employees covering relevant technical skills training, management courses and leadership development.
ARPC supports employee attendance at relevant industry conferences, seminars and external courses. These programs achieved high participation rates and consistently positive feedback from participants.
During 2010-11, employees attended development programs such as:
insurance accounting course;
introductory course to reinsurance;
foundations of human resources;
communication management; and
ARPC’s employees have access to the training and development programs offered by Treasury and actively participate in those programs.
ARPC has an agreement with ANZIIF to provide employees with an online learning facility: InSite. InSite has been developed specifically to address the ongoing education and training requirements in the insurance and financial services reform environment. ARPC encourages all employees to use the InSite learning facility to further develop their knowledge in the insurance and finance industry.
Studies assistance is an integral part of ARPC’s HR strategy, as it responds to the employee development needs identified through such means as corporate planning, performance management and career development processes. ARPC provides support, in the form of leave and financial assistance, to employees undertaking part-time courses of study that will enhance their contribution to ARPC. ARPC has supported employees undertaking education programs such as an MBA, CPA and leadership courses.
The terms and conditions of employment for non-SES staff are governed by ARPC’s enterprise agreement 2010-12. The agreement came into operation on 1 March 2010 and nominally expires on 30 June 2012.
ARPC’s enterprise agreement contains provisions to enhance the working conditions of ARPC’s employees covering areas including consultation, representation and dispute resolution; salary and classification structure; allowances; parental leave; and measures to assist staff to balance the demands of work and family life.
The terms and conditions for SES equivalent staff are governed by individual employment agreements. Employment agreements provide ongoing employment for all ARPC employees, other than the CEO who is employed on a fixed term contract.
In 2010-11, ARPC maintained its commitment to ensuring the health and safety of all its employees.
A health and safety committee has been established by Treasury to address matters such as OH&S issues and policies, employee wellbeing, health and safety performance reporting, accommodation issues and accident and incident reports. The committee consists of representatives from each Treasury workplace group and Treasury agencies covered by service level agreements. It also includes members of the Treasury workplace committee and key corporate services staff. ARPC has a representative on the committee, as part of our service level agreement with Treasury.
Treasury’s OH&S policy is designed to foster and maintain a safe and healthy working environment in accordance with the OH&S Act.
In recognising the importance of providing and maintaining healthy and safe workplaces, ARPC’s health and safety management arrangements are used in conjunction with the OH&S Act, regulations and approved codes of practice and are integrated into the daily management of the office.
No serious personal injuries, prescribed incapacities or dangerous occurrences were reported during 2010-11 which resulted in a compensation claim. ARPC’s policy is to thoroughly investigate all reported incidents and to take action to ensure employee health and safety is not compromised.
Workplace inspections are also conducted four times a year to minimise the risk of injuries to staff.
During 2010-11, no directions were given under section 45 and no notices were given under sections 29, 46 or 47 of the OH&S Act.
Commitment to OH&S
ARPC is committed to providing a safe and healthy workplace for all employees and visitors. To this end it has established and monitors health and safety management arrangements including:
electing/selecting a health and safety representative;
providing training for the representative;
outlining the roles and responsibilities in relation to OH&S; and
implementing mechanisms to ensure the application of OH&S related matters.
developed and reviewed internal policies and procedures and addressed any new or emerging hazards;
offered influenza vaccinations to all employees;
placed posters received from Treasury on reducing the spread of coughs and colds in the workplace;
promoted the use of the employee assistance program; and
attended training sessions relating to bullying and harassment within the workplace.
These procedures have been developed in consultation with staff and provide a framework and support network designed to foster a healthy and safe workplace. They reinforce the responsibilities that ARPC has in actively promoting these strategies for the wellbeing of all employees, contractors and visitors to our workplaces.
ARPC has an obligation under the OH&S Act to provide a first aid service to staff. The Canberra office has one senior first aid officer and two qualified first aid officers and the Sydney office has one qualified first aid officer. All employees will retain their qualifications by undertaking refresher courses each year.
ARPC’s commitment to workplace diversity is demonstrated by its implementation of the strategies and initiatives of Treasury’s workplace diversity program. The program seeks to foster an environment that attracts, develops, values and retains people from varying cultural backgrounds as well as those of different ages, genders, skills, experiences, perspectives and backgrounds.
ARPC has a number of family friendly and work/life balance practices, including flexible working arrangements (such as part-time and work from home arrangements) and leave.
During the year, ARPC maintained and paid premiums for insurance covering Members and certain employees. The premium paid for the insurance, which includes liability for legal costs, was $60,670.86 (2010: $60,715.28).
During the year ended 30 June 2011, there were no judicial decisions or reviews by outside bodies (other than ANAO’s report on the financial statements) affecting ARPC of which it is aware.
ARPC implements strategies designed to minimise waste, conserve energy and minimise its environmental footprint by striving to implement the following:
shutting down computers outside of work hours;
utilising double sided printing to reduce the volume of paper used;
turning off non-essential lights and computers; and
recycling of paper, cardboard, printer cartridges, plastics, glass and fluorescent tubes.
ARPC’s new premises in Sydney have a four star energy rating and the Canberra office has a 4.5 star energy rating. Some of the systems used in our buildings to decrease our carbon footprint are:
grey water harvesting and re-use system;
high efficiency magnetic chillers. The chillers used to generate the building cooling are an innovate design that has magnetic bearings rather than the conventional setup. This eliminates friction resulting in higher efficiency chillers;
air-conditioning system which uses high efficiency pump and fan motors;
high performance double glazing;
low energy LED lighting; and
high efficiency hydraulic fixtures. Water conservation within the building has been optimised via the use of highly efficient taps, shower heads and toilets.
There were no freedom of information requests during the year ended 30 June 2011. The following statements are made as required by section 8 of the Freedom of Information Act 1982.
ARPC’s functions and powers are detailed in Chapter 1 along with an organisation chart.
ARPC produces a number of publications aimed at informing clients and others of ARPC and its functions. Key publications in 2010-11 included:
2009-10 annual report;
ARPC … Covering Australian business against terrorist incidents – a brochure explaining the scheme;
Under the Cover – a quarterly electronic newsletter distributed to clients and other stakeholders; and
Mixed-use high rise building report.
A request for access to documents or other matters relating to freedom of information should be directed to:
Tel: +61 2 6279 2100
Fax: +61 2 6279 2111
In our opinion, the attached financial statements for the year ended 30 June 2011 are based on properly maintained financial records and give a true and fair view of the matters required by the Finance Minister’s Orders made under the Commonwealth Authorities and Companies Act 1997 as amended.
– $108,720,000 $105,391,000
– ($84,186,000) ($80,098,000)
5(a) $24,534,000 $25,293,000
6(b) ($609,000) ($603,000)
– $23,925,000 $24,690,000
5(b) $8,004,000 $7,551,000
5(c) $36,180,000 $28,351,000
5(d) ($88,000) ($596,000)
6(b) ($6,635,000) ($6,800,000)
– $61,386,000 $53,196,000
7 $14,660,000 $41,668,000
8 $38,961,000 $38,002,000
9 $665,648,000 $576,334,000
10(a) $42,664,000 $43,249,000
11 $327,000 $39,000
$762,260,000 $699,292,000
12 $1,094,000 $901,000
12 $1,769,000 $799,000
$2,863,000 $1,700,000
$765,123,000 $700,992,000
13(a) $56,086,000 $52,411,000
14(a) $42,524,000 $43,274,000
15 $45,000 $45,000
16(a) $201,000 $298,000
$98,856,000 $96,028,000
15 $203,000 $247,000
16(a) $218,000 $257,000
$421,000 $504,000
$99,277,000 $96,532,000
$665,846,000 $604,460,000
Statement of changes in equity as at 30 June 2011
Opening balance at 1 July 2010
– – – 75 604,460 551,189 604,460 551,264
61,386 53,196 – – – – 61,386 53,196
– (75) – 75 – –
1(m) (61,386) (53,196) – – – – (61,386) (53,196)
– – – – 61,386 53,196 61,386 53,196
Closing balance at 30 June 2010
– – – – 665,846 604,460 665,846 604,460
Cash flow statement for the year ended 30 June 2011
120,470 114,680
8,803 8,311
36,777 26,546
166,159 149,537
87,278 83,205
8,003 7,708
7,035 6,538
102,316 97,451
17 63,843 52,086
1,167 597
89,314 46,396
90,851 47,885
(90,851) (47,885)
(27,008) 4,201
41,668 37,467
7 14,660 41,668
Service level agreements *
708 1,095
Software license agreements **
Software development agreement ***
787 1,636
Operating leases ****
4,280 4,193
5,827 7,039
5,302 6,399
development agreement commitments
3,195 2,550
359 1,063
Outstanding contractual payments for software license agreement.
Notes to and forming part of the financial statements for the year ended 30 June 2011
Finance Minister’s Orders (FMOs) for reporting periods ending on or after 1 July 2010; and
In preparing the financial statements, ARPC has applied the exemption provided by the Minister for Finance and Deregulation in Division 17.14 of the FMOs, allowing ARPC to present a financial report in a format consistent with that used in the general insurance industry in place of the prescribed format as outlined in Annexure A to Schedule 1 of the Finance Minister’s Orders.
Unless alternative treatment is specifically required by an accounting standard, revenues and expenses are recognised in the Statement of Comprehensive Income when and only when the flow, consumption or loss of economic benefits has occurred and can be reliably measured.
Premium revenue comprises amounts charged to insurers excluding taxes collected on behalf of third parties. The earned portion of premiums received and receivable, including unclosed business, is recognised as revenue in the Statement of Comprehensive Income. Premiums are recognised as earned based on time from the date of attachment of risk. Premiums not received at reporting date and for the quarter ended 30 June 2011 are recognised as premiums receivable in the Balance Sheet.
There is no deficiency noted or recorded in these financial statements (2010: $0). Accordingly, there has been no write down in ARPC’s deferred acquisition costs.
The financial statements have not included a provision for outstanding claims (2010: $0). ARPC has not engaged an actuarial assessment to independently assess this balance as:
Pursuant to section 38(3)(b) of the TI Act, the Minister may give written direction to require ARPC to make payments to the Commonwealth in the nature of dividends. No direction has been received for these financial statements (2010: $0).
The liability for superannuation recognised as at 30 June 2011 represents outstanding contributions for the final fortnight of the year.
No financial assets or liabilities were derecognised in these financial statements (2010: $0).
There are no contingent liabilities or assets noted in these financial statements (2010: $0).
Plant and equipment 3 to 7 years 3 to 7 years
There has been no impairment adjustment recognised in these financial statements (2010: $0).
Software is amortised on a straight-line basis over its anticipated useful life. The useful life of ARPC’s externally purchased and internally developed software is four years (2010: 4 years).
All software assets were assessed for indications of impairment as at 30 June 2011. There has been no impairment write-off recognised in these financial statements (2010: $0).
ARPC’s approach to managing risk is consistent with the Australian/New Zealand Standard for Risk Management (AS/NZS 1S0 31000:2009) and the Australian Prudential Regulation Authority’s Prudential Standard GPS 220. The Risk Management Strategy (RMS) identifies ARPC’s policies and procedures, processes and controls that comprise its risk management and control systems. These systems address all material risks, financial and non-financial, which ARPC has identified it might face.
ARPC purchased retrocession to encourage capacity to return to the terrorism insurance market, control exposure to declared terrorist incident (DTI) losses and protect capital. ARPC’s strategy in respect of the selection, approval and monitoring of retrocession arrangements is addressed by the following:
treaty retrocession is placed in accordance with the requirements of ARPC’s retrocession management strategy;
retrocession arrangements are regularly reassessed based on current exposure information; and
Credit rating impact – 2011
19,000 434,600 175,120 483,680
942,230 288,050 407,320 2,750,000
22,650 72,500 127,875 407,375
1,334,915 239,400 395,285 2,600,000
The following details ARPC’s capital structure to cover claims from declared terrorist incidents:
ARPC has access to its reserve for claims cash and investments of $666 million. In the event of a DTI ARPC would be required to pay $350 million before claiming on its retrocession program;
ARPC has access to a $2.750 billion retrocession program excess of $350 million; and
ARPC has unrestricted access to a $10 billion Commonwealth guarantee.
All foreign transactions are converted to Australian dollars at the exchange rate at the date of the transaction. There has been no foreign currency transactions recognised in the financial statements (2010: $0).
7 14,660 – – 14,660
9 – 607,500 45,000 652,500
9 – 10,112 3,036 13,148
14,660 617,612 48,036 680,308
4.69% 5.82% 6.18% 5.82%
Exposure to interest rate risk and the effective weighted average interest rate for interest bearing financial assets – 2010
7 41,668 – – 41,668
9 – 500,975 55,000 555,975
9 – 10,093 10,266 20,359
41,668 511,068 65,266 618,002
4.40% 5.39% 6.00% 5.39%
The table below details the interest rate sensitivity analysis of ARPC at the reporting date, holding all other variables constant. The Department of Finance and Deregulation deemed a 175 basis point change to be reasonably possible and this was adopted by ARPC when reporting interest rate risk.
+1.75 +1.50 11,905 9,270 11,905 9,270
+1.75 -1.50 (11,905) (9,270) (11,905) (9,270)
The method used to arrive at the possible change of 175 basis points was based on both statistical and non-statistical analysis. The statistical analysis has been based on the cash rate for the past five years issued by the RBA as the underlying dataset. This information is then revised and adjusted for reasonableness under the current economic circumstances.
The Department of Finance and Deregulation considers 175 basis points is reasonable because it is reasonably possible that there will be greater volatility compared to that which has been experienced in recent years.
7 2,763 – 5,318 6,579 14,660
9 – – 606,500 46,000 652,500
9 13,148 – – – 13,148
15,911 – 611,818 52,579 680,308
This table provides information regarding the aggregate credit risk exposure to APRC in respect of financial assets. The table classifies the assets according to Standard & Poor’s counterparty credit ratings. – 2010
7 35,120 – 4,671 1,877 41,668
9 70,000 – 441,975 44,000 555,975
9 15,204 5,155 – – 20,359
120,324 5,155 446,646 45,877 618,002
8 – 25,824 23,935 25,824 23,935
8 – 3,922 4,081 3,922 4,081
8 9,193 9,987 – 9,193 9,987
8 11 – – – 11 –
9,204 9,987 29,746 28,016 38,950 38,003
The table below summaries the maturity profile of ARPC’s financial liabilities. All liabilities are
measured on an undiscounted cash flow basis given their short term maturity.
14 42,524 43,274 42,524 43,274
15 248 292 248 292
42,772 43,566 42,772 43,566
112,555 104,885
(3,835) (506)
108,720 105,391
(84,186) (80,098)
24,534 25,293
Retrocession commision income
8,004 7,551
1,695 2,049
33,332 24,130
1,153 2,172
36,180 28,351
(74) (223)
(123) (373)
(88) (596)
68,630 60,599
2,320 2,336
3,619 3,739
626 696
7,244 7,403
5,945 6,197
1,923 1,866
(43) 57
14,660 41,668
Cash and cash equivalents consist of at call deposits held with the Reserve Bank of Australia, Australian and New Zealand Bank, Commonwealth Bank of Australia, National Australia Bank and Suncorp Metway Ltd.
25,824 23,935
3,922 4,081
9,193 9,987
38,961 38,002
All receivables are with entities external to ARPC. Credit terms are net 30 (2010: 30 days).
Note 8: Receivables – Receivables (gross) are aged as follows:
2010 ($’000)
29,768 28,015
The interest rate ranges from 4.15% to 6.50% (2010: 3.88% to 7.60%) and the frequency of monthly for cash accounts and on maturity for term deposits.
652,200 555,975
13,148 20,359
665,648 576,334
Term deposits are held with Australia and New Zealand Bank, Commonwealth Bank of Australia, National Australia Bank, Westpac Banking Corporation, Bank of Western Australia and Suncorp Metway Ltd and earn an effective rate of interest of 5.82% (2010: 5.42%). Interest is payable on maturity for deposits with a term of 12 months or less. Where the term exceeds 12 months, interest is paid at 12 months with the balance of maturity. Terms are between 28 and 735 days (2010: 12 and 730 days).
Securities have terms of up to 3 years. They are issued or guaranteed by the Commmonwealth, a State or a Territory Government and are traded in active markets. The effective interest rate is 6.13% (2010: 6.62%).
Deferred insurance assets as at 1 July
10(b) 42,139 42,734
10(c) 525 515
42,664 43,249
42,734 38,060
42,139 42,734
(42,734) (38,060)
(515) (509)
Intangibles $’000
457 87 598 1142
850 92 – 942
– – 493 493
– – 105 105
(457) (8) (41) (506)
850 171 1,1155 2,176
850 171 1,155 2,176
350 11 – 361
– – 991 991
– – 176 176
1,200 182 2,322 3,704
(293) (41) (233) (567)
(124) (24) (163) (311)
357 5 40 402
(60) (60) (356) (476)
(137) (31) (197) (365)
(197) (91) (553) (841)
164 46 365 575
790 111 799 1,700
1,003 91 1,769 2,863
All valuations are independent and are conducted in accordance with the revaluation policy at Note 1(s).
A revaluation was undertaken by an independant valuer, Preston Rowe Paterson NSW Pty Limited on 30 November 2007.
Previous financial year revaluation related to leasehold improvements which have been written off due to the short term of the lease for the previous premises. This financial year is nil. (2010: $74,598).
No indications of impairment were found for leasehold improvements or plant equipment in 2011 (2010: Nil).
13(b) 52,132 48,297
13(c) 3,954 4,114
56,086 52,411
48,297 48,803
52,132 48,297
(48,297) (48,803)
4,114 3,504
3,954 4,114
(4,114) (3,504)
41,795 42,386
42,524 43,274
Retrocessionaire creditors:
In accordance with ARPC’s reinsurance treaty the retrocession premium is paid quarterly in advance. Settlement is made 30 days of the start of each quarter.
61,386 53,196
(959) (1,426)
(288) (16)
585 (4,680)
3,675 104
(750) 4,168
(44) 292
(136) 85
63,843 52,086
768,052 946,293
125,867 204,622
3,000 108,049
896,919 1,258,964
71,870 86,410
21,447 24,316
990,236 1,369,693
1. Notes 19a, 19b, and 19c were prepared on an accrual basis (so the performance bonus expenses disclosed above differ from the cash “Bonus paid” in Notes 19d, 19e
1. Notes 19a, 19b, and 19c excludes acting arrangements and part-year service where remuneration expensed for a senior executive was less than $150,000.
Note 19d: Average annual remuneration packages and bonus paid for substantive Senior Executives as at the end of the reporting period (2011)
1 170,000 – 170,000 –
2 190,130 – 190,130 3,000
1 217,000 – 217,000 –
1 323,054 – 323,054 –
Note 19e: (2010) Average annual remuneration packages and bonus paid for substantive Senior Executives as at the end of the reporting period
2 157,135 – 157,135 –
2 192,790 – 192,790 15,000
$240,000 – $269,999
1 246,440 – 246,440 –
1. This table reports substantive senior executives who were employed by the entity at the end of the reporting period. Fixed elements were based on the employment agreement of each individual. Each row represents an average annualised figure (based on headcount) for the individuals in that remuneration package band (i.e. the “Total” column).
2. This represents average actual bonuses paid during the reporting period in that remuneration package band. The “Bonus paid” was excluded from the “Total” calculation, (for the purpose of determining remuneration package bands). The “Bonus paid” within a particular band may vary between financial years due to various factors such as individuals commencing with or leaving the entity during the financial year.
Bonuses were based on the performance rating of each individual. The maximum bonus that an individual can receive was 10 per cent of his/her base salary.
Personal Leave (PL): entitle to 15 days (2010: 15 days) or part-time equivalent; and
Senior executives were members of the following superannuation funds:
Australian Government Employee Superannuation Trust (AGEST): this fund is for senior executives who were employed for a defined period. Employer contributions were set at 9 per cent (2010: 9 per cent).
Other: there were some senior executives who had their own superannuation arrangements (e.g. self-managed superannuation funds). Their employer contributions were set at 9.0 per cent (2010: 9.0 per cent).
Various salary sacrifices arrangements were available to senior executives including super, motor vehicle and expense payment fringe benefits.
During the reporting period, there were nil employees whose salary plus performance bonus were $150,000 or more. These employees did not have a role as senior executive and were therefore not disclosed as senior executives in Note 19.
$56,917 $50,906
$122,000 $114,500
The financial statement audit services are provided to ARPC by the Auditor-General. No other services were provided by the Auditor-General during the reporting period.
Mr. J Gersh, Ms. P Azarias, Ms. J Bowe, Mr. T Karp, Ms. M Micalizzi, Mr. J Murphy and Mr. G Vogt.
Ms. Azarias and Mr. Murphy were reappointed for a further three year term on 25 April 2011.
Mr. Karp and Mr. Vogt were reappointed for a further six month term on 6 September 2011.
ARPC has not entered into any contract with Members or their related entities
The service level agreement with the Department of the Treasury is considered a related party transaction. This agreement is for the provision of corporate support to services to ARPC at a cost of $249,769 (2010: $196,747). These transactions were made on terms equivalent to those that prevail on arms length transactions.
Other interest bearing liabilities – at amortised cost15248292
8 38,950 38,003
9 652,500 555,975
9 13,148 20,359
719,258 656,005
14 42,524 43,274
42,772 43,566
5(c) 36,180 28,351
Carrying amount 2010 ($’000)
Fair value 2010 ($’000)
7 14,660 14,660 41,668 41,668
8 38,950 38,950 38,003 38,003
9 652,500 652,500 555,975 555,975
9 13,148 13,148 20,359 20,359
719,258 719,258 656,005 656,005
14 42,524 42,524 43,274 43,274
15 248 248 292 292
42,772 42,772 43,566 43,566
Farm cover accounts for 0.02 per cent of gross written premium. This figure has been rounded down for the purposes of this table. ↩
CIPMA is a world-leading modelling program for critical infrastructure. It is a key component of the Australian Government’s efforts to enhance critical infrastructure protection and is a major national security initiative. It also supports the work of the Trusted Information Sharing Network for Critical Infrastructure Protection. ↩