ARPC and the Boston Marathon

My article was written last week before the horrendous events at the Boston Marathon last Sunday.

By the time the article was posted as a blog, I asked the question to various recipients : ” In light of the horrendous events at the Boston Marathon, why would the Gillard Government assume $3 billion of terrorism risk that it doesn’t have to”.The question was designed to highlight the short term thinking of the proposal to direct the ARPC to cancel its retrocession acquisition for two years, and instead pay the equivalent premium ($75M per annum) to the Government as an additional dividend to fund flood mitigation and other government expenditures.

The question was designed to highlight the short term thinking of the proposal to direct the ARPC to cancel its retrocession acquisition for two years, and instead pay the equivalent premium ($75M per annum) to the Government as an additional dividend to fund flood mitigation and other government expenditures.


The original decision may have been partly practical and partly ideological. The SMH reported that an unnamed government source had observed that the only party affected by the proposal would be some ” Swiss suits” ( yes, them and the Australian taxpayer to the tune of $3 bn should an incident occur and the government be forced to payout for a risk it could have laid off, simply by using the insured’s premium payments for the purpose for which they were intended ).

The original decision may have been partly practical and partly ideological. The SMH reported that an unnamed government source had observed that the only party affected by the proposal would be some ” Swiss suits” ( yes, them and the Australian taxpayer to the tune of $3 bn should an incident occur and the government be forced to payout for a risk it could have laid off, simply by using the insured’s premium payments for the purpose for which they were intended ).

Boston may have changed everything.

Dennis Shanahan in today’s Australian reports that the Government is no longer proposing to direct ARPC as to whether or not to purchase retrocession. This is apparently a change from what was first contemplated.

Clearly though, if the additional dividend mooted (ie $75M for two years) is required of the ARPC (something that will be revealed at the latest in May’s budget), the ARPC’s ability to purchase retrocession will be severely impacted. Apart from anything else, as the pool of funds depletes, the “attachment point” ie the level of risk assumed by the providers of retrocession ,necessarily changes, considerably raising the cost of any retrocession purchased and limiting the amount that can be purchased within a given budget. It also limits the ARPC’s ability to provide co-insurance, a means by which costs are able be kept down.

Bear in mind that the funds sought additional to the $400M the ARPC has been directed to pay the Government as a dividend over four years.

ARPC’s cover incepts on 1 January each year, which means that the final decision as to how this issue is handled will be made after the next Federal election.

It will be interesting to see how this plays out.

Joseph Gersh AM is Executive Chairman of Gersh Investment Partners Limited and was inaugural Chairman of the ARPC (2003-2012). He is the longest serving Director of Reserve Bank of Australia Payment Systems Board.