Taiwan P&C sector to withstand earthquake losses despite BI exposure

Taiwan's property and casualty insurers do not appear to be on the hook for significant insured losses for property damage connected to last month's major earthquake due to a combination of state-backed mechanisms, adequate reinsurance and the low take-up rate of earthquake insurance.

As of April 7, the National Land Management Agency registered 848 disaster inspection cases in Hualien, Taipei, Taoyuan, New Taipei City and Keelung, with 42 red alerts, 70 yellow alerts and 693 no-danger alerts issued. In addition, the government-backed Taiwan Residential Earthquake Insurance Fund (TREIF) has started to process claims.

Taiwan insurers generally have adequate reinsurance protection against property catastrophe risk that significantly reduces the impact of major events on the sector's net combined ratio, according to an S&P Global Ratings report.

However, Taiwan's non-life insurers are exposed to other claim risks under wider insurance coverage. Reinsurance costs have risen following previous catastrophe events while potential losses on commercial property and business interruption coverage are higher today due to the rise in coverage offered to companies such as Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC).

The business interruption exposure of the general insurance sector could be up to NT$10 billion, as high-tech industries, particularly chip manufacturers, face damages resulting from scrapping semi-finished products, Johnny Chang, a professor at CTBC Business School in Tainan, wrote in an email to S&P Global Market Intelligence.

Earthquake insurance take-up

As of April 30, 2024, the cumulative liability amount for the residential earthquake insurance system was NT$5.942 trillion cumulative liability amount, according to the TREIF. There were 3,552,862 policies in force, representing a take-up rate of 38.24%, based on a total of 9,290,424 households in Taiwan.

However, the hardest-hit city of Hualien only accounted for 1.61% of the policies in force.

Under TREIF's risk spreading mechanism effective April 1, 2024, first-tier liabilities of NT$5 billion are assumed by a residential earthquake insurance pool and second-tier liabilities of NT$115 billion are assumed and spread by TREIF.

Liabilities up to and including NT$98.2 billion are covered through a combination of domestic and overseas reinsurance markets, capital markets or by TREIF itself. The portion exceeding NT$98.2 billion and up to NT$115 billion is assumed by the government.

TREIF assumes 100% of risks ceded from non-life insurers and manages the coinsurance pool and the reinsurance arrangement. In 2022, TREIF transferred risk to the reinsurance market by renewing excess of loss reinsurance contracts in three layers: NT$10 billion in excess of NT$20 billion, NT$10 billion in excess of NT$30 billion and NT$10 billion in excess of NT$40 billion.

Total damages on residential buildings incurred from the earthquake have not reached the triggering point of NT$2 billion for TREIF to start making payments. The total expected cost of damage from the earthquake on residential buildings is only NT$640 million, Chang wrote.

Such losses are unlikely to cause large exposure to international reinsurers, Chang added.

Business interruption implications

The earthquake forced TSMC to suspend work, and the semiconductor giant expects losses from the April 3 event to be approximately NT$3 billion, net of insurance claims, which will be registered in the second quarter of 2024.

The NT$3 billion equals approximately 0.5% of the company's second-quarter gross margin, and if the deductible of TSMC's insurance is 10% to 15% of total damages, the insurance recoveries are likely to fall within NT$20 billion to NT$30 billion, Chang wrote.

There were no power outages, no structural damage to fabrication plants and no damage to critical tools, including all of its extreme ultraviolet lithography tools, according to TSMC. A certain number of wafers in process were impacted and had to be scrapped, but the company expects most of the lost production to be recovered in the second quarter.

TSMC did not respond to a request for comment regarding insurance recoveries.

"The primary source of claim risks could come from physical damages of manufactured goods, work in progress [and] machinery equipment that may occur during business interruption by the earthquake," S&P Global Ratings analyst Serene Hsieh wrote in an email. "Thus far we have not observed material wave of claims from the public information. [A] possible reason is that the power shortage was not severe and most of the machines were said to be built to withstand [a] certain degree of earthquake."

Other losses

The stone industry in Hualien County suffered an estimated NT$1 billion in losses, while Taiwan Tobacco and Liquor Corp. incurred damages including almost 200,000 broken bottles of alcohol at its factory warehouse in Hualien, with an estimated loss of NT$14 million, Guy Carpenter & Co. LLC said in a report.

Agricultural losses were estimated at about NT$81 million, with almost 98% coming in Hualien County. The largest damage affected private and public farming and fishery facilities, with smaller losses to crops and livestock. The reinsurance broker emphasized that not all of the above losses are covered by earthquake insurance.

Fubon Financial Holding Co. Ltd., which owns local property and casualty insurer Fubon Insurance Co. Ltd., declined to comment for this article. Cathay Financial Holding Co. Ltd., which owns Cathay Century Insurance Co. Ltd., did not respond to a request for comment. Local reinsurer Central Reinsurance Corp. did not respond to a request for comment.