2008 Reinsurance Market Position
Natural perils continue to be excluded from most proportional treaties and are reinsured under catastrophe excess of loss programs. For those proportional treaties covering natural perils, event limits are still imposed. With excellent results in 2007, some cedents were able to increase their proportional treaty capacity and event limits for 2008.
Excess of Loss
Property excess of loss reinsurance programs in Taiwan tend to be structured into separate risk and catastrophe programs, with only four combined risk and catastrophe programs in 2008. Catastrophe excess of loss programs cover all perils, but some of the top layers can be for the earthquake peril only.
Overall property results in 2007 were favorable to cedents, and it was possible to achieve risk-adjusted rate reductions of 10 percent to 15 percent for risk excess of loss programs that enjoyed loss-free results. Event limits are normally imposed on risk excess of loss programs when natural perils are included.
There were six typhoons making landfall in Taiwan during 2007, one of which being Typhoon Krosa-a Category 4 super-typhoon with a large system that made double landfall in Taiwan in early October. During Typhoon Krosa, the accumulated rainfall in some locations exceeded 1,000mm. However, the Yuan Shan Tzu Flood Diversion Tunnel successfully diverted a significant volume of rainfall to the northeast coast, lowering the Keelung River’s water level effectively. This tunnel, completed in July 2005, is one of the most important implements for the integrated watershed management measures in the Keelung River Basin. All catastrophe excess of loss programs were unaffected, making 2007 the sixth consecutive year with claims-free results.
Due to co-insurance activities and willingness to retain business, most cedents’ exposure continued to increase by an average of 24 percent in 2007. As demonstrated in the chart below, cedents’ net retained catastrophe exposure has been increasing since the market restructured in 2002.
Cedents are becoming more conscientious in meeting rating agencies’ requirements and financial groups’ expectations when protecting their catastrophe exposure. Some cedents are beginning to explore Enterprise Risk Management (ERM) disciplines. As a result, there is a general trend of purchasing higher limits, particularly for earthquake.
Cedents in Taiwan are developing the general impression that vendor wind models for Taiwan are conservative and may not reflect the typhoon/flood perils or the flood mitigation measures and construction projects implemented in recent years. The typhoon/flood capacity purchased in Taiwan has been declining since 2004, but stabilized for 2007 and 2008.
Most Taiwanese catastrophe excess of loss programs are medium-sized and therefore do not require significant global capacity, instead relying mostly on regional capacity. This, coupled with loss-free experience since 2002, has led to further price reductions, as seen in the charts below.
The first chart below reflects the change in rate on line (ROL) averaged over the company base, but does not account for underlying changes in exposure. The average risk-adjusted reduction was about 30 percent in 2008.
There continued to be a plentiful supply of capacity for catastrophe excess of loss programs, despite price reductions. Reinsurers are willing to offer bigger written lines to compete for business and better signings as they are generally reluctant to relinquish renewal accounts due to loss-free results since 2002.
Taiwan is exposed to earthquake, typhoon, and flood. In recent years, the country experienced two catastrophic events that significantly impacted the insurance industry. The Chi Chi earthquake in September 1999 damaged more than 50,000 properties, causing an insured loss of TWD23.8 billion (USD744 million). Typhoon Nari, which struck Taiwan from the northwest in September 2001, caused the most severe floods in the country’s history, with an insured loss of TWD17.3 billion (USD540 million).
Basic commercial property forms cover fire, lightning and fire following explosion. These forms can be endorsed to cover additional perils, including earthquake, typhoon/flood and terrorism.
A comprehensive commercial property policy is available to provide all-risk coverage, including earthquake and typhoon/flood. For the larger industrial and commercial risks, earthquake and typhoon/flood coverage is available by endorsement to all-risk policy forms used in the international market, mainly the Association of British Insurers (ABI) or Munich Re forms. The natural peril coverage is provided mainly on a sub-limit basis.
Tariff rates apply except for risks:
- With sum insured values exceeding TWD3 billion (USD90 million)
- With multiple locations and total sum insured values exceeding TWD5 billion (USD1450 million)
- Of the same group with total sum insured values exceeding TWD10 billion (USD2900 million)
On April 1, 2002, a new version of the residential fire and earthquake policy form was introduced by the Insurance Bureau (formerly the Ministry of Finance). The residential fire section can be extended to cover additional perils, including typhoon/flood. Earthquake coverage is provided up to a maximum insured value of TWD1.2 million, with contingent living expenses of TWD180,000. This coverage will only respond to a constructive total loss. Since January 1, 2007, the earthquake coverage has been extended to include constructive total loss caused by tsunami, tidal waves or flood following earthquake.
Long-term residential fire policies issued prior to April 1, 2002 will be phased out, but can be endorsed to cover earthquake within the mortgage period.
Coverage for terrorism is available by endorsement to both the residential fire and basic commercial property policy forms. Tariff rates are 0.02 percent for residential and 0.012 percent for commercial. Due to a lack of reinsurance support, local insurers generally do not offer this coverage to the commercial sector. Public demand for the coverage is limited, except for big commercial/industrial accounts handled by international insurance brokers. The reinsurance for these accounts is placed mainly in the international facultative market.
On January 1, 2004, an insurance pool was formed providing terrorism coverage for personal accident business up to a maximum insured amount of TWD2 million (USD 63,000) per person. This pool is administered by the Non-Life Insurance Association in Taiwan and was created to share terrorism risk for personal accident business among private insurance companies and the Central Reinsurance Corporation in Taiwan. The pool has a cap amount of TWD1 billion (USD 31 million). If losses exceed that amount, claims would be paid on a pro rata basis.
Taiwan will be entering into the final stage of market deregulation and rate liberalization on January 1, 2009 (which has been postponed from April 1, 2008). All tariff rates will be abolished, except for residential earthquake insurance and compulsory motor third party liability. Insurance companies are required to submit their application to the Insurance Bureau for approval if they intend to write business with free rating during this final stage.
Residential Earthquake Pool
The Taiwan Residential Earthquake Insurance Pool was instituted by the Insurance Bureau on April 1, 2002, and administered by the Central Reinsurance Corporation. The pool was created to share earthquake risk between private insurance companies and the government. As of December 1, 2005, the Taiwan Residential Earthquake Insurance Fund (TREIF) became the pivotal organization of the Taiwan Residential Earthquake Insurance Scheme. Most of the operation and handling of the scheme has now been transferred to the TREIF.
The total limit of the scheme was initially set at TWD50 billion, but has increased to TWD60 billion since January 1, 2007. Private insurers participate in the claim-paying structure of the earthquake scheme by retaining the first TWD2.4 billion. TREIF assumes the risk above that level, up to TWD48 billion , transferring losses in excess of TWD20 billion and up to TWD40 billion to the reinsurance market. The Taiwanese government is responsible for an additional TWD12 billion layer above that, giving the scheme a total limit of TWD60 billion Losses exceeding this amount are paid on a pro rata basis. USD = TWD 32
|Residential Earthquake Insurance Scheme Claims-Paying Capacity|
|TWD12 billion xs TWD48 billion||Government|
|TWD8 billion xs TWD40 billion||TREIF|
|TWD10 billion xs TWD30 billion||Reinsurance Second Layer|
|TWD10 billion xs TWD20 billion||Reinsurance First Layer|
|TWD17.6 billion xs TWD2.4 billion||TREIF|
|Primary TWD2.4 billion||Domestic Insurers (Private Sector)|
Source: Guy Carpenter & Company, LLC
In an effort to complement TREIF’s reinsurance program and diversify sources of reinsurance capacity, the Taiwanese government successfully issued a landmark USD100 million catastrophe bond in August 2003. The three-year bond operated with an indemnity trigger of TWD20 billion and expired on June 30, 2006.
Prior to the Chi Chi earthquake in 1999, only about 1 percent of the residences in Taiwan had earthquake insurance. Since the establishment of TREIF, the take-up rate of earthquake insurance has been increasing, reaching nearly 25 percent as of May 2008 (calculated based on an estimated total of 7.8 million households in Taiwan as of January 2008).