HONG KONG--(BUSINESS WIRE)--Sizeable business interruption losses in Taiwan from the Tainan earthquake in early 2016 is a reminder to the insurance industry that mega-risk industrial losses could be severe in the event that an earthquake interrupts the country’s science-based industrial parks’ production.
Taiwan plays an important role in the world for its high-tech industry focus, and its science parks, where production of semi-conductors used in high-tech products is concentrated, are subject to natural catastrophe risks such as earthquakes. The Best’s Special Report, titled, “Taiwan Earthquakes Threaten Science Parks,” notes that Taiwan insurers have prudent reinsurance protection and have set aside special reserves in the past years to ensure adequate capital for paying potential catastrophe losses. Hence, the risk-adjusted capitalization levels, as measured by Best’s Capital Adequacy Ratio (BCAR), of Taiwan non-life insurance companies have not significantly deteriorated as a result of the Tainan earthquake.
Most of the property catastrophe excess of loss (CAT XOL) reinsurance layers in Taiwan have one reinstatement term and so the limits of the layers impacted by the February earthquake could be restored to its full amount after the reinstatement premium payment. As a result, the CAT XOL will still be effective for covering losses in the event of a second major catastrophe event. However, if it were to be an extraordinarily active catastrophe year, these exhausted layers would no longer be effective if a third major catastrophe event occurs. Therefore, some Taiwan direct insurers immediately sought back-up reinsurance protection after the Tainan earthquake. According to the report, without the back-up reinsurance cover, the Taiwan rated companies median BCAR would drop from 260% to 224%, under the assumption of withstanding another two 1-in-250 year earthquake events after the Tainan earthquake.
The concentration of high-tech risks in the country’s science parks results in an accumulation of insured values. In case of a severe earthquake, the insured loss from the science parks could add a significant amount to the total insured losses on top of the normal residential and commercial risks, due to business interruption as well as damage to buildings and expensive equipment. To manage these risks, in A.M. Best’s view, the Taiwan insurance industry needs to charge adequate premium, improve the data quality for advanced and detailed catastrophe modeling to accurately assess the potential loss impact on their books, purchase adequate reinsurance protection and have robust capital levels to support the risks. In the case of the science parks, the manufacturers carry a large self-insured retention. Additionally, there can be captive insurance solutions, which would keep some of the risk outside of the commercial market. Overall, A.M. Best views the Taiwan insurance industry as prudently managed with adequate capital to withstand major earthquake losses and contingency reserves in place for catastrophe loss relief.
To access a complimentary copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=254321.
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