Tension between Beijing and Taipei looks set to continue this year after the ruling Democratic Progressive Party (DPP) won a historic third term on Saturday, 13 January. This is certain to prompt more insurers to reassess their exposure to Taiwanese risk, but others are sensing opportunities for more sophisticated risk modelling in the country.
China, under Xi Jinping, has declared unification with Taiwan a goal, previously denouncing the DPP and framing the election as a choice between conflict and prosperity.
But the Taiwanese electorate appeared to ignore Beijing’s warnings when it handed more than 40% of the vote to the DPP, led by William Lai Ching-te. Voter turnout was more than 70%.
‘Risk fundamentals’
At the start of the year, Lloyd’s asked its members to identify risks that they are exposed to, should there be potential conflict within the country.
According to one source from a Lloyd’s syndicate, members were asked to look at scenarios ranging from blockades of shipping lines and airports all the way through to direct military confrontation.
Since running these scenario stress tests, some insurers have pulled back from the market and expressed an unwillingness to write new risk.
The head of Asia at one Lloyd’s insurer says: “We do write some Taiwanese risk in our policies, but we have become much more cautious about how we approach the market. We don’t write Taiwanese risks on a standalone basis because of the dangers involved.”
However, Manoj Kumar, group chief executive officer of MNK Re, says that the retreat of insurers from the market is not based on sound risk fundamentals.
“Many underwriters and capital providers are playing a safe game at the moment, even though there is nothing to suggest that the insured risk has increased in a disproportionate way,” he says.
Manoj Kumar
Group CEO of MNK ReMNK Re is a UK-based speciality MGA, with a particular focus on providing capacity for hard-to-price risk, including within Taiwan.
Kumar warns that many insurers are being overly-swayed by international geopolitics.
“Insurers should stick to hardcore underwriting and only look at the perils that they’re going to cover,” he says. “If someone is writing non-war political risk as part of property or casualty policies, then there would be no difference doing so yesterday or five years ago.”
Improving models
Those insurers that still have appetite for Taiwanese risk say having the right model in place is crucial for deriving value from the market.
“The model should be calibrated to an Asian view of risk rather than being too US-centric,” says the head of political risk for Asia at one global insurer, who declined to go on record because of the sensitivities in discussing Taiwan. “We typically take a short-term view of three to five years when assessing risk in the country, and do not see the chance of conflict being particularly high over this period of time.”
The political risk head adds: “We will remain in the market and continue to underwrite the same level of risk there, including political violence cover. There are lots of products in Taiwan that still need insurers’ support.”
Anonymous industry source
Head of Political Risk for Asia at a global insurerHe adds that the important thing is to have the right model in place, which should be calibrated to an “Asian view of risk” rather than being too US-centric.
Babak Tavassolie, Head of Analytics within the Political and Credit Risk team of SCOR, says that “insurers would be amiss to not be cautious about Taiwan given the frequent and numerous tensions one can witness between China and Taiwan”.
But he doesn’t think that such concerns are a reason to avoid the country altogether.
“I am a big fan of the ‘airbag approach’ of portfolio management, best achieved through educated diversification,” says Tavassolie. “Some crash or other will happen eventually – that’s after all what we’re here for – but drive carefully and, if a crash happens, get out bruised but alive!”
He adds that it is important to have in place the right models for assessing risk.
“It should be relatively straightforward for insurers to model the impact of a potential invasion,” says Tavassolie.
“I’d recommend modelling several scenarios: a full invasion followed by a full Western embargo on China, a full invasion that is not followed by a full Western embargo and a full invasion that is followed by US military actions against China to defend Taiwan. These extreme scenarios should help insurers running targeted probable maximum loss predictions and then preparing their portfolio appropriately.”
Babak Tavassolie
Head of Analytics, Political and Credit Risk at SCORA holistic view
Chris Don, head of brand and communications at Russell Group, a modelling company, says that “Taiwan is a special case” and, because of this, it is important for insurers to look at the country in an integrated way.
A lot of the world’s global supply chains – car manufacturing, mobile phone technology, things like that – rely on Taiwan. The strategic nature of Taiwan makes it very difficult to isolate the risk of an attack on the territory. Any incident there is certain to spill over into multiple territories,” he says.
Chris Don
Head of Brand and Communications at Russell GroupRussell Group is working with a number of Lloyds’ syndicates to help assess the risk in the country.
“We look across all areas of cover, assessing the potential economic loss [in the country] and then overlaying that across all business lines,” says Don. “Insurers need to understand: if there were to be an event in Taiwan, even if this is a few years from now, what is their potential exposure be across the entire portfolio?”
