Outlook for Taiwan non-life sector improves

AM Best has revised its outlook on Taiwan’s non-life insurance segment from Negative to Stable.

The ratings agency said that the key supporting factors included the following:

• The segment’s capital strength recovered significantly in 2023 after plummeting in 2022 due to sizeable pandemic insurance losses, albeit remaining below pre-pandemic levels;
• Insurers remain prudent in underwriting and investment strategies, while operating profitability improved in 2023 and 2024 to date; and,
• Solid growth in the top line has been driven by rate adjustments in key product lines, such as voluntary motor and commercial fire, as well as “robust” growth in engineering, fuelled by offshore windfarm projects.

AM Best said that the following factors partially counter the positives:

• Net investment yields are low compared to other markets in the region, attributable to low domestic interest rates;
• Exposure to natural catastrophes is high, although insurers generally maintain prudent reinsurance protection despite the heightened costs.

Taiwan’s non-life sector reported improved operating profitability, with pre-tax earnings soaring more than twofold, year over year, during the first seven months of 2024, noted the ratings agency.

This result is partially attributable to the efforts of insurers to strengthen their underwriting guidelines, it said.

“Insurers reviewed their portfolios and non-renewed or increased rates for unprofitable business, while passing on some of the increased reinsurance costs to policyholders. Additionally, along with primary rate increases, with limited insurance budgets, some commercial clients chose to increase their retentions or lower insurance policy limits alongside higher premium rates,” said AM Best.

“Furthermore, insurers have adopted a more proactive approach in offering risk advisory services and implementing loss prevention measures, with the goal of reducing the frequency and severity of claims,” added the agency.

The non-life segment recorded an 11.4% year-over-year increase in direct premiums written (DPW) in July 2024, a continuation of the strong double-digit growth in 2023. “AM Best anticipates that this momentum will remain strong in the short to intermediate term, driven by key product lines such as voluntary motor, commercial fire, and casualty insurance. The combined effect of robust new car sales, a rising proportion of higher-value imported vehicles, and the ongoing rate adjustments in third-party liability coverage is expected to sustain growth in voluntary motor insurance,” it said.

“Additionally, the engineering sector has seen significant expansion, driven by large-scale offshore windfarm projects and increased reinsurance rates, resulting in a 70% surge in engineering DPW. However, a substantial portion of this is ceded to the international reinsurance market due to limited domestic capacity, with insurers relying on the capacity and underwriting expertise of overseas reinsurers to manage this emerging risk,” pointed out AM Best.

Taiwan is, of course, prone to frequent natural disasters due to its location, with earthquakes, typhoons, floods, and landslides posing the greatest threat to life and property.

The earthquake that struck Hualien in early April 2024 resulted in insured losses exceeding TWD 30bn ($930m), primarily from large commercial property risks, said AM Best.

Typhoon Gaemi, which struck the island in July 2024, was one of the most powerful storms in the past eight years. The event led to insured losses across multiple lines of business, including agriculture, as well as flood-related losses in the property and engineering segments.

“Nonetheless, net retained losses are manageable and are expected to be absorbed by favourable underwriting and investment results in 2024. Prior to 2022, accumulated special reserves, which served as a capital buffer, played an important role in supporting capitalisation and stabilising underwriting results during significant loss events,” commented AM Best.

“However, following the release of these reserves to mitigate pandemic-related insurance losses, the reduced buffer has weakened the non-life sector’s ability to absorb potential future losses from major catastrophes. Hence, adequate and appropriate reinsurance protection is essential to the insurance companies, especially in the next few years, while they try to improve profitability to rebuild capital. Despite higher reinsurance rates,” it added.

“Taiwanese non-life insurers continue to exercise caution in structuring their reinsurance programmes. Retention levels remained largely stable in the past renewal, and catastrophe excess-of-loss limits are adequate to cover the modelled outcomes for high return periods,” concluded the ratings agency.