Taiwan earthquake claims unlikely to cause capital event

Insured losses to commercial insurers from the 3 April earthquake in Taiwan are unlikely to exceed 2016 Meinong earthquake levels, which led to estimated commercial fire loss of $500m, said AM Best.

The credit ratings agency said that its estimate is based on the greater distance of this earthquake from the economic centres and science parks compared to the previous events.

“This earthquake is not expected to add significant net claims and lead to a capital event for the Taiwan non-life industry,” said AM Best.

The agency noted that the non-life segment’s capitalisation was weakened from a large operating loss in 2022 caused by pandemic insurance.

The industry’s capitalisation rebounded in 2023 after capital injections from insurers’ parent companies, coupled with favourable operating results, but remain below 2021 industry capital levels by 21%, it added.

“Standalone credit quality and the ability to withstand major catastrophe losses vary by company, but some insurers’ overall credit fundamentals are supported by strong parental financial support as per regulations,” said AM Best.

In Taiwan, residential earthquake losses are all ceded to the Taiwan Residential Earthquake Insurance Fund (TREIF), so commercial insurers mainly bear commercial and industrial losses.

Unlike the Meinong earthquake, where the epicentre was on the western coast close to the Southern Taiwan Science Park, this latest earthquake’s epicentre was on the east coast. However, large semiconductor manufacturing companies have temporarily halted operations and evacuated a number of their plants after the earthquake, said AM Best.

“Most prior major earthquakes in Taiwan resulted in claims to commercial insurers for industrial losses. More generally, significant losses for the latest event could arise from business interruption (BI) coverage. This is due to the material role the technology and science sectors play in Taiwan’s overall economy, combined with large insureds purchasing adequate insurance protection, with the vast majority of these exposures ultimately being ceded to the international reinsurance market. However, BI claims are not anticipated to reach the Meinong earthquake levels given the greater distance from the science parks,” said the agency.

Overall, AM Best’s outlook for Taiwan’s non-life insurance segment stands at Negative because of rising reinsurance costs and declining investment assets. Non-life premiums have been growing steadily, but claims arising from pandemic-related insurance skyrocketed in 2022, resulting in a net paid loss ratio exceeding 150%. The large operating loss in 2022 outstripped the cumulative earnings of the last decade and depleted capital, noted the agency.