Morakot: A Major Test of Taiwan’s Developing Nat Cat Market

Typhoon Morakot may turn out to be the island nation’s most significant natural disaster since 2001 and the first major test of it’s still developing private reinsurance market.

While loss data is still being collected, first reports show major damage from flooding and resulting mudslides. According to published reports over 400 people are missing in one regional mudslide and over a million have been residents have been evacuated from flooded areas.

The country has been tested by major natural catastrophes in the recent past. In 1999 a 7.6 magnitude earthquake struck central Taiwan causing over 2,000 deaths and $744 million in damage. That was followed by 2001’s Typhoon Nari that resulted in major flooding with over 50 inches of rain throughout the country and $540 million in damage.  

Those two events — coupled with a hardening market in 2002 — transformed the way the Taiwanese market covers natural catastrophes, says Danny Yeung, managing director and head of Taiwan operations for Guy Carpenter in Hong Kong.

She explains the market has become more sophisticated over the past several years, with a significant amount of risk now transferred to the traditional reinsurers.

“Many clients are retaining their nat cat exposure and spending a great deal of time putting up quality data to use with more sophisticated catastrophe models,” said Ms. Yeung.

Most Taiwanese insurers are using three private market earthquake models, with many companies purchasing coverage on a 250 year probable maximum loss (PML), Yeung explains. Beyond that, there are two active wind and a single one locally constructed flood model and most insurers are purchasing a one-in-a-hundred PML.

“There is some significant deviation among the different models,” Yeung says.

According to a report published my Ms. Yeung on Guy Carpenter’s, since 2002 the net retained catastrophe exposure by Taiwan cedents has been increasing and grew by as much of 27 percent in 2007.

That means reinsurers may be exposed to major natural catastrophe losses in Taiwan for the first time in the form of Typhoon Morakot

The storm may turn out to be a significant event for Taiwan not because of wind damage but because of a massive rainfall that has caused flooding and mudslides.

“One of the factors that was exceptional for Morakot was rainfall. The storm was very large and slow moving, so it hung around Taiwan for a very long time,” says Adam Lea, PhD., a research fellow at the Tropical Storm Risk center located at the University College in London. “Also, the storm track was right over the center of the island and the storm circulation encompassed the entire country.”

“The rainfall that was damaging factor,” Dr. Lea adds.

In terms of alternative structures, there has been one catastrophe bond that referenced a Taiwan risk: a $100 million catastrophe bond issued in 2003 by the Taiwan Residential Earthquake Insurance Fund. The three-year bond operated with an indemnity trigger of NT$20 billion and expired on June 30, 2006 and was not renewed.

Guy Carpenter’s Yeung says that although Taiwanese insurer remain interested in insurance linked securities, pricing in the  traditional reinsurance market does not make the deals practicable.

“People are interested, but they are in the explorations stage since reinsurance prices have provided more economic value to insurers,” she says.  “I believe many clients are attempting to learn more and when the market turns they are prepared.”

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