Taiwan urged to buy catastrophe insurance, cat bonds might suit

The government of Taiwan is being urged to purchase insurance protection against natural disasters and catastrophe events, such as earthquakes and typhoons which affect Taiwan every year, as a way to lower the burden of reconstruction on public money.

Over the past 14 years the government of Taiwan has spent around $1.4 billion on post-disaster reconstruction and now a minister is raising the valid issue of catastrophe insurance which the government could buy to protect itself against severe natural hazards and to provide capital after events to assist with the reconstruction efforts.

Lee Hong-yuan, Minister of the Interior of Taiwan, is quoted by the Taipei Times as saying; “Since 1999, the government has spent NT$42 billion in special budgets to deal with reconstruction after the country gets hit by earthquakes and typhoons. However, many Western countries, as well as Japan and South Korea, are purchasing catastrophe insurance, so that insurance companies can partially or completely cover the costs for disaster relief. I think buying catastrophe insurance is a good idea, especially for a country like ours that is often hit by earthquakes or typhoons.”

Lee also mentioned the fact that despite 53% of natural disasters occurring in Asia, and just 12.5% in the U.S., over the last 30 years almost 66% of the insurance payouts are made in the U.S. and just 9% to Asian countries. The payouts in Asia are predominantly in Japan and South Korea, where disaster insurance is in place and governments also have some form of catastrophe coverage.

Discussions between the Ministry of the Interior and the Ministry of Financial Affairs have taken place and the idea of Taiwan’s government acquiring disaster insurance coverage is seen as a positive one. Lee said that he would continue to discuss the issue with other government ministries.

Taiwan, with its high exposure to both earthquakes and typhoons, would perhaps benefit by following the MultiCat model for a catastrophe bond designed to provide post-disaster financing. The MultiCat catastrophe bonds, so far only used in Mexico (most recent example here), were designed with the help of the World Bank and use parametric triggers which make them suitable as a form of contingent disaster capital.

Taiwan could issue a catastrophe bond linked to both earthquake and typhoon using parametric triggers. The data for the triggers is widely available and the country has a robust earthquake monitoring network. An analysis of the countries exposures and concentrations of risk would likely yield a very good design for triggers for such a cat bond.

The insurance-linked securities investor community would likely welcome a Taiwanese catastrophe bond, either dual-peril or single peril focused on either earthquake or typhoon risks. For the Taiwanese government it would secure them a source of post-disaster financing which they could be sure would payout under specific disaster conditions.

Interestingly, at a Standard & Poor’s run ILS conference held in London today, at least one investor suggested that they would be willing to look at any earthquake catastrophe bonds originating from most countries in the world. As long as the deals came with sufficient data, robust historical information and the usual levels of transparency and diligence in terms of structuring, the investors suggested they would definitely be prepared to assess them. If they could get comfortable with the risks, structure and pricing then they would likely be prepared to invest in them, was the general opinion.

With the current appetite in the capital markets for catastrophe risk-linked investments it stands to reason that Taiwan will at least look at catastrophe bonds as a possible solution for its disaster risk financing needs. Whether it would ever become a reality would likely come down to cost and at what severity the cat bonds would need to be triggered. A cat bond for Taiwan could play a very useful role in the upper layers of a sovereign disaster insurance facility.

Update: A regular reader pointed out that we should really mention the Formosa Re Ltd. catastrophe bond from 2003, which saw the Taiwan Residential Earthquake Insurance Pool sponsor the first Taiwanese cat bond. There is absolutely no reason why this could not be repeated, helping the government to reach its goal of better protecting itself.