Timetric’sInsurance Analyst Jay Patel gives an overview of the Taiwanese non-life insurance market and the factorsinfluencingits future development.

Taiwan has a mature non-life insurance market that is in line with its status as one of the wealthiest countries in Asia. According to Timetric, the Gross Written Premium (GWP) for the non-life insurance sector was measured at US$3.9 billion in 2013 and forecast to reach US$4.98 by 2018.Furthermore, according to the Directorate-General of Budget, Accounting and Statistics, Taiwan has the highest level of insurance penetration in the world, at 18.9%, while Hong Kong is the second highest with 12.4%.

Natural catastrophes

As an island nation located near a major fault line and fairly close to the equator, Taiwan is vulnerable to earthquakes and typhoons and these natural catastrophes are one of the major drivers of the insurance market in the country. A cornerstone of Taiwan’s economy is its world leading capability in high value manufacturing. The likes of the Taiwan Semi-Conductor Manufacturing Company (TSMC) and United Microelectronics Corporation (UMC) are amongst the largest semi-conductor manufacturers in the world. However, as Taiwan is located in an area which is vulnerable to earthquakes, this makes business interruption a significant risk for these manufacturers. Therefore, insurers offering protection against these risks do face the prospects of large payouts when earthquakes occur, even if they are mild.

Looking at recent history, there has not been a large catastrophe in Taiwan since the Jiji ‘921’earthquake in 1999. Therefore, in the past few years, there have not been any huge claims payouts. This may be reflected by the fact that 90% of Taiwan’s cars are not insured against storm damage, according to a director of Taiwan’s Non-Life Insurance Association speaking to the China Times.

Entry and exit of insurance firms

The Insurance Bureau imposessignificant costs of entry and exit upon firms that want to participate in the Taiwanese insurance market. It sets the cost of an insurance license at NT$2 billion (US$64 million), 20% of which is to be paid at the time of application. Foreign insurance brokers and agents are charged a minimum capital requirement of NT$5 million, while reinsurance brokers are charged NT$10 million. The foreign insurer must also have a minimum operating fund of NT$50 million and meet the FSC’s credit rating requirements. These onerous entry requirements are also matched by the IB’s unwillingness to allow foreign insurers to exit the market. The high costs of entry and exit can discourage new entrants from the market and stifle competition.  In fact, the IB blocked AIG from selling their business in 2012. For these reasons, the Taiwan insurance industry is not perceived to be as open to foreign insurers as Singapore and Hong Kong.

Market events

AIG eventually received the green light from the IB to sell its insurance license to the domestic insurer Nan Shan Life Co., Ltd for NT$4.9 billion (US$158 million). This license will enable Nan Shan Life to predominantly sell insurance in personal motor lines and for small and medium sized enterprises (SMEs). AIG will continue its presence in the Taiwanese market through its Singaporean branch and will focus on attracting large corporate client’s cover lines in property, casualty and trade credit.

In June 2015, Willis, the global insurance broker, acquired the Taiwanese broker Elite. This has doubled the size of Willis’ Taiwan business and made it the country’s third largest broker. Willis has been particularly strengthened in the marine sector and technology, media and telecoms (TMT).

Motor insurance

Compulsory Motor Liability Insurance is the mandated automobile insurance in Taiwan. The calculation of premiums for this type of insurance is only based on three factors: the driver’s claim record, age and gender. Whilst on the coverage side, Compulsory Motor Liability Insurance only covers bodily injury or death. It does not cover damage to the third party’s property, so it must be purchased through voluntary car insurance policies, meaning their uptake is much lower. The ‘cash before cover’ premium rule was applied to motor insurance on 1^st January 2015. This rule means that motor coverage will only be valid after the premiums are paid to the insurer.

Car sales in Taiwan rose 3.7% year on year to 46,800 units in July 2015, and cumulative car sales for the year were 3.2% higher than in the previous year. This is the key reason why the market in motor insurance is expected to grow over the next few years. Timetric forecasts the motor insurance category to value US$2.95 billion in 2018.