TAIWAN
1.
Taiwan Residential Earthquake Insurance Fund (TREIF). Introduction 1
Taiwan is located in the Circum-Pacific seismic zone,
one of the world’s three major seismic zones. Shakes occur
frequently and are a constant nightmare to residents. As a natural peril, earthquakes are so unpredictable in terms of occurrence and magnitude that the destruction they cause to life
and property is devastating, representing a harsh menace to
the island. Nevertheless, the Taiwanese government is
strongly committed to confronting the threat and clearly
recognises the importance of risk management, taking the
necessary mitigation measures against this natural disaster,
promoting anti-seismic measures to protect buildings and
properties from damage, and ensuring that emergency rescue
and relief are in place and utilized. Even with all these steps, Taiwanese people do not consider
the country to be immune from a destructive earthquake, particularly if it is a great and devastating event; hence the need for a national insurance programme to indemnify losses and secure the
socioeconomic infrastructure.
2.
Development and Implementation of the National Residential Earthquake
Insurance Program
An earthquake measuring 7.3 on the Richter scale, known as the Chi-Chi earthquake or 921
earthquake, hit Taiwan on September 21, 1999; a tremor so powerful and destructive that it is still
fresh in the mind of every Taiwanese resident. This quake immediately contributed to the establishment of an earthquake co-insurance scheme by the authorities, the consensus on the need to
reinforce earthquake insurance facilities, and the inclusion of section 138 into the Insurance Law
as the Draft of the Insurance Law Amendment Act, introduced in 1999, requiring mandatory cover
for earthquake-related perils to be included under residential fire insurance, and a scheme to
assume and spread the envisaged residential earthquake risk. The amendment was passed and the
amended section went into effect on 9 July 2001, creating the National Residential Earthquake
Insurance Program.
Under this program, all residential fire insurance policies issued by insurers must automatically be extended to cover residential earthquake risk with a maximum sum insured of NT$1.2
million on every residence for a unified annual premium rate of NT$1,459 (85% pure risk and 15%
loading).
1
This chapter has been prepared by Cynthia Po (TREIF, Taiwan).
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This coverage, termed as basic coverage, includes perils of fire, explosion, landslide, land subsidence, land movement, land rupture, tidal wave, surge and flood caused by earthquake and
resulting in actual total loss or constructive total loss (uninhabitable residence which must be
demolished and rebuilt or whose repair cost exceeds 50% of the rebuilding value) to the insured
residence. In addition, a Contingent Living Expense of NT$180,000 will be paid to the insureds
once the insured residence has been assessed as actual or constructive total loss.
In 2001, under Regulations Governing Taiwan Residential Earthquake Insurance Pool and
Risk Transfer Scheme, a capacity of aggregate event limit of NT$50 billion was provided for
Taiwan’s earthquake risks, and Central Reinsurance Corporation (Central Re), a commercial
reinsurer previously owned by the government, was designated as scheme manager. One hundred percent of residential earthquake insurance underwritten by the insurance companies was
required to be ceded to Central Re, which would in turn cede or allocate the business assumed
among the Co-insurance Pool members, the TREIF, the local and foreign insurers and reinsurers,
the capital markets, and the national government with varied limits as shown in the following
diagram:
NT$
50 Bn.
40 Bn.
Government
10 billion
Local and Overseas Reinsurance and Capital Markets
20 billion
20 Bn.
Taiwan Residential Earthquake Insurance Fund (TREIF)
18 billion
2 Bn.
Taiwan Residential Earthquake Co-insurance Pool
2 billion
Source: Taiwan Residential Earthquake Insurance Fund.
The authorities revised the Regulations Governing Taiwan Residential Earthquake Insurance
Pool and Risk Transfer Scheme and put them into effect on December 1, 2005, proclaiming the
TREIF as the pivotal organization of the program to ultimately take up all the obligations and liabilities, and adjusting the entire Program from four tiers to two tiers. The limit of the 1st tier NT$2
billion is still taken by local property insurers (including Central Re) as pool members, while the
remaining NT$48 billion, exceeding NT$2 billion, is taken by TREIF first and then transferred to
various risk takers.
The authorities revised again the aforementioned Regulations and put them into effect on January 1, 2007, increasing the limit of the scheme from NT$50 billion to NT$60 billion. The limits
for each tier and risk taker are shown in the following diagram:
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1st TIER
NT$2.4 billion, taken by local property insurers (including Central Re) as pool members
2nd
NT$57.6 billion, taken by TREIF first and then transferred to various risk takers, i.e.
(1) Up to NT$17.6 billion, taken by TREIF
(2) NT$17.6 billion - NT$37.6 billion, transferred to local and overseas reinsurers, and capital market
(3) NT$37.6 billion - NT$45.6 billion, taken by TREIF
(4) NT$45.6 billion - NT$57.6 billion, taken by the Government
TIER
Source: Taiwan Residential Earthquake Insurance Fund.
NT$
Govenment
12 billion
60 billion
2nd Tier
TREIF
8 billion
TREIF
57.6 billion
2.4 billion
Local/Global
Reinsurance and Capital
Markets
20 billion
1st Tier
Residential
Earthquake
Co-Insurance Pool
2.4 billion
TREIF
17.6 billion
Source: Taiwan Residential Earthquake Insurance Fund.
3.
The Background of TREIF
To soundly lay the legal foundation for the National Residential Earthquake Insurance Program, the TREIF Contribution Memorandum, the TREIF Management Ordinance, and the Regulations Governing Taiwan Residential Earthquake Insurance Pool and Risk Transfer Scheme were
promulgated on November 30, 2001 under section 138(1) of the Insurance Act. Subsequently, the
relevant authorities agreed that the Taiwan Insurance Development Fund would contribute NT$20
million to fund the initial stage of the establishment of TREIF as an office of Central Re, to initiate
and administer the program under the direct supervision of the Executive Secretary and other staff
secretaries.
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4.
The TREIF’s Pivotal Role in the National Residential Earthquake Insurance
Program
At the initial stage of implementing the National Residential Earthquake Insurance Program,
Central Re was designated to manage the Regulations Governing Taiwan Residential Earthquake
Insurance Pool, and to implement the Risk Transfer Scheme. Being in charge of all the business
related to co-insurance management and reinsurance arrangement, Central Re with its experience,
expertise and enormous effort, contributed to the establishment of guidelines for residential earthquake insurance underwriting and claim settlement, and of the procedure for reinsurance placement and securities election to safeguard the smooth operation of the program.
However, it is inevitable that there are reinsurers that might fail; and with no provisions under
existing regulations prescribing that Central Re will assume such credit risk, the question arises as
to who will assume the loss resulting from reinsurers’ non-payment. Moreover, it was envisaged
that for a national program, a government supervised not-for-profit organization would be more
competent to serve as the key to fulfilling its mission.
The relevant authorities revised the Regulations Governing Taiwan Residential Earthquake
Insurance Pool and Risk Transfer Scheme and put them into effect on December 1, 2005, proclaiming TREIF as the pivotal organization of the program to ultimately assume all the obligations
and liabilities and to actively promote TREIF’s independent operation.
As a result, TREIF became independent of Central Re on July 1, 2006. Thereafter, the scheme
of spreading residential earthquake insurance risk, including insurance operation, establishment
and amendment of the standard claim system process, co-insurance management, claim handling,
reinsurance arrangement, business promotion, fund management and adjustor qualification training have been handled by TREIF.
Being the pivotal organization, not only does TREIF retain a big portion of the limit
—NT$25.6 billion— but also assumes the credit risk resulting from the non-payment of reinsurance securities.
5.
The Structure of TREIF
TREIF is a not-for-profit organization, established officially on January 17, 2002, making it the
third national residential earthquake insurance program in Asia, after those of Japan and Turkey.
TREIF is run by a Board of Directors which includes eleven Directors and a Supervisor
engaged by the relevant insurance authorities under TREIF’s contribution memorandum.
When TREIF was established, Mr. Chen Chong, deputy minister of the Ministry of Finance,
was first appointed to serve concurrently as TREIF’s chairman. Later, in July 2002, Ms. Chang
Show-Lian, also deputy minister of the Ministry of Finance, and also serving concurrently, succeeded Mr. Chen as chairman. On July 1, 2004, the Financial Supervisor Commission (FSC) of
Taiwan was established and became the TREIF’s supervisory authority, replacing the Ministry of
Finance in this role, and the FSC Commissioner, Mr. Ling Kuen Bao, was appointed to replace Ms.
Chang as chairman of TREIF on September 30, 2005. Ms. Cynthia Po was retained as chairman
from October 1, 2006, after TREIF became independent from Central Re.
TREIF is structured into two departments: Business and Administration. The Business
Department is mainly responsible for both inward and outward business (including electronic data
transmission and claim handling programs), in addition to local insurers’ relevant business audit-
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ing, promotion and training, research and IT development. The Administration Department is
responsible for finance, accounting, personnel, administration and miscellaneous jobs.
6.
Business and Finance of TREIF
TREIF’s main income comes from pure risk premium allotments and management fees for
doing National Residential Earthquake Insurance Program business. Under the TREIF management rules, at the end of every year, all income received from official operation after operational
costs and operating capital should be withheld as a special reserve, to be used only to indemnify
residential earthquake insurance claims.
Should a greater earthquake occur and the accumulated fund is inadequate to fully pay the
claims, TREIF will apply to the Ministry of Finance, subject to Executive Yuan approval, for a
Treasury guarantee in order to source additional funds to replenish the shortfall.
Since the first residential earthquake insurance policy was issued in 2002, Taiwan’s residential
earthquake insurance business has been growing steadily. Policies in force totalled more than
1,670,000 on December 31, 2006, with a take-up rate of 22% based on the number of residences in
Taiwan, of 7,600,000. Written premiums for 2006 also increased substantially, to more than
NT$2.4 billion.
RESIDENTIAL EARTHQUAKE INSURANCE WRITTEN PREMIUM AND GROWTH RATE
Direct Premium
Year
2002 (1 April - 31 Dec.)
2003
2004
2005
2006
Amount NT$ 1,000
Growth Rate
%
661,231
1,242,788
1,702,959
2,101,527
2,425,076
—
88
37
23
15
Source: Taiwan Residential Earthquake Insurance Fund.
Total TREIF income for 2006 (including premium income, management fees, and interest
earned) was NT$1.4 billon, representing an increase of 27.01% over the preceding year.
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TREIF VARIOUS INCOMES AND THEIR GROWTH RATES
(unit: NT$1,000)
2002
(April-December)
2003
2004
2005
2006
.
.
.
.
334,525
16,715
1,160
—
450,749
31,016
6,647
3,340
879,201
42,771
11,143
2,490
1,078,720
52,745
31,296
2,734
1,342,886
60,996
64,799
11,581
Total . . . . . . . . . . . . . . .
352,400
491,752
935,605
1,165,495
1,480,262
Growth rate . . . . . . . . .
—
39.54%
90.26%
24.57%
27.01%
Year
Premium . . . . . . .
Management fee .
Interest earned . .
Other Income . . .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
Source: Taiwan Residential Earthquake Insurance Fund.
TREIF Income
1,600,000
1,480,262
1,400,000
1,165,495
Unit: NT$1,000
1,200,000
935,605
1,000,000
800,000
600,000
400,000
491,752
352,400
200,000
0
2002
2003
2004
2005
2006
Source: Taiwan Residential Earthquake Insurance Fund.
TREIF’s special accumulated reserve totalled NT$4.38 billion at the year-end of 2006, representing a substantial increase of 49.32% over NT$2.93 billion at year-end of 2005.
TREIF SPECIAL RESERVE ACCUMULATION
Year
2002
2003
2004
2005
2006
Special Reserve (NT$1,000). . . . . . .
351,491
840,160
1,773,155
2,934,560
4,381,784
Growth rate . . . . . . . . . . . . . . . . . .
—
139.03%
111.05%
65.50%
49.32%
Source: Taiwan Residential Earthquake Insurance Fund.
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TREIF special reserve
5,000,000
4,381,784
4,500,000
Unit: NT$1,000
4,000,000
3,500,000
2,934,560
3,000,000
2,500,000
1,773,155
2,000,000
1,500,000
840,160
1,000,000
500,000
351,491
0
2002
2003
2004
2005
2006
Source: Taiwan Residential Earthquake Insurance Fund.
TREIF will manage its special reserve with the most prudent care, aiming at both minimizing
investment risk and maximizing investment profitability. As of 2006, TREIF’s available fund has
accumulated a total of NT$4.38 billion, which was invested in the money market as bank deposits,
bonds RP, government bonds and financial bonds with an average investment yield of 2.029%.
TREIF INVESTMENT PORTFOLIO 2006
INVESTMENTS
Amount
(NT$1,000)
Bank Deposits and Bonds RP . . . . . . . . . . . . . . . . .
Government Bonds . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,367,902
1,621,661
1,113,114
33.34
39.53
27.13
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,102,677
100.00
Ratio (%)
Source: Taiwan Residential Earthquake Insurance Fund.
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TREIF investment portfolio 2006
Financial Bond
1,113,114
Bank Deposit and
Bond RP
1,367,902
27.13
33.34%
39.53%
Government Bond
1,621,661
Bank Deposit and Bond RP
Government Bond
Financial Bond
Source: Taiwan Residential Earthquake Insurance Fund.
7.
TREIF’s Future Perspective
Being the pivotal organization of the National Residential Earthquake Insurance Program,
TREIF’s business will prosper steadily in the short term. It is also expected that the take-up rate
will increase through extensive education and active promotion to the public held under the auspices of local insurance companies. Moreover, TREIF is going to establish a standard residential
earthquake insurance claim handling procedure for the local market to follow, and will be making
timely adjustments to the risk-spreading structure as business develops. It is imperative that a comprehensive residential earthquake business database be established, together with the installation of
an auxiliary backup scheme to handle TREIF business without interruption in the event of any contingency. In addition, it is hoped that Section 138 under the Insurance Act will be amended in order
to qualify TREIF to accept residential earthquake insurance business directly from local companies instead of through a professional reinsurer. TREIF will endeavour to see this realized.
In the future, TREIF will be strengthening and extending its functions through cooperation
with various domestic and overseas earthquake research organizations and institutes, and participation in attempts to establish a local earthquake risk evaluation model, an earthquake risk mitigation
plan, and the catastrophic insurance actuarial model. Besides, TREIF will make every effort to
secure treasury guarantees to cover any shortfall in the event of a major earthquake. Furthermore,
to complete TREIF’s goals, it will extend its functions to include typhoon and flood risk coverage
under the National Residential Earthquake Program.
In addition to earthquake, typhoon and flood risk coverage, TREIF will try its best in the long
run to extend the insurance coverage of the National Residential Earthquake Insurance Program to
include other natural catastrophic risks. This, coupled with the constant promotion sponsored by
TREIF and the insurance industry’s interest to enhance the public’s comprehensive understanding
of the function and mechanism of the program in relation to risk-spreading, will minimize the economic losses to individuals and their families, and effectively restore social stability as quickly as
possible following a major quake in Taiwan. And that is the grand mission that TREIF is committed to achieving.
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