By Jonathan Saul and Carolyn Cohn
LONDON (Reuters) -Lloyd’s of London underwriters are leading insurers in raising rates and cutting the amount of cover they offer for risks involving Taiwan as concerns grow over possible military action by China, industry sources with knowledge of the matter say.
Insurers are on heightened alert after Russia’s invasion of Ukraine last year, which took market players by surprise and left jets stuck in Russia and ships marooned in Ukraine.
As a result, insurers have generally excluded Russia and Ukraine from policies, or increased rates.
Similar action by insurers over Taiwan – the world’s largest advanced semiconductor chip maker – would make it more difficult and expensive to do business there, industry sources say.
Taiwan plays a crucial role in the global economy – a Chinese invasion of Taiwan that halted chip production could potentially wipe out up to $1 trillion per year from the global economy in the first few years, U.S. Director of National Intelligence Avril Haines estimated in May.
“Availability of cover for Taiwan has got tighter,” Crispin Hodges, head of trade and political risk with insurer Canopius, told Reuters.
Lloyd’s insurers have become more focused on how much risk they are exposed to from ships in ports in a conflict zone, Hodges added.
Insurers that cover war risks for aircraft are raising rates and reducing the amount of cover for issues such as confiscation, one Lloyd’s market source said, who declined to be named due to business confidentiality.
Taiwan, which China claims as its territory, has repeatedly complained of Chinese military activity near it over the past three years, as Beijing steps up pressure to try to force the island to accept its sovereignty.
“From a political risk standpoint, it’s a constant challenge and there is an underlying murmur of concern that’s there on a daily basis,” Canopius’ Hodges said.
Taiwan’s democratically-elected government says only the island’s people can decide its future.
The Lloyd’s of London insurance market, which has around 100 syndicate members, asked members in January to identify potential exposure to so-called realistic disaster scenarios related to conflict in Taiwan in insurance classes including marine, aviation and political risk, in documents seen by Reuters.
The scenarios were drawn up by insurance broker CHC Global, according to the documents. A CHC spokesperson confirmed the scenarios report, but declined to comment further.
The scenarios ranged from a Chinese naval quarantine of the country, to China seizing outlying Taiwanese islands and, in the most extreme scenario, a Chinese attempt to take Taiwan by force.
This could result in some aircraft and ships at Taiwanese airports and ports being damaged or destroyed, and the imposition of wide-ranging, economically-damaging Western sanctions against China.
The scenarios could play out in the next 10 years, CHC said.
Since receiving initial responses from members in April, Lloyd’s, which has some regulatory powers, has asked for a further review, the first Lloyd’s market source and two others said, all declining to be named.
It is not unusual for Lloyd’s to ask for more information as initial responses can trigger further queries, a separate industry source told Reuters anonymously, citing business confidentiality.
After Lloyd’s collates the market’s overall exposure to a realistic disaster scenario in both insurance and reinsurance, it can ask individual syndicates to pare their business or put more capital behind it, this industry source said.
“Lloyd’s regularly asks market participants to model for plausible, but hypothetical scenarios to assess their potential impact on our market,” a Lloyd’s spokesperson said.
“This is an important part of protecting our customers against the kind of external shocks seen in recent years and ensuring our market is ready to respond in a range of scenarios.”
In the documents, Lloyd’s said it neither endorsed the scenarios presented nor took a view on their likelihood.
China’s embassy in London did not immediately respond to a request for comment.
Some insurers are already imposing exclusions on Taiwan in political risk or political violence policies, three additional industry sources told Reuters.
Such policies are usually sold as an add-on to property insurance, and cover property damage and business interruption losses for issues including terrorism, sabotage and war. Broader political risk insurance can also cover confiscation of assets.
“Political risk and credit capacity for both China and Taiwan has been restricted since Q3 last year, and insurers are generally seeking to reduce aggregate (total) exposure where possible,” said Nick Robson, global chairman, credit specialties with broker Marsh.
Two of the additional industry sources – and three others – said the restrictions were also feeding into the marine market for Taiwan, and one of them added that one U.S. insurer was introducing exclusions for ships sailing to Taiwanese waters.
Shih Chiung-hwa, director general of the Insurance Bureau of Taiwan’s Financial Supervisory Commission, told Reuters she was not aware of the Lloyd’s review of Taiwanese insurance cover, but noted the market had been tightening coverage more broadly over the last 2-3 years, mainly in response to climate change and geopolitical risks, such as those posed by the Russia-Ukraine conflict.
“It’s difficult to say we can mitigate against this with any one action, as there are several players in the reinsurance market, not just Lloyd’s. But Taiwan insurance companies will evaluate how to negotiate both with Lloyd’s and their customers to ensure any measures taken are appropriate.”
A separate official with Taiwan’s financial regulator, who spoke on condition of anonymity, added that conditions for reinsurance contracts get negotiated every year, and will likely take place this year in October.
Taiwan’s financial regulator will not interfere with the commercial mechanism for reinsurance contracts, the official said.
Major Lloyd’s insurer Hiscox has run its own scenario simulations on Taiwan, prior to the Lloyd’s exercise, and identified risks in the region for marine and energy insurance, Hiscox CEO Aki Hussain told Reuters.
“We’ve been tightening up the wording to ensure that the policies reflect the underlying risk that we want to insure and there aren’t any unintended risks being taken on.”
(Additional reporting by Faith Hung, Emily Chan, Liang-sa Loh and Ben Blanchard in Taipei, Editing by Sinead Cruise and Mark Potter)