Lloyd’s of London ‘cuts cover’ on Taiwanese risk

London — Lloyd’s of London underwriters are leading insurers in raising rates and cutting cover they offer for Taiwan risk amid mounting concern at the possibility of Chinese military action, say informed sources.

Insurers have been on the alert since Russia invaded Ukraine in 2022, taking market players by surprise and leaving airliners stuck in Russia and ships held up in Ukraine. 

As a result, insurers have generally excluded Russia and Ukraine from policies, or increased rates.

Similar action by insurers on Taiwan — the world’s largest advanced semiconductor chipmaker — would make it harder and costlier to do business there, insurance sources say.

Taiwan plays a crucial role in the global economy. A Chinese invasion of Taiwan halting chip production there could wipe out up to $1- trillion a year from the global economy in the first few years, US director of national intelligence Avril Haines estimated in May.

“Availability of cover for Taiwan has got tighter,” said Crispin Hodges, head of trade and political risk with insurer Canopus. Lloyd’s insurers have become more focused on how much risk they are exposed to from ships in ports in a conflict zone, he said.

Insurers that cover war risks for aircraft are raising rates and reducing the amount of cover for issues such as confiscation, said a Lloyd’s market source said, who declined to be named.

Taiwan, which China claims as its territory, has repeatedly complained of Chinese military activity near it over the past three years, as Beijing intensifies pressure to force the island to accept its sovereignty.

“From a political risk standpoint, it’s a constant challenge. There is an underlying murmur of concern that's there on a daily basis,” said Hodges.

Taiwan’s democratically elected government says only the island’s people can decide its future.

Scenarios

The Lloyd’s of London insurance market, which has about 100 syndicate members, asked members in January to identify potential exposure to 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 China trying 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, said CHC.

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, said this insurance source.

“Lloyd’s regularly asks market participants to model for plausible, but hypothetical scenarios to assess their potential impact on our market,” said a Lloyd’s spokesperson.

“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.

Exclusions

Some insurers are already imposing exclusions on Taiwan in political risk or political violence policies, three additional insurance 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 chair credit specialities with broker Marsh.

Five insurance sources said the restrictions are also feeding into the marine market for Taiwan. One said a US 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 knew of the Lloyd’s review of Taiwanese insurance cover and had asked Taiwan’s insurance association to assess all possibilities and consider appropriate countermeasures.

“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.”

Major Lloyd’s insurer Hiscox has run its own scenario simulations on Taiwan, before the Lloyd’s exercise, and identified risks in the region for marine and energy insurance, said Hiscox CEO Aki Hussain.

“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.”

Reuters