Taiwan is located in the Circum-Pacific seismic zone, one of the world's three major seismic regions. Earthquakes are natural calamities that strike without warning. Their timing is unpredictable and their destructive power is unimaginable. In view of this threat, it is vital to implement earthquake risk management concepts at all times. Earthquake protection measures must be strengthened and related work needs to be emphasized in all situations before disaster strikes. At the same time, post-quake response measures must be firmly established and diligently practiced. Even then, we need to be aware that even the best earthquake protection measures can only minimize the destruction, not eliminate the risk of earthquakes. Since major earthquakes will still occur, it is essential to establish an insurance system for earthquake indemnification to strengthen the social safety net.
1. Origins and Development of the Taiwan Residential Earthquake Insurance Program
On September 21, 1999, a magnitude 7.3 earthquake, known as the "Chi-Chi earthquake" or "921 earthquake," struck Nantou County in central Taiwan, an event that remains fresh in the minds of the people of Taiwan today. The quake prompted the government to set up an earthquake insurance pool system and build consensus to strengthen the earthquake insurance mechanism. At the end of 1999, the competent authority also introduced amendments to Article 138-1 of the Insurance Law to include provisions on underwriting residential earthquake insurance by the insurers and establishment of a mechanism for assuming earthquake risk. The amendment was promulgated on July 9, 2001, and a prototype of the Taiwan Residential Earthquake Insurance Scheme came into existence. In accordance with Article 138-1 of the Insurance Law, the competent authority announced the "Enforcement Rules for Coinsurance and Risk Assumption Mechanism of Residential Earthquake Insurance" on November 30, 2001. The rules stipulate a liability limit of NT$50 billion and four liability tiers, including co-insurance pool, the Taiwan Residential Earthquake Insurance Fund (TREIF), domestic and overseas reinsurance markets and capital markets, and the government.
Effective from April 1, 2002, all residential fire insurance policies must automatically include basic coverage for residential earthquake risk, with a maximum insured amount of NT$1.2 million per household. The annual flat premium was set at NT$1,459 (85% for the pure premium and 15% for loading).
On November 30, 2001, the competent authority announced the“Taiwan Residential Earthquake Insurance Fund Articles of Incorporation,” and “Regulations Governing Taiwan Residential Earthquake Insurance Fund”, laying a legal foundation for the establishment of TREIF. It also instructed the Taiwan Insurance Development Fund to contribute NT$20 million to fund the establishment of TREIF.
In the initial stage, TREIF was jointly administered by Central Reinsurance Corporation (Central Re), under the Ministry of Finance (MOF). Central Re personnel staffed the positions of executive secretary and staff secretaries to handle all affairs of TREIF. All residential earthquake insurance policies issued by non-life insurers were assigned to Central Re, which in turn allocated them among co-insurance pool, TREIF, domestic and overseas insurers and reinsurers, and the government. This laid the foundation for Taiwan's residential earthquake insurance risk assumption mechanism.
On December 1, 2005, the competent authority promulgated the amended "Enforcement Rules for Coinsurance and Risk Assumption Mechanism of Residential Earthquake Insurance," under which the risk-bearing system was adjusted from four tiers to two tiers. Under the new system, the NT$2 billion in Tier 1 was still assumed by residential Earthquake co-insurance pool, and the remaining NT$48 billion was assumed and then transferred by TREIF.
On December 29, 2006, the competent authority promulgated the amended "Enforcement Rules for Coinsurance and Risk Assumption Mechanism of Residential Earthquake Insurance." Under the amendment, the limit of the residential earthquake insurance system was increased from NT$50 billion to NT$60 billion effective from 2007. Of this total, NT$2.4 billion was assumed by the co-insurance pool and NT$57.60 was undertaken and then transferred by TREIF.
In accordance with additional revisions to Article 138-1 of the Insurance Law, amended on July 18, 2007, the "Enforcement Rules for Coinsurance and Risk Assumption Mechanism of Residential Earthquake Insurance" were renamed on November 26, 2007, as the "Enforcement Rules for the Risk Spreading Mechanism of residential Earthquake Insurance". Since 2008, all earthquake insurance underwritten by non-life insurers has been ceded to TREIF, which retained or transferred the risk, thus laying the foundation for the current residential earthquake insurance operation model.
On December 30, 2008, the competent authority promulgated the revised “Enforcement Rules for the Risk Spreading Mechanism of Residential Earthquake Insurance,” raising the risk assumption limit of the residential earthquake insurance’s risk spreading mechanism to NT$ 70 billion effective from January 1, 2009, in response to growth of cumulative liability amounts in recent years and forecasted future growth trends. Effective from January 1, 2012, the risk liabilities of tier 1 was increased to NT$3.0 billion, which of tier 2 was adjusted to NT$67.0 billion.
Moreover, from April 1, 2009, the annual flat premium for the insurance was reduced from NT$1,459 to NT$1,350, retaining the flat premium system, with a maximum sum insured of NT$1.2 million per policyholder. While effective from January 1, 2012, the maximum sum insured per policyholder was increased to NT$ 1.5 million and the maximum contingent living expense was also increased to NT$200,000.
On March 12, 2021, the competent authority promulgated the revised “Enforcement Rules for the Risk Spreading Mechanism of Residential Earthquake Insurance” raising the risk assumption limit of the residential earthquake insurance’s risk spreading mechanism to NT$ 100 billion effective from April 1, 2021, in response to growth of cumulative liability amounts in recent years and forecasted future growth trends. Effective from April 1, 2021, the risk liabilities of tier 1 was increased to NT$4.2 billion, which of tier 2 was adjusted to NT$95.8 billion.
Policies provide coverage for actual total loss or constructive total loss due to fire, explosion, landslide, land subsidence, land movement, land fissure, land rupture, or tsunami, sea surge and flood caused by an earthquake. Once the insured residence is assessed to meet the requirements of a total loss, the underwriting insurer will pay the insured amount and contingent living expense to the policyholder.
Under the revised rules, the total loss mentioned above refers to any situations where::
1) The subject matter insured is demolished as informed, ordered or acted by the government agency; or
2) The subject matter insured has been assessed by a qualified adjuster,or by an association of professional architect,structural engineer, civil engineer,or geotechnical engineers, that the insured building has been assessed uninhabitable and in need of demolition and rebuilding; or has been assessed that it could be inhabitable after repairing and equand the repairing cost equals to or exceeds 50% of the replacement cost at the time when the insured risk occurs..
2. TREIF's Pivotal Role in Taiwan's Residential Earthquake Insurance Program
Residential earthquake basic insurance is a statutory insurance in Taiwan. A non-profit organization therefore should play a pivotal role in implementing the program to ensure full compliance with policy objectives. During the initial implementation stage of the residential earthquake insurance program, Central Re was designated as the program manager. It was responsible for managing the co-insurance pool and overseas reinsurance placement. It also contributed greatly to the establishment of earthquake underwriting and claim settlement guidelines and the careful selection of reinsurance placements and securities. However, it remained unclear who should assume losses that might result should an overseas reinsurer become insolvent since there were no provisions under existing regulations prescribing that Central Re should assume such credit risk. In order to resolve this problem, the authorities revised the "Regulations Governing Implementation of the Residential Earthquake Co-insurance and Risk Bearing Mechanism." Effective from December 1, 2005, the revised rules clearly designate the TREIF as the pivotal organization of the residential earthquake insurance scheme and actively promote the operational independence of the TREIF.