The Taiwan Banker

The Taiwan Banker

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Editor in Chief, The Taiwan Banker
Hank Huang (黃崇哲)
Strengthening Risk Management for Natural Disasters 2018.11 The Taiwan Banker NO.107

Taiwan should thank its lucky stars. The Pacific subtropical ridge generated more than 24 typhoons this year, but almost none of them directly hit Taiwan. Neighboring Japan, Philippines, and China all suffered from major disasters. Typhoon Jebi battered Japan, and even flooded the entire Kansai airport, highlighting the vulnerability of important infrastructure to nature’s wrath.

 

Besides typhoons, Taiwan also faces continuous risks from earthquakes, droughts, floods, and even infectious diseases. Natural disasters are a fact of life on this island, which is reflected in the pious nature of its inhabitants. As society progresses and property accumulates, though, we can no longer rely solely upon prayers to fend off disasters. We must enhance risk prevention and preparedness, allowing us to mitigate the effects of natural disasters more effectively. If we fail to do so, we increase the possibility of a natural disaster causing catastrophic damage.

 

On the one hand, disaster prevention and management measures can help us prevent natural disasters from causing catastrophic damage. This is especially important given the prevalence and rising frequency of such catastrophes in light of climate change. At the same time, the financial sector can play an important role in boosting society's ability to manage natural disasters. By using catastrophic insurance and various catastrophic event securities, unpredictable risks can be effectively shared, and even linked to the development of the investment management industry. Under this scenario, losses from natural disasters are borne by a larger group to prevent individual groups from being unable to recover from disasters.

 

Catastrophic insurance is an effective risk countermeasure, but it is often difficult to implement, as can be seen with the example of Taiwan's agricultural insurance initiative. This initiative has faced a number of difficulties, notably a low coverage rate and a gap between farmers’ expectations of coverage and payouts. We can only hope that agricultural insurance will benefit from the  Agricultural Insurance Law, the establishment of an agriculture insurance database, personnel training, and the accumulation of reserve funds.

 

In addition to agricultural products, catastrophic insurance for public assets is also paramount for Taiwan’s future development. Indeed, unlike Japan, Taiwan's public construction is largely not covered by comprehensive insurance for civil engineering risks and natural disasters. Because Japan's Kansai Airport had a contract with the government that specifies maximum liability for natural disasters at 10 billion yen, the excess losses were borne by the government. As a result, the recent typhoon will not significantly affect its future operations.

 

If a similar disaster were to strike an airport in Taiwan, that airport would be in a far worse predicament than Kansai. According to statistics from the Non-Life Insurance Association, Typhoon Morakot in 2009 caused NT$ 180 billion in losses. Insurance covered only NT$ 2.3 billion, just 1.24% of the damages. In the 1999 Jiji earthquake, as well, the payout rate was only 4.03%, resulting in the central government paying for reconstruction – not only creating a tax burden for citizens, but also squeezing normal budgets, and affecting the national economy. The final consequences are still borne by taxpayers.

 

Beautiful Taiwan cannot expect natural disasters not to occur. Its broad fault stratification makes it a center of tectonic activity. However, there is a silver lining here: Utilizing the strengths of the financial sector to build a more robust disaster protection network for Taiwan – preempting the next natural disaster – will support the nation's sustainable development.