May 11, 2022

Risk Management: China and Taiwan

I recently blogged about the role political risk insurance might play in helping companies recoup some of their losses arising out of Russia’s invasion of Ukraine. Yesterday’s WSJ included an article on the growing demand for political risk insurance since the Ukraine crisis began, but notes that it’s focused on another geopolitical nightmare scenario – a Chinese invasion of Taiwan. This excerpt quotes Daniel Riordan, who’s in charge of Vantage Group’s political risk business:

“They’re concerned about the potential for China getting even more aggressive with Taiwan, particularly in the wake of Russia’s invading Ukraine,” said Mr. Riordan, adding that his political risk business has seen an influx of new clients. “We’re seeing boards who are saying, ‘OK, where’s our political risk insurance?’” he said.

Mr. Riordan said his political risk business—measured in the volume of new insurance proposals submitted to underwriters—jumped about 25% from the last quarter of 2021 to the first quarter of 2022, driven in part by China-related concerns. The increase bucked a normal trend of business slowdown over that time frame, he said.

Beijing regards Taiwan as an integral part of the People’s Republic of China, while Taiwan views itself as a sovereign and independent state. Tensions between the two have risen in recent years, as China has suppressed Hong Kong’s democratic aspirations and repeatedly dispatched military aircraft into Taiwan’s air-defense zone.

The article says that Taiwan-related political risk insurance has been purchased to cover risks in the tech & power sectors, reflecting Taiwan’s dominance in semiconductors and its wind-power industry. In mainland China, it’s companies with manufacturing operations there that are the prime customers for political risk insurance.  Not surprisingly, the article also says that pricing is on the rise and that the number of underwriters participating in the market is starting to decline.

If your company has significant exposure to either Taiwan or China – and who doesn’t? – then you may want to look into political risk insurance or other alternatives to mitigate the risk of an armed conflict. If war breaks out between China & Taiwan and your board hasn’t devoted serious attention to alternatives for mitigating political risk in those countries, they may well be setting themselves up for a Caremark claim. Of course, if China invades Taiwan, corporate director liability may be pretty far down the list of our concerns.

John Jenkins