Taiwan Strait scenario
A crisis scenario, blockade or conflict around Taiwan, that insurers and reinsurers study as one of the heaviest for political risk, trade credit, marine and cyber, because of the global concentration of advanced semiconductors.
Taiwan concentrates most of the world's production of the most advanced semiconductors, made mostly by a single foundry. Any crisis in the Strait would therefore hit global value chains, automotive, electronics, defense, data centers, far beyond the parties to the conflict. Analysts distinguish several variants of rising intensity: military pressure and exercises, customs quarantine, naval and air blockade, armed conflict. For insurance, each activates different lines, and it is their sum that worries. Marine and aviation policies respond through listed areas, additional war premiums and seven-day cancellation clauses. Trade credit and political risk bear payment defaults, confiscations and transfer restrictions. Property and contingent business interruption policies suffer supply disruptions, subject to war exclusions. Cyber last, because a conflict would almost certainly come with operations against infrastructure. Published estimates of the economic cost of a conflict run into points of global GDP. Insurers use the scenario to test accumulation across lines that models treat separately, and to check that their war exclusions work together, with no gap and no overlap.
Textbook case: a reinsurer builds a six-month blockade scenario. It adds up expected losses in trade credit on Taiwanese buyers, in hull for trapped vessels, in contingent business interruption for its electronics clients and in cyber for targeted European companies, and finds an accumulation three times its worst natural catastrophe scenario. Dated case: from August 4 to 7, 2022, after the Speaker of the U.S. House of Representatives visited Taipei, the People's Liberation Army held live-fire drills in six zones around the island, forcing ships and aircraft to reroute: the first large-scale rehearsal of the situation this scenario puts a number on.
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