Regulatory barriers to trade in insurance services

1. Regulatory barriers to trade in insurance services Philippa Dee and Dinh Huong Crawford School of Economics and Government

2. Outline • Reasons for regulating insurance • Nature of barriers to trade in insurance services • How barriers vary across countries • How barriers vary across time • Future research

3. What do insurance companies do? • Provide risk pooling and risk bearing • Reduce individual risks by diversifying • Hold equity to cover the residual risk of the pool • Provide real services related to insured losses • Risk assessments • Coverage design • Loss assessment services • Intermediation services • Many insurance policies have a savings component, which may be explicit (interest paid) or implicit (discount on premiums)

4. Reasons for regulating insurance • Moral hazard and adverse selection? • There are market-based approaches that insurance companies can use to mitigate these problems • Example – can offer inducements to policy-holders to take risk-avoidance action (moral hazard) • Example – no-claim discounts, waiting periods, loyalty programs (adverse selection) • Systemic instability associated with intermediation function • Insurance companies subject to prudential regulation

5. Prudential regulation • Minimum capital requirements • Capital adequacy ratios • Liquidity reserve ratios • Required participation in an insolvency guarrantee scheme • Required frequency of disclosure • These NOT covered by the study

6. Regulatory trade restrictions • Can be discriminatory or non-discriminatory • Can affect all 4 modes of delivery • cross-border trade • consumer buying insurance while offshore • foreign firms establishing commercial presence • foreign companies sending temporary representatives • Can affect up to 8 different types of products • Life, medical, property, marine aviation and transport, automobile, freight, reinsurance, auxiliary services • Potentially 2*4*8=64 different kinds of barriers

7. Examples • Cross-border supply • Bans on non-resident insurance companies providing insurance services • Consumption abroad • Bans on residents buying insurance services abroad • Commercial presence • Restrictions on establishment (eg licensing restrictions, equity limits) • Restrictions on ongoing operations (eg restrictions on placement of assets, statutory monopolies, ceding requirements, price controls) • Movement of natural persons • Restrictions on movement of intra-corporate transferees • Restrictions on nationality of board of directors

8. Dataset of barriers to trade in insurance services • Covers 35 countries • For each country, covers 8 years from 1997 to 2004 • Useful in its own right for tracking liberalisation of insurance markets • Will provide input into future research • How do trade barriers affect the profit margins and/or cost structures of insurance firms?

9. Index of restrictions (ave. 1997-2004)

10. Relationship with per capita GDP

11. Lots of variation within regions

12. Most restrictions affect mode 3

13. Who has been liberalising?

14. What have they been liberalising?

15. Overall picture • Reforms have been mostly unilateral … • India, Singapore, Pakistan, Argentina • … or driven by WTO accession • China • There has been backsliding, including in highly restrictive countries • Malaysia, Thailand • Biggest liberalisation has been in foreign equity limits or domestic equity limits (ie privatisation) • Liberalisation also in licensing restrictions and ceding percentages • No recorded liberalisation in mode 1 or mode 2

16. Further research • What affect do these barriers have?

17. Regulatory barriers to trade in insurance services Philippa Dee and Dinh Huong Crawford School of Economics and Government