Insurance Liberalization and its Effects on Economies By: Dr. Reza Ofoghi Assistant Professor ECO College of Insura

1. Insurance Liberalization and its Effects on EconomiesBy: Dr. Reza Ofoghi Assistant Professor ECO College of Insurance Allameh Tabatabai University

2. 2 Introduction Why this subject? Fact 1: Negotiations on trade in services returns to the Uruguay Round in the 1990s. As a result, studies on services trade liberalization impact on economies have remained sparse. Fact 2: Most studies on the effects of the liberalization of trade in services consider services as a whole, or financial and telecommunication sectors. Fact 3: Comparing the value of insurance premiums and insurance exports indicates about 2% of insurance produced was traded between nations.

3. 3 The goal of the study: Main purpose of this study is to analyse and empirically dissect the effects of the liberalization of insurance services on different economies around the world. What Results do I expect ? The EU region will gain, as most European countries have a comparative advantage in insurance services. The effects for developing and less developed countries are ambiguous: If the use imported insurance as an intermediate input, so liberalization can provide cheaper insurance for production sectors. Because these countries do not specialize in insurance, liberalization just in the insurance sector may cause a loss rather than a benefit.

4. 4 Literature review: Benjamin and Diao (2000): Service sector trade liberalization in the Asia-Pacific Economic Co-operation (APEC) forum. They concluded that the western APEC members received the greatest welfare gains from service trade liberalization, while the developing economies gained more only if tariffs were eliminated. Robinson et al. (2002): The impact of service sector trade liberalization on the world economy. Although their measure of liberalization was completely different from Benjamin and Diao�s (2000) measure, they reached the same conclusion. Verikios and Zhang (2003): Used a global general equilibrium model to quantify the impact on global and regional economies of liberalizing trade in financial services. They used data on FDI. In general, regions with the highest barriers, such as developing countries, were found to benefit the most. Matto et al. (2006): by running cross-country regressions for a sample of 60 countries for the period 1990�1999, the authors claimed that financial sector openness in the service sector influences long-run growth performance and service liberalization could bring greater growth benefits to developing countries.

5. 5 Data & Model The data used in this research comes from the latest GTAP (Global Trade Analysis Project) database. The results reported were obtained using the GEMPACK economic modelling software. I use a CGE model that includes 8 regions and 5 sectors. Regions: NAFTA, the EU (26 countries), Japan, Oceania, East Asia (Korea and China), low-income (55), middle-income (93), and high-income (22). Sectors: Food, manufacturing, the financial sector (excluding insurance), insurance, and other services (all services other than the financial and insurance sectors). Following Benjamin and Diao (2000) we consider an imperfectly competitive structure for the financial and insurance sectors. This approach enables us to assess the effects of removing insurance barriers on the world economy. The other sectors are characterized by a perfectly competitive structure. 

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7. 7 Assumptions of the model Perfect Competition Model: A household spends total regional income according to a Cobb-Douglas per capita utility function over the three forms of final demand: Private household expenditures Government expenditures Saving. Firms combine inputs to produce output are as follows: Separability in choosing the optimal mix of primary factors and intermediate factors. There is a non-substitution relationship between primary factors and intermediate factors. It is assumed that the elasticity of substitution between all primary factors is equal. It is assumed that imported intermediate inputs are separable from domestically produced intermediate inputs. Firms first decide on the sourcing of their imports, and then, based on the resulting import price, they determine the optimal mix of imported and domestic goods (Armington approach). Imperfect Competition Mode: Modified by Roson (2006): Price setting in oligopolistic models is based on mark-up rules.

8. 8 Description of the policy simulations 1-Removing import tariffs in food and manufacturing sectors in all regions under IMPERFECT COMPETITION structure for insurance and financial sectors and PERFECT COMPETITION structure for the rest. 2-Removing import tariffs in food and manufacturing sectors in all regions under PERFECT COMPETITION structure for all sectors (except financial sector). 3-Removing import tariffs in food and manufacturing sectors in all regions under IMPERFECT COMPETITION, while benchmark coefficients (APM) are adjusted for SPECIFIC COMMITMENTS for the insurance sector under the GATS. 4- To evaluate whether developing countries are losers through the suspension of insurance negotiations. This means that we keep middle income, low income and East Asia�s commitments on the insurance industry unchanged and liberalize other regions� commitments by, for example, 50%.

9. 9 Results Impact of insurance liberalization on social welfare across regions (as a percentage of GDP in base year)

10. 10 Insurance sector net export trade balance (US million dollars)

11. 11 Conclusion: If developing countries adopt a full liberalization scenario: These countries realize that this policy would decrease their welfare. It has a positive effect on their balance of trade. Negative effect on their net insurance exports. Conclusion: It is not in the interest of developing countries to move towards full liberalization of trade in insurance if they consider welfare as a key goal. Developed countries have comparative advantages in insurance. What happens if developed countries force developing countries to take bigger steps towards insurance liberalization? Developing countries may think it is not fair play and suspend negotiations. Suspension causes a substantial welfare and GDP loss in most regions. It has a strong positive effect on the developing countries� balance of trade. So, what is the best move? Conclusion: As it decreases their welfare, is not a good policy in the long-run It seems that the best action to ensure that all parties benefit is to move based on GATS commitments or simply negotiations. It adjusts the adverse effects of aggressive moves towards full liberalization or suspension.

12. 12 Thank you