Regulatory barriers to trade in insurance services

Philippa Dee and Dinh Huong

Crawford School of Economics and Government

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

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)

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

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

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

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

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?

Index of restrictions (ave. 1997-2004)

0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80

United Kingdom

Netherlands

Germany

France

Denmark

Italy

Argentina

Greece

South Africa

Hong Kong

Sweden

Indonesia

Spain

Austria

Mexico

Israel

Chile

Switzerland

Singapore

Japan

United States

Hungary

Canada

Czech

Taiwan

Australia

Pakistan

Egypt

Brazil

Turkey

Thailand

Korea

China

Malaysia

India

Restrictiveness index

Domestic Foreign

Relationship with per capita GDP

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0 5000 10000 15000 20000 25000 30000 35000 40000

GDP per capita (USD)

Res

tric

tiven

ess

inde

x

Lots of variation within regions

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

Rest

rictiv

enes

s in

dex

Index Regional average

Most restrictions affect mode 3

0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80

United Kingdom

Netherlands

Germany

France

Denmark

Italy

Argentina

Greece

South Africa

Hong Kong

Sweden

Indonesia

Spain

Austria

Mexico

Israel

Chile

Switzerland

Singapore

Japan

Hungary

United States

Canada

Czech

Taiwan

Australia

Pakistan

Egypt

Brazil

Turkey

Thailand

Korea

China

Malaysia

India

Restrictiveness index

Mode 1 Mode 2 Mode 3 Mode 4

Who has been liberalising?

0.0000

0.1000

0.2000

0.3000

0.4000

0.5000

0.6000

0.7000

0.8000

0.9000

1.0000

1997 1998 1999 2000 2001 2002 2003 2004

Year

Res

tric

tive

ness

inde

x

India

China

Malaysia

Korea

Egypt

Thailand

Pakistan

Taiwan

Czech

Singapore

Japan

Mexico

Argentina

Indonesia

What have they been liberalising?

M3_DIF

M3_DID

M3_LICD

M3_CEDF

M3_PRICEF

M3_PRICED

M3_LICF

M3_INTF

M3_EXPF

M3_SCREENF

M4_BODF

M3_CEDD

M4_LONGF

M4_SHORTF

M3_MONOF

M3_SCBF

M3_REINF

M3_MONOD

-20.0 -18.0 -16.0 -14.0 -12.0 -10.0 -8.0 -6.0 -4.0 -2.0 0.0

Average percentage change over time

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

Further research

What affect do these barriers have?

Regulatory barriers to trade in insurance services

Philippa Dee and Dinh Huong

Crawford School of Economics and Government