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Tremendous opportunity for growth exists in the international insurance market, but in many cases regulatory environments present barriers to nondomestic insurers and reinsurers. Examples are China, where obtaining operating licenses can be a slow process; and Brazil, which has backtracked on allowing foreign reinsurers to write business. David Snyder, associate general counsel of the Washington-based American Insurance Assn., discusses how removing trade barriers would allow the worldwide demand for insurance to be satisfied.
There is tremendous unmet worldwide demand for insurance and financially strong insurance companies with the interest and the capacity to meet that demand.
Yet there are significant barriers, usually arising out of regulation, that are preventing the supply of insurance from satisfying this demand for coverage. The U.S. International Trade Commission estimated in a 2009 report that foreign regulatory barriers to trade cost U.S. property/casualty insurers an annual loss of $40 billion in potential premium.
Barriers to trade harm not just insurers but the countries that would benefit from greater insurance coverage for their families and businesses. This is because insurance plays a critical role in economic development and improving the quality of life.
Insurers provide compensation for personal injury and economic losses and thereby remove some of the financial burdens from policyholders and victims. Recovery is therefore speeded up and further losses are reduced.
Insurance frees up government resources from having to provide compensation for losses and protects accumulation of wealth. Insurance also adds social value by providing loss prevention expertise and information and political advocacy for measures that improve the safety of buildings, workplaces and highways.
China and Brazil are two excellent examples of the global challenges and opportunities to private international insurance market expansion. Both are sizable countries that are regional leaders with rapidly growing economies. Both would benefit from greater foreign (re) insurance activity.
Ten years have passed since China's accession to the World Trade Organization. But foreign insurers have gained only a small toehold in that country, and the insurance sector overall still is underperforming.
The major regulatory hurdles creating these conditions are the inability to seek licenses concurrently so as to expand geographically, the length of time needed to acquire each license, the inefficiencies of mandates on companies to perform functions in all offices, and problems with distribution channels.
There are, however, some encouraging signs. Among them was a commitment this year to open the mandatory third-party auto liability insurance market. Also, the annual Sino-U.S. Insurance Dialogues have proven to be fruitful. These sessions have dealt in depth with a wide range of issues, including financial regulatory matters, natural catastrophe coverage and emerging technologies.
We believe future progress will rely on a “win/win” proposition—linking insurance market liberalization with the achievement of national goals in areas such as developing a more consumer-friendly financial system and encouraging the growth of green technology and life sciences.
In addition, China has enacted a new liability system and would benefit from the liability claims expertise that global insurers are uniquely qualified to provide.
Like China, Brazil is a regional leader in terms of its size and economic growth. It acted to reduce a major hurdle to insurance market growth when in 2007 it began to remove the monopoly status of the state-run reinsurer. The market responded so well to this liberalization that the state-related reinsurer rapidly lost market share. Responding to this, the country's finance minister in 2010 pre-emptively reversed course and imposed severe and unprecedented limits on affiliate reinsurance and required that 40% of reinsurance be placed with Brazil companies.
These protectionist actions could not have come at a more sensitive time for Brazil, which was facing huge infrastructure needs to support the World Cup and Olympics and the rapid growth of its infrastructure. In addition, the reinsurance restrictions will not serve the country well if it is hit with a major natural catastrophe. Compare, for example, the recent major earthquake in Chile, in which 95% of its losses were paid by the global reinsurance industry.
The finance minister's actions are strongly opposed by the global insurance industry and many governments. They are also controversial within Brazil, leading to a legislative hearing, a request for an attorney general opinion, and high-level concerns from some government and private-sector representatives.
As with China, the challenge is to convincingly link market liberalization with the goals Brazil has set for itself. In addition, effective negotiating by the United States, the European Union and other governments continues to be essential for success.
These two major markets reflect the current opportunities and challenges in overcoming the barriers to the growth of international insurance operations. The irony is that trade barriers to foreign insurers are a lose/lose situation—certainly for the companies who wish to expand more rapidly, but also for the countries whose individuals and businesses could have more choices in insurance coverage.
Our future success in overcoming these barriers will lie in the ability of the industry and government negotiators to demonstrate how insurance market liberalization assists in furthering legitimate national goals, improves the quality of life for the host country’s people and supports its economic development.
David Snyder is associate general counsel of the Washington-based American Insurance Assn. He can be reached at firstname.lastname@example.org.