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Regulatory barriers to trade in insurance
services
Philippa Dee and Dinh Huong
Crawford School of Economics and
Government
Outline
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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
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Regulatory trade restrictions
 Can be discriminatory or non-discriminatory
 Can affect all 4 modes of delivery
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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)
India
Malaysia
China
Korea
Thailand
Turkey
Brazil
Egypt
Pakistan
Australia
Taiwan
Czech
Canada
Hungary
United States
Japan
Singapore
Switzerland
Chile
Israel
Mexico
Austria
Spain
Indonesia
Sweden
Hong Kong
South Africa
Greece
Argentina
Italy
Denmark
France
Germany
Netherlands
United Kingdom
0.00
0.10
0.20
0.30
0.40
0.50
Restrictiveness index
Domestic
Foreign
0.60
0.70
0.80
Relationship with per capita GDP
Restrictiveness index
0.80
0.70
0.60
0.50
0.40
0.30
0.20
0.10
0.00
0
5000
10000 15000 20000 25000 30000 35000 40000
GDP per capita (USD)
In
di
ala a
ys
ia
Ch
ina
Ko
r
Th e a
ail
a
Pa n d
kis
ta
n
Ta
Si iwa n
ng
ap
or
In
do e
Ho n esi
a
ng
Ko
ng
Index
Regional average
Eg
yp
t
So Isra
ut
el
h
Af
ric
a
Br
az
il
Ch
ile
Ar
ge
nti
na
M
Restrictiveness index
Lots of variation within regions
0.80
0.70
0.60
0.50
0.40
0.30
0.20
0.10
0.00
Most restrictions affect mode 3
India
Malaysia
China
Korea
Thailand
Turkey
Brazil
Egypt
Pakistan
Australia
Taiwan
Czech
Canada
United States
Hungary
Japan
Singapore
Switzerland
Chile
Israel
Mexico
Austria
Spain
Indonesia
Sweden
Hong Kong
South Africa
Greece
Argentina
Italy
Denmark
France
Germany
Netherlands
United Kingdom
0.00
0.10
0.20
0.30
0.40
0.50
Re strictive ne ss inde x
Mode 1
Mode 2
Mode 3
Mode 4
0.60
0.70
0.80
Who has been liberalising?
1.0000
India
0.9000
China
Restrictiveness index
0.8000
Malaysia
Korea
0.7000
Egypt
0.6000
Thailand
Pakistan
0.5000
Taiwan
0.4000
Czech
Singapore
0.3000
Japan
0.2000
Mexico
Argentina
0.1000
Indonesia
0.0000
1997
1998
1999
2000
2001
Year
2002
2003
2004
What have they been liberalising?
M3_MONOD
M3_REINF
M3_SCBF
M3_MONOF
M4_SHORTF
M4_LONGF
M3_CEDD
M4_BODF
M3_SCREENF
M3_EXPF
M3_INTF
M3_LICF
M3_PRICED
M3_PRICEF
M3_CEDF
M3_LICD
M3_DID
M3_DIF
-20.0
-18.0
-16.0
-14.0
-12.0
-10.0
-8.0
-6.0
Average percentage change over time
-4.0
-2.0
0.0
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