Insurance and the World Trade Organization negotiations
The Doha Round at the World Trade Organization has been a serious failure for the insurance sector, despite strong efforts by many parties. Instead of increasing the consensus for free trade, the Round has served to divide the developed countries, especially the United States and European Union, even as it has failed to open insurance markets in developing countries. Deadlines have come and gone and successive strategies have been unsuccessfully employed to get the negotiations going. Most importantly, the packages that have been tabled to date are disappointing and wholly inadequate.
Companies that were once invested heavily in the WTO process have now pulled back, believing the WTO is increasingly irrelevant. Fortunately, however, we have made significant progress toward opening many insurance markets in bilateral negotiations.
The linkage with agriculture and manufacturing has crippled the WTO process. Services constitute the lion’s share of the global economy yet progress on global services negotiations has been relegated to a position for all practical purposes behind agriculture and manufacturing. And, as those sectors continue to generate controversy and realize no breakthroughs, they slow down services negotiations, as well.
The effect of this linkage has been to divide the U.S. and E.U. and cause commercial harm. It is painfully obvious that the failure to move on agriculture and manufacturing, and the increasingly strident demands in these areas, along with Mode 4 (temporary entry of workers) demands on the U.S., have worked to the advantage of protectionist forces and to the disadvantage of the people of both the world’s developed and developing economies. This is manifested most obviously in the inability of the developed countries to obtain anything meaningful in terms of market opening from the less developed countries. So the commercial harm is significant to companies and the economies of the developed world.
The social and economic harm caused by stunting the growth of insurance is particularly acute for the less developed countries. Among its other social values, insurance compensates for loss that would otherwise be borne by government, thereby freeing public resources for other uses. It provides compensation and thereby supports the security of individuals and businesses. Pending payment of claims, insurance premiums are invested in the economy, largely for infrastructure development, including roads, airports, hospitals and schools that support overall development. Finally, insurers as risk managers and mitigation advocates can assist in reduction of loss of life, injuries and productivity losses due to preventable occurrences, such as industrial accidents and vehicle crashes.
Despite the current stagnation, hope springs eternal. Based on the schedule set forth last December, a good plurilateral proposal, the Financial Services Collective Request, was agreed to by a reasonably strong set of demandeurs including the E.U. and the U.S. with a target group including China, India, Brazil, Indonesia and more than a dozen other countries. While general, it certainly is a decent conceptual foundation with all of the core components, especially commercial establishment and transparency in regulation. Now, we are at a critical period determining whether this procedure will be any more successful than its failed Doha Round predecessors.
Certain insurance issues are recurring and would best be dealt with through multilateral negotiation. Many obstacles are raised to insurance market liberalization. The obvious ones are foreign equity caps (e.g., India and Malaysia), the refusal to permit freedom of establishment including branching (e.g., the Russian accession position) and non-transparent regulatory systems (e.g., China).
More specific issues include reservations for certain lines of insurance, such as “compulsory lines” (e.g., Russian accession position) which in actuality make up a large portion of any non-life insurance market and uncompetitive reinsurance rules such as forced investment in state-run monopolies (e.g., Brazil) or local companies (e.g., China). An example would be China’s inconsistent regulatory approvals for branches that are advantageous for Chinese companies but consecutive and drawn-out for foreign companies.
Because of the heavy regulation of insurance, even excellent commitments at the negotiating table can be denied through day-to-day regulation. That is why we try to obtain commitments for a transparent regulatory process, including publication in draft form, opportunity to submit comments and have them considered, a final publication with adequate compliance time and the ability to appeal to a neutral court.
The substance of insurance regulation is also vital, especially with regard to solvency and market conduct. The International Association of Insurance Supervisors is gradually building up a system of international standards and guidelines with an accreditation process. While having independent and competent regulation is important for the health of any insurance market, the lack of deference to other regulators, or mutual recognition, will loom as a larger issue for insurers as the regulatory apparatus in the underdeveloped countries grows.
David F. Snyder is vice president and assistant general counsel of the American Insurance Association.