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United Nations Conference on Trade and Development

Trade and development aspects of insurance

services and regulatory frameworks

UNITED NATIONS

New York and Geneva, 2007

ii E Note •The symbols of United Nations documents are composed of capital letters combined with figures. Mention of such a symbol indicates a reference to a United

Nations document.

•The views expressed in this volume are those of the authors and do not necessarily reflect the views of the United Nations Secretariat. The designations employed and the presentation of the material do not imply the expression of any opinion whatsoever on the part of the United Nations Secretariat concerning the legal status of any country, territory, city or area, or of its authorities, or concerning the delimitation of its frontiers or boundaries, or regarding its economic system or degree of development. •Material in this publication may be freely quoted or reprinted, but acknowledgement is requested, together with a reference to the document number. A copy of the publication containing the quotation or reprint should be sent to the UNCTAD secretariat at: Palais des Nations, 1211 Geneva 10, Switzerland. •All references to dollars ($) in this publication are to United States dollars, unless otherwise stated.

For further information on the Trade Negotiations

and Commercial Diplomacy Branch and its activities, please contact:

Ms. Mina MASHAYEKHI

Head, Trade Negotiations and

Commercial Diplomacy Branch

Division of International Trade in Goods and

Services, and Commodities

Tel: +41 22 917 56 40

Fax: +41 22 917 00 44

E-mail: trade.negotiations@unctad.org

www.unctad.org/tradenegotiations www.unctad.org/dispute

UNCTAD/DITC/TNCD/2007/4

iii

Foreword

As one of the key pillars of the financial services sector the insurance sector is a central element of the trade and development matrix. As both an infrastructural and commercial service, a well-functioning insurance sector plays a crucial role in economic development not just at a macro economic level but also in terms of the activities of individuals and businesses. The world insurance market is dominated by industrialized countries which in 2004 generated about 88 per cent of world life insurance premiums and accounted for 90 per cent of the world non-life market. However figures for real growth rate and insurance density, i.e premium per capita, indicate the potential for substantial growth within the insurance sectors of emerging markets. The overall real growth rate of emerging markets for 2004 stood at 7.5 per cent as compared with 1.7 per cent in industrialized countries. Figures for insurance density also indicate substantial differences between industrialized countries ($2,966) and emerging markets ($687). Given the importance of the insurance sector, its potential for growth, rapidly emerging trends within the sector including the trend towards liberalization of insurance services, it is essential to clearly understand the challenges and opportunities that arise from both the development of the insurance sector as well as its liberalization for developing countries. It was with this objective in mind that UNCTAD, at the behest of its member States and in accordance to its mandate pursuant to the ninth session of the Commission on Trade in Goods and Services, and Commodities, held in Geneva from 14 to 18 March 2005, held an ad hoc expert meeting on insurance services on 24 November 2005. The discussions indicated that while insurance service liberalization and globalization can be beneficial, they have different impacts on developed and developing countries. Country experiences seemed to indicate that liberalization of insurance services needs to be accompanied by a strategic and clearly defined national policy on the financial services sector in general and the insurance sector in particular (taking into account each country's specific national development objectives), as well as the development of efficient and effective regulatory and supervisory frameworks, in line with international initiatives. This recognition that liberalization alone might be insufficient may be one of the reasons for the hesitation of some countries in the context of the liberalization of insurance services. Other areas that pose a challenge for developing countries include the potential impact of the operations of insurance companies on the activities of policyholders and the economy as a whole, the impact of emerging trends in the global insurance market, the need to overcome supply-side constraints, the need to raise public awareness about the benefits of insurance coverage, the need to build human capacity and how to take advantage of changes arising from liberalization and globalization within the insurance sector to develop export opportunities. The role of regional/South-South cooperation and that of government as a facilitator, regulator and provider of insurance services also require due consideration. The challenge would ultimately lie in reconciling efficiency and social considerations, particularly for lower-income and marginal sections of the population. iv The UNCTAD ad hoc expert meeting on insurance services drew heavily on the experiences of the insurance sector in India, China, Africa and Guatemala to identify to the widest extent possible the problems faced by developing countries. This was complemented by deliberations and interventions made by representatives from the private sector, regulators, trade negotiators, international organizations (including the international association of insurance supervisors), academics and government representatives from both developed and developing countries, thereby enabling not just a sharing of views, but concrete and varied suggestions on the way forward. As the focal point of the United Nations for the integrated treatment of trade and development and interrelated issues, UNCTAD will continue its work on insurance services and its trade, development and regulatory implications.

Mr. Supachai Panitchpakdi

Secretary-General of UNCTAD

v

Acknowledgements

The volume contains papers, presentations and submissions delivered at the UNCTAD ad hoc expert meeting on insurance services held on 24 November 2005 at the Palais des Nations, Geneva, organized under the supervision of Lakshmi Puri, director of the Division on International Trade in Goods and Services, and Commodities, by a team led by Mina Mashayekhi, head of the Trade Negotiations and Commercial Diplomacy Branch. The volume also draws on the ongoing substantive work of UNCTAD. The volume was edited and prepared by Mina Mashayekhi and Deepali Fernandes. The major contributors are the authors of the individual papers. Substantive contributions of the participants in the above forum were also significant, particularly those from Yoshihiro Kawai, Secretary-General, IAIS; Yoseph Aseffa, former Secretary-General, African Insurance Organization; John Cooke, chairman, Financial Leaders Working Group; Israel Kamuzora, Commissioner of Insurance, United Republic of Tanzania; Jurgen Huppenbauer, Udaibir Das, Ahmed Zinoun, executive manager, Societe Centrale de Reassurance Casablanca, Morocco; Wei Zheng, Secretary-General, China Center for Insurance and Social Security Research; and Nigel Easton, UNCTAD. A full list of participants is contained in annex I to this volume. We would like to thank all our experts who took part and contributed to the meeting, and UNCTAD members and donors for their interest in and follow-through on the meeting. vi vii

Contents

Forewordiii

Acknowledgements v

Part One: Overview

I. Introduction to the trade and development aspects of insurance services and regulatory frameworks 1

Lakshmi Puri

II. Trade and development aspects of insurance services and regulatory frameworks 5 Mina Mashayekhi, Elizabeth Tuerk and Deepali Fernandes Part Two: Global market trends in insurance services

III. Insurance: global market trends 37

John Cooke

IV. 2010: hallmarks for success in insurance 43

Chris Gentle

V. Players and driving forces in world insurance services: locations and governance 47

J. François Outreville

Part Three: Regulatory aspects of insurance services, regulatory frameworks and international regulatory standards VI. Insurance services, regulatory frameworks in Africa and international regulatory standards 63

Israel Kamuzora

VII. Guidance on insurance regulation and supervision for emerging market economies 67 International Association of Insurance Supervisors VIII. Insurance Core Principles and Methodology 83 International Association of Insurance Supervisors IX. A new framework for insurance supervision: towards a common structure and common standards for the assessment of insurer solvency 145 International Association of Insurance Supervisors

Part Four: National experiences

X. China's insurance industry: reform, opening and development 153

Wei Zheng

XI. Insurance services liberalization and capacity-building: the case of Africa 199

Yosef Aseffa

viii XII. Benefits of insurance liberalization in India: a case study 243

Anuroop "Tony" Singh

XIII. An Indian perspective on the insurance sector 249

JB Boda Insurance

XIV. Life insurance in Africa 253

Basil Reekie

XV. Insurance as part of the financial system in Guatemala 259

Mauro S. Monterroso Xoy

Part Five: Perspectives on the challenges ahead for developing countries XVI. Financial services liberalization and insurance: some key considerations 265

Udaibir S. Das, Neil Saker and Jahanara Zaman

XVII. Globalization and insurance: the challenges ahead for developing countries from the

African viewpoint 299

Bakary Kamara

XVIII. Insurance and developing countries: some issues for consideration 311

Julian Arkell

XIX. Towards more inclusive insurance markets 331

Craig Churchill

XX. The role of insurance intermediaries 345

World Federation of Insurance Intermediaries

Part Six: Liberalization of insurance services in the GATS and developing countries: the way forward XXI. Insurance liberalization and the Model Schedule 353

Association of British Insurers

XXII. Approaches to GATS liberalization, and the challenges for emerging markets 369

John Cooke

XXIII. The way forward: policy conclusions and recommendations 391

Annex I

Programme of the UNCTAD ad hoc expert meeting on insurance services, and list of participants 407

Annex II

Presentations made at the UNCTAD ad hoc expert meeting on insurance services 411

Part One: Overview

1

I. Introduction to the trade and development

aspects of insurance services and regulatory frameworks

Lakshmi Puri

1

Global picture of insurance services

We are all aware of the essential role that insurance services play as a commercial and infrastructural service. From an infrastructural perspective it promotes financial and social stability, mobilizes and channel savings, supports trade, commerce and entrepreneurial activity and improves the quality of the lives of individuals. In a fast-globalizing world economy, Governments the world over are faced with challenges relating to the regulatory environment, emerging global trends in the insurance sector, technological innovations and liberalization of the insurance sector. The impact of these trends is perhaps more pronounced in the case of developing countries, who stand to benefit from liberalization of the insurance sector provided due consideration is paid to putting in place an efficient and well-functioning institutional and regulatory framework, tailored national policies and well-planned sequential commitments on insurance liberalization. One finds that there is a positive correlation between a country's level of development and insurance coverage. Developed countries tend to have better developed and well- functioning insurance services sectors both domestically and in terms of insurance exports, as compared to developing countries. This is perhaps most evident when one compares the share of industrialized countries in the world insurance markets, which in 2004 stood at 88.5 per cent as compared with 11.4 per cent for emerging markets, the majority of which are developing countries. Another good indication of insurance penetration is the premium volume generated as a percentage of gross domestic product (GDP). For developed countries this figure stood at 9.02 per cent in 2004, whereas for developing countries it stood at 3.94 per cent. What is interesting to note here, however, is that emerging markets have a far higher overall real growth rate, at 7.5 per cent, than industrialized countries, where it is 1.7 per cent, indicating the existence of substantial potential within emerging markets.

Challenges for developing countries

Developing country challenges in relation to insurance services sector arise essentially from five areas. First is the impact of insurance liberalization on developing countries. While liberalization and privatization is likely to lead to the admission of foreign insurers with substantial financial strength, technological and industry know how and good risk management and asset liability management skills vis-à-vis global markets, it also raises 1 Director, Division on International Trade in Goods and Services, and Commodities, UNCTAD. Trade and development aspects of insurance services and regulatory frameworks 2 areas of concern for developing countries. One of the principle areas is the security and stability of the insurance sector, which in turn is linked to setting up and ensuring a well- functioning insurance supervisory and regulatory authority. Other concerns include the possibility of anti-competitive practices, selective marketing to high value client's, possible loss of employment in the case of privatization, selective sectors of operation, protection of nascent insurance operations and perhaps the most important of all the need to set in place strong and adaptable regulatory systems within the insurance sector. A second area is the importance of building supply side capacity. Given the capital intensive nature of the insurance sector this is a not a simple task, but nonetheless one which is achievable, primarily by building on existing insurance strengths. This could involve raising public awareness, training of insurance professionals, identifying sectors of strength or niche areas where strength can be developed. In this regard, Developing countries can avail of inherent advantages such as existing distribution networks, local knowledge, identifying niche areas of operation including in the context of Mode 4, insurance intermediation, software and outsourcing services among others. Further South- South and regional cooperation and exchanges particularly relating to human resource- building, financial and information pooling and regulatory practices could be extremely valuable in addressing supply side constraints. A third area is the role of regulation frameworks. The importance of setting in place efficient regulatory structures as a prerequisite to the efficient operation of the insurance sector and particularly in the context of insurance liberalization and an evolving global insurance sector is essential. Emerging trends in the global insurance market particularly those relating to technology, newer financial products and corporate failures have underscored the value of regulation in the insurance sector. There exist differences, sometimes large ones in the regulatory and supervisory structures of developed and developing countries. In respect of regulation most Governments are faced with three challenges. One as pointed out earlier is the need to set up efficient regulatory structures, the second is harmonization of prudential and regulatory structures across countries and the third is an examination of the implications of accessions to international standards in general and vis-à-vis the General Agreement on Trade in Services (GATS). Also relevant in this context is an examination of provisions within the GATS such as those relating to domestic regulation and the prudential carve-out and its implications for developing countries. This last area specifically has raised much discussion within WTO and is considered in more detail later on in this book. A fourth area, relates to the current negotiations on insurance services within the GATS. One part of this relates to proposals made and discussions on issues such as classification of insurance services, transparency, and the scope of the prudential carve out, the exemption for services supplied in the exercise of governmental authorities, among other things. The other part relates to specific commitments made and those that are being requested of developing countries. For instance it is estimated that approximately 30 of the total 69 offers made in the current Doha round of negotiations relate to insurance and insurance related services. A fifth area for consideration relates to the role of the Government as a provider of insurance services and the extent of its role as a provider of insurance services. This is particularly relevant for developing countries and to the interests of the lower income sections within these populaces. In the past where the Governments in these countries

Part One: Overview

3 have been the sole if not the only supplier of insurance services, this has offset thequotesdbs_dbs33.pdfusesText_39

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