Policy statement
The liberalization
of trade in insurance services
Commission
on Financial Services and Insurance, 25 May 2000
French
version
The ICC Commission on Financial
Services and Insurance recognizes that the 1997 Financial Services Agreement
was an important first step in achieving trade liberalization and market access
in financial services. The "GATS 2000" negotiations in the WTO provide
an opportunity for further insurance market liberalization among WTO members.
The arguments in favour of the elimination of restraints on foreign participation
in financial services have been well rehearsed and the economic benefits of
market access in both developed and developing economies are recognised. GATS
2000 must be used as an opportunity to build on the achievement that has already
been made. ICC would like to adopt the following insurance related goals in
the forthcoming GATS 2000 Financial Services negotiations:
Pro-competitive
regulatory reform
Local regulatory requirements often prevent foreign investors from competing
on a level playing field with domestic firms. Market access does not necessarily
guarantee liberalization. Consequently, regulatory regimes that are pro-competitive
are required. This means that regulators should focus on solvency and
prudential requirements to ensure a stable market while, in most cases,
allowing competition to determine the most effective products and price.
Transparency and fair enforcement of regulations are also important aspects
of a pro-competitive regulatory framework that is conducive to equal competition
amongst foreign and local firms. This should encompass exchange control
restrictions which inhibit the free flow of funds, or the rights to invest
in secure financial instruments whether domestically or abroad. There
should also be provisions making all regulations publicly available and
open to comment with the explanations from the government supporting its
acceptance or rejection of outside recommendations.
An independent regulatory
body with sufficient resources to adequately enforce regulations is also essential
to a fair and open insurance market. In that regard, the WTO should develop
capacity-building programmes to assist developing countries in establishing
the regulatory systems needed to support market opening commitments made in
the 2000 negotiations. A detailed list of necessary elements for an open and
competitive insurance market is annexed. This list has been taken from a working
document on "Pro-competitive Regulatory Principles for Insurance"
which was drafted and adopted by the Financial Leaders Working Group - Insurance
Evaluation Team on 1 July 1999.
Establishment
The 1997 negotiations resulted in a significant improvement in providing
non-resident insurers with the opportunity to establish and expand their
commercial presence in foreign markets. We believe foreign insurers of
other WTO countries should enjoy the same rights of access to domestic
insurance markets as domestic insurers. These rights should be available
to these foreign insurers, whether they choose to establish by way of
subsidiary or branch, and whatever their legal form, provided that legal
form is recognised in the foreign insurer's home state. Similar rights
of access should be available to intermediaries.
To ensure equal treatment,
discriminatory capital requirements, discriminatory reporting requirements and
restrictions on posting of key personnel should all be removed.
This right to establish
and operate competitively should also entail:
- removal of obstacles
to majority ownership and control of joint ventures and subsidiaries;
- removal of obstacles
to expansion in an insurance market, notably through branching; and
- 'grandfathering' of existing
investments.
Cross
border provision of services
Unnecessary restrictions
on cross border financial services business involving large industrial
and commercial risks should be removed, as the benefits of trade in this
sector should be realisable without requiring actual establishment. Insureds
in these areas normally enjoy a level of financial sophistication which
reduces the need for the level of host country consumer protection which
may otherwise be warranted for 'mass' risks. Seeking this form of liberalization
is particularly relevant to marine, aviation and transport insurance,
large construction risks, as well as credit insurance, in view of its
international character. As developed below, similar liberalization should
be introduced with respect to reinsurance.
Reinsurance
Considerable freedom presently exists for cross-border provision of reinsurance
in many WTO countries. Nevertheless, there are significant barriers in
many countries, and this is by no means confined to any particular regions
or to economies in a particular stage of development. Discriminatory reinsurance
practices exist in some of the countries with the most developed reinsurance
sectors and highest per capita insurance expenditure, as well as in many
of the least developed.
Progress towards liberalization,
not just resting on the stand-still commitments made in the first GATS rounds,
is particularly important in this sector. Unlike direct insurance, where local
or host country considerations of consumer protection may warrant some deference,
reinsurance is conducted exclusively between or among professional managers,
and the number of participants and transactions, even after greater liberalization
is achieved, should not be so large as to overburden the resources of prudent
solvency supervision, when it is administered on a non-discriminatory basis.
Reinsurance, moreover, is or should be one of the principal mechanisms for expansion
of domestic underwriting capacity and of pooling risk or buffering national
economies against the shock of economic losses resulting from catastrophic natural
events. Given these factors, reinsurance is a sector where early progress toward
mutual recognition of supervision standards is most justified and should be
achievable.
Among the barriers, direct
and indirect, which should be addressed in the GATS 2000 are the following:
- removal of mandatory
cessions to or preferences for domestic reinsurers, either private or state
owned;
- removal of requirements
that foreign reinsurers establish or provide direct insurance services as
a condition to providing reinsurance in the host country;
- reduction of deposit
or funding requirements which exceed the prudential security standards effectively
required of equivalent reinsurance from domestic sources; and
- elimination of credit-for-reinsurance
or other accounting standards for cedents which effectively discriminate against
provision of reinsurance by foreign insurers.
In addition to the liberalized
cross-border reinsurance, it should be a goal of the Financial Services 2000
negotiations to confirm the right of foreign investors to establish a reinsurance
business through a wholly owned presence or other form of business ownership
and to operate competitively through established vehicles available to national
companies in all WTO countries.
Intermediaries
The crucial role played by professional insurance intermediaries has received
insufficient recognition. Not only do these parties often assist assureds
in pursuit of the most cost-effective means of managing the transfer of
risk, their role in risk management techniques and in providing services
designed to minimize companies' exposure to risk is an essential contribution
to economic growth. Consequently, unnecessary restrictions on the right
of establishment of foreign insurance intermediaries should be removed
and these parties should have the right to establish, either through a
wholly owned operation or some other business ownership vehicle. It is
important that foreign insurance intermediaries should be allowed to compete
on a level playing field with local intermediaries. Unnecessary restrictions
on cross border and multinational insurance placements should also be
removed and insurance intermediaries should be permitted to place business
in the most suitable market for risk, with the prudential supervision
limited to objective criteria of quality, not the nationality of the security.
E-commerce
ICC recognises the growing importance of electronic commerce and the opportunity
which it presents to facilitate international trade in services. Electronic
commerce does not represent a new type of trade, but a new method of trading.
Electronic commerce is automatically international and the services it
offers are available anywhere in the world. Consequently, its potential
in encouraging cross border trade is significant. Because of its international
nature, there is a danger that overlapping jurisdictions may be applied,
and this must be avoided by the introduction of a regulatory regime that
does not inhibit this method of trading. At the same time, any such regulatory
regime should ensure effective consumer protection and adequate monitoring
of solvency.
Phasing
in liberalization
Insurance markets are at different stages of development among the WTO
member countries, and ICC acknowledges that the liberalization objectives
it has outlined may need to be phased in over an appropriate transition
period in certain countries, especially developing economies. These phase-in
periods will vary by country depending on its local market, legal, regulatory
and administrative frameworks. It may be appropriate for certain liberalization
steps to be phased in before others. The developed countries should support
capacity building programmes within the WTO and other organizations that
will assist countries to create the conditions necessary for full implementation
of liberalization commitments. In the services negotiations, governments
should still include timelines for meeting liberalization commitments
and these should be as short as is reasonable in light of the specific
circumstances of each member country.
Concluding
remarks
The understanding on Commitments in Financial Services annexed to the
GATS contains a set of commitments which recognises the above mentioned
requirements and this should be adopted by each WTO member as a minimum
commitment.
ICC welcomes this opportunity
of identifying objectives which should be pursued in GATS 2000. Significant
progress has already been made with the 1997 Financial Services Agreement and
this has established a framework within which our goal of further liberalization
should be achieved.
Document 113-2/16
Rev.2
25 May 2000
ANNEX
Necessary elements
for an open and competitive insurance market
A Guide to achieving
pro-competitive regulation on insurance
Market access and right
of establishment
For most insurers, the right to establish a commercial presence is critical.
Thus, laws and regulations should permit a non-resident insurance provider the
opportunity to establish and expand a commercial presence, via any legal entity
it prefers, either through de novo investment or through acquisition of an existing
enterprise, under terms and conditions of authorization that accord national
treatment.
Mode of
delivery
Countries should make commitments to allow non-resident insurance providers
and intermediaries options with respect to its form of establishment in foreign
markets, i.e., branches, subsidiaries or joint ventures. This should include
recognition of the relationship of a non-resident insurer to its parent company
for purposes of licensing approval. The non-resident company should be free
to enter a market under the name of their choice.
Foreign
equity limitations
Countries should make commitments to allow foreign insurance providers the right
to hold, as an absolute minimum, a controlling interest of 51 percent in a domestic
insurance provider by a specific date. Foreign Intermediaries should also be
allowed a controlling interest of 51 percent in a domestic insurance intermediary
by a specific date. Any remaining impediments to 100 percent ownership that
might exist at the end of the negotiations should be subject to a progressively
liberalised timetable.
National
treatment and equal competitive opportunity
All statutory and administrative standards of insurance should ensure non-discriminatory
treatment for national and foreign insurers. Foreign firms licensed in the market
should have the same right as domestic firms to compete for local business,
including that of state-owned or state-affiliated enterprises. Anti-competitive
practices among domestic insurance firms or between a domestic firm and affiliated
non-insurance enterprises should be prohibited. Timely regulatory enforcement
of technical, consumer protection, administrative and solvency regulation should
be consistent and not discriminate between foreign and domestic firms.
Solvency
and prudential focus
Regulations should focus on insuring that institutions meet reasonable solvency
and prudential requirements as the primary means of protecting consumers. In
most cases, governments should allow the market to determine the most effective
products and the pricing of those products in a competitive regulatory environment
that encourages innovation and product diversity.
Appropriate rules and procedures
that do not discriminate against foreign insurers and intermediaries and are
consistently applied should be established and made public governing the identification
and handling (including closure) of financially troubled institutions.
Transparent
regulation of remaining monopolies
In insurance, governments have reduced legal monopolies and introduced competition.
Market liberalization requires the removal of state monopolies. Those legal
monopolies that remain should be appropriately regulated to ensure fair competition
with new entrants competing in the liberalised areas. In particular, old state
monopolies should be prevented from abusing their market power.
Also, insurance services
providers which have been granted a legal monopoly should maintain separate
accounts for those services falling within the monopoly and those that do not.
Monopolies should be prohibited from cross-subsidising competitive services
with revenue obtained from monopoly activities.
Grandfather
clause
The inclusion of a grandfathering provision that recognises foreign insurers'
past and future acquired rights and existing investment is critical to liberalization
and ensures that international capital is available at times of market crisis.
This principle includes the right to majority ownership, with special emphasis
on stopping forced divestitures of equity positions acquired with regulatory
approval.
A transparent
legal, administrative, and regulatory environment
Standards, requirements, and codes of practice need to be promulgated with consultation,
full documentation and accessibility by all market participants. Foreign insurance
firms applying for authorization to do business should be provided a written
statement, setting out fully and precisely the documents and information the
applicant insurer must supply for the purpose of obtaining authorization. This
statement should aim to simplify and accelerate, as appropriate, the explicit
procedures to be followed.
Specific pro-competitive
steps that should be taken include the following:
- Existing regulations
applicable to financial services should be made public and available to consumers
and business;
- All proposed government
regulations related to financial services should be made available to consumers
and local business in advance of formal promulgation with adequate time for
both to provide comments;
- Governments should explain
why business and consumer comments are accepted or rejected;
- Government regulators
or an equivalent mechanism should provide information to consumers in a form
that enables them to make independent judgements about the creditworthiness
of financial institutions and provide market participants with the means to
judge the financial condition and risk exposure of a firm;
- Governments should eliminate
restrictions on the provision of financial services information from domestic
and international sources.
The regulatory body should
be an independent government entity. Decisions regarding the procedures used
by the regulators/supervisors should be impartial with respect to all participants
and not supplant a competitive marketplace. The government should ensure that
the financial services regulatory bodies have sufficient resources and trained
personnel to effectively enforce the solvency, prudential and consumer protection
laws and regulations.
Income security
Leveraging the "three pillar" pension system recommended by the World
Bank and the Organisation for Economic Co-operation and Development, the private
sector insurers support the development of a GATS mechanism to strongly encourage
global pension reform based on free market principles, with sound regulation,
and tax treatment that encourages citizens to offset the forecasted large gaps
in public expenditures through either group or individual forms of savings and
benefits.
Access to
international reinsurance markets
International reinsurance market access is necessary in all product lines to
better spread loss exposures, absorb catastrophes and marshal sufficient capacity
to insure adequate market resources to avoid any crisis. Therefore, all insurers,
domestic and foreign, should have access to the international reinsurance market,
with cross-border transactions authorised and monopolistic mandatory cession
requirements prohibited.
The agreement should:
- insure the removal of
requirements to invest a minimum percentage in specific categories of assets;
- abolish restrictions
on localising assets and matching requirements which exceed what is justified
from a prudential point of view;
- guarantee freedom of
contract form for reinsurers.
Regulations should provide
locally established direct insurers with the option to take credit for cross
border reinsurance secured by either: letter of credit, reasonable trust fund
deposit, or funds withheld.
Freedom to introduce new products and compete on value-added
services
Consumer protection can be afforded through solvency regulation, as well as
ensuring that the industry has flexibility within a competitive regulatory framework
to expeditiously provide new products and services to consumers. Mechanisms
to accelerate the licensing of new insurance products should be encouraged,
e.g. file and use. Expedited licensing procedures should be available for those
products, which already fit into the existing regulatory framework and are available
in the market. No limits should be placed upon the number or frequency of new
product introductions by a company.
Standardised
reporting, accounting, actuarial, and training practices/requirements
These practices/requirements are widely accepted on an international basis.
The adoption of standards facilitates the evaluation of a company's financial
strength, the incorporation of new skills and permits the comparison of companies.
Governments should encourage adoption of accounting and auditing standards based
on recognised international "best practices" standards.
Choice of
representatives
A foreign insurer should be able to appoint, as his representative, any competent
and honest ("Fit & Proper") person who is domiciled and actually
resides in that country, irrespective of his nationality. In order to enter
a market and begin training the local work force, insurance companies need to
be able to maintain foreign staff as needed and, when necessary, provide short
and mid-term support staff from related insurance operations elsewhere. Therefore,
a liberal and expeditious visa policy for foreign insurance professionals is
a necessary element to be able to operate competitively abroad.
Transition
periods - phased-in liberalization
Remaining impediments to substantial full market access, national treatment
and pro-competitive regulation should be liberalised progressively on an accorded
transition schedule. Countries should make firm commitments that they will move,
within a reasonable time frame and by a date certain, to national treatment,
right of establishment and equal competitive opportunity. "Free riders"
undermine the benefits of a broad based agreement and should not be permitted.
Standstill
Schedules that bind countries below the existing level of liberalization, or
schedules that fail to contain commitments not to impose new restrictions, are
inconsistent with the liberalising objectives of the WTO and should be strongly
discouraged.
Cross-border
trade
All parties should permit the freedom of consumers to purchase insurance from
a licensed provider while in another country. Restrictions with respect to the
ability of local residents to purchase from non-resident insurance providers
should be liberalised for reinsurance, tourist insurance, and marine, aviation,
cargo and transport insurance. Countries should consider the possibility of
allowing the aforementioned product categories of insurance services to be provided
on a cross-border basis in or into their respective territories within a reasonable
time frame.
Scheduling
of other commitments
With respect to countries which have bilateral or regional agreements, those
agreements should be reviewed and, when it is determined to be advantageous,
their respective commitments should be scheduled on a MFN basis.
Financial
requirements
Capital, solvency, reserve and other financial requirements should be scheduled
on a non-discriminatory basis.
Taxation
stability
The agreement should require the scheduling of all future taxation (national
and sub-national) of life insurance, property and casualty insurance, reinsurance,
pensions, long-term care, disability income and retirement security products,
prior to entry into force via a biannual notification process.
Mutual companies
Mutual financial services companies should not be subject to discriminatory
licensing requirements or other barriers to establishment and operation.
Improving
definitions
USTR and EU Commission should determine and confirm with the WTO Secretariat
the extent to which all member company product lines are currently covered by
the existing GATS and, as necessary, take steps to ensure that all are clearly
covered by GATS liberalization provisions. Suggested additions that are not
currently explicitly covered include: life reinsurance, pension products and
annuities, surety bonds and financial guarantees, disability income and long
term care insurance, health care and medical insurance, as well as ancillary
services such as pension fund management and related endeavours.
Commercial
value
The criteria by which the private sector trade associations will evaluate their
support for the WTO Insurance Agreement will include a determination as to the
quality of individual offers by countries that are considered, now and prospectively,
significant to the financial services sector, as well as the overall quantity
and quality of commitments and their collective value to a WTO Financial Services
Agreement.
Financial Leaders Group - Insurance
Evaluation Team
Brussels/Washington
1 July 1999
- American Council of Life
Insurance
- American Insurance Association
- Alliance of American
Insurers
- Comité Européen
des Assurances
- Council of Insurance
Agents and Brokers
- Health Insurance Association
of America o International Insurance Council
- National Association
of Mutual Insurance Companies
- Reinsurance Association
of America o Surety Association of America