Protectionist measures harm jurisdictions

Free trade environments for re/insurers are under threat from jurisdictions adopting more protectionist measures—but many such regimes may actually hurt the very economies they aim to protect.

This is according to an October 2017 insight briefing from Insurance Europe, Protectionism creates dangerous risk concentrations.

The briefing argues that regional protectionist measures concentrate risk, rather than allowing it to be spread throughout the global reinsurance market, which is possible only if markets are open.

Examples of this can be seen in many parts of Asia, specifically China and Indonesia. A common example is compulsory cessions or “rights of first refusal”. Insurance Europe stated that such measures oblige local insurers to cede their risks to local, often state-owned reinsurers.

Insurance Europe noted that some countries are taking steps to open up their markets, even if limited in terms of scope and ambition.

In India, for example, the government has taken significant steps towards reducing trade barriers and improving access to its re/insurance market by allowing global reinsurers to establish branches.

But some of these changes were then reversed in implement regulations, which are intended to offer first preference to local market players such as the state reinsurer, General Insurance Corporation of India (GIC Re).

The briefing also highlighted the activities in Indonesia, where the government is in the process of transforming national reinsurer Indonesia Re into a “giant” reinsurance company, absorbing a number of existing local re/insurers.

“With this increased capacity in Indonesia Re, there is a risk that the government may seek to further increase compulsory cessions from local insurers,” Insurance Europe said in the report. “In parallel, reductions in the 80 percent foreign ownership limitation continue to be contemplated by local policymakers, which would further restrict foreign players’ access to the Indonesian market.”

There is a long list of protectionist measure in place which, Insurance Europe believes, hinder the free transfer of risk across borders.

The report notes that between mid-October 2016 and mid-May 2017, 74 new trade-restrictive measures had been put in place by members of the World Trade Organization, as highlighted in its July 2017 trade development report. These measures included new or increased tariffs, along with customs regulations and quantitative restrictions.

Although this was a decrease on its previous review period, it still amounted to more than 10 new measures per month. Similarly, the Global Reinsurance forum in August 2017 identified 30 major territories that have implemented, or are in the process of implementing, barriers, an increase of four since January 2016.

Equal opportunity

Going forward, Insurance Europe suggested that foreign re/insurers need to be authorised by regulators to do business and to be treated the same as local companies.

“Many of the issues in the Indonesian, Indian and Chinese markets, for example, may be addressed by EU policymakers in discussions on possible trade agreements between the EU and its Asian trade partners.

“Other issues, for example prudential ones, can be raised in bilateral regulatory dialogues. More dialogue and cooperation at regulatory level will help support more cross-border business.”

Cristina Mihai, head of prudential regulation and international affairs at Insurance Europe, commented: “These kinds of protectionist measures remain a major risk for the jurisdictions that implement them. They concentrate risk in the jurisdiction’s economy, rather than allowing it to be spread throughout the global reinsurance market, which is possible only if markets are open.”

The report added that many protectionist practices also go against the spirit of free trade agreements that various jurisdictions have in place.

Mihai said: “It is hoped that these kinds of issues will be addressed by EU policymakers in forthcoming discussions on possible trade agreements.

“By opening their markets to foreign re/insurers, jurisdictions can benefit their domestic markets in several ways. These include wider access to operational expertise, skills and discipline in underwriting; access to a wider range of products; a strong risk management culture; technological developments and training. All these elements can benefit other companies and sectors, and hence the economy,” she concluded.

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