PCI Tells U.S. Trade Commission China Insurance Link Important

September 24, 2008

In testimony before the U.S. International Trade Commission, the Property Casualty Insurers Association of America (PCI) stressed the “importance of the U.S.-China insurance trade relationship.” The PCI also told the Commissioners of the “need to allow foreign insurers access to the mandatory third party liability auto insurance marketplace, as well as the “the need to address discriminatory restrictions on foreign investment in Chinese insurance companies.”

“With China, as one of the fastest growing international markets and the United States’ second largest trading partner, PCI appreciates the importance of this relationship and the benefits of increasing services trade between our countries,” stated Robert Gordon, the PCI’s senior vice president for policy development and research.

“Chinese consumers could greatly benefit from the increased capital, sophisticated underwriting techniques, and loss mitigation guidance that U.S. insurers could bring to the marketplace,” he added. “PCI member insurance companies are ready and eager to bring these benefits to the Chinese market. We believe expanding insurance trade has enormous benefits for international consumers in foreign countries. U.S. insurers bring significant additional capital investment and commitment to their host countries, creating high paying jobs where they do business, and bringing innovative and sophisticated underwriting techniques that can help transform the marketplace.”

The PCI’s bulletin noted that the U.S. trade deficit with China for the first seven months of 2008 is $142 billion, according to the U.S. Census Bureau. However, the PCI added, that this deficit is partly offset by a burgeoning surplus in services trade, including insurance. “Auto insurance, in particular, represents an opportunity to further soften the U.S.-China trade imbalance in a mutually beneficial manner,” Gordon noted. “Auto insurance premiums constitute about 70 percent of the overall premium in the Chinese general insurance market, with growth expected to continue to balloon in concert with the dramatic expansion in Chinese auto sales, which is now the third largest auto market.”

Gordon testified that there are significant problems in the operation of the Chinese auto insurance market that could be alleviated by allowing U.S. and other foreign insurers to write mandatory third party liability (MTPL) coverage.

“The number of insurance company market participants could be easily expanded without undermining domestic revenues, with U.S. insurers bringing significant capital investment, risk management, and solvency expertise that could benefit the entire marketplace,” he explained. “U.S. insurers also have extensive experience with developing loss information databases and risk-based pricing, which would help reward responsible consumer behavior and provide more affordable insurance for most drivers. Additionally, U.S. insurer participation in MTPL auto could provide sophisticated and streamlined claims management models to help all insurers satisfy the consumer marketplace.”

Gordon pointed out that allowing U.S. insurers into the Chinese market would also help bring needed stability to insurance pricing while facilitating the transition back to a free-market competitive system.

The PCI also reminded the Commissioners of the several studies it has presented to Congress, “demonstrating the advantages to consumers of competition-based pricing in states like Illinois, as well as recent trends in South Carolina and the auto market in New Jersey.” It also cited The National Association of Insurance Commissioners draft of its “Personal Lines Regulatory Framework of September 8, 2006,” which “recognized that the vast majority of states have moved away from a prior approval pricing framework and toward a reliance on competitive forces.”

Commenting on the current economic turmoil, The PCI noted that The NAIC had recognized “that not one single insurer has become insolvent at this time because of the current crisis.” In what would seem to be a response to a question about AIG, the PCI indicated that the NAIC had noted that “AIG is not an exception as the problems in AIG were caused by an unregulated non-insurance subsidiary and AIG’s insurance units are still sound.”*

“U.S. insurers have decades of experience weathering volatile economic climates while maximizing consumer benefits and maintaining high levels of solvency in a competitive market. This history of success could be brought to the Chinese marketplace and disseminated widely by allowing foreign insurers to provide MTPL,” said the PCI.

The testimony was given in connection with the work of the PCI and its members in working with the U.S. government “to address a draft regulation issued by the China Insurance Regulatory Commission (CIRC) in April 2008 that imposes discriminatory limitations on foreign investment in Chinese insurance companies,” said the bulletin.

The PCI said: “These regulations contain provisions that would require foreign financial institutions investing in Chinese insurance companies meet a series conditions, some of which create artificial and discriminatory barriers to investment. Conditions such as requiring consecutive profitability for the last three fiscal years, mandating a long term credit rating of above ‘A’ as rated by international rating agency; and limiting foreign insurers to investment in only one Chinese insurer are viewed by PCI as being onerous to foreign investment.”

“These barriers limit Chinese access to beneficial foreign investment and the corresponding expertise and commitment the investment would bring,” Gordon added. “Notably, none of these conditions apply to Chinese-owned property-casualty companies. PCI hopes to work with the Chinese government to redraft these restrictions to create a more level playing field that allows potential participation by top foreign companies investing in the Chinese market.”

In conclusion the PCI said it “applauds both the International Trade Commission and the United States Trade Representative for initiating this important investigation into foreign property and casualty insurance markets. PCI will continue to be engaged in a dialogue with the U.S. Department of Commerce and USTR to help encourage and facilitate increased openness and competition in foreign markets.”

*Ed: Note: As described by the PCI, the NAIC’s description of AIG’s financial problems is a bit ingenuous. True, the operating insurance subsidiaries have substantial reserves, as required by the various states that regulate their activities, but the bailout was directed at the essential holding company, which manages all of AIG’s 240 or so subsidiary operations. That operation is not in turn a “subsidiary” of any of them.

Source: Property Casualty Insurers Association of America – www.pciaa.net

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