AIA Calls for More International Market Access for U.S. Insurers

The American Insurance Association has issued a statement, which points out several instances of a “disconnect between the continued significant global insurance capacity and a strong demand for insurance products that is often created by protectionist barriers in emerging markets.”

AIA VP and associate general counsel David Snyder submitted a statement to the House Financial Services (HFSC) Subcommittee on Insurance, Housing and Community Opportunity in advance of hearings held May 17, entitled “U.S. Insurance Sector: International Competitiveness and Jobs.”

The statement cited figures from Swiss Re’s Global Insurance Review 2011 and Outlook 2012/2013, which predicted that non-life insurance growth in emerging markets would reach 7.0 percent in 2012 and 8.6 percent in 2013 as compared to 1.7 percent and 2.9 percent respectively in industrialized nations.

The AIA also noted the conclusion of the U.S. International Trade Commission (ITC) in its “Insurance Trade Restrictiveness Index” that U.S. insurers “could increase direct sales by 48 percent or $870 million annually while the sales of the affiliates of U.S. insurers would increase 28 percent or $39.1 billion annually among sampled countries.”

Snyder’s statement points out that “both the capacity to write insurance and the global demand for insurance are high,” as P&C insurers, “despite the recent challenges, remain strongly capitalized and able to take on more business. In addition, insurance regulation in the U.S. and other developed markets is comprehensive and performed well during the financial crisis.”

The potential for growth in emerging markets, as set out in the ITC report referenced above, is substantial. The AIA also points out the role insurance plays in “supporting economic development and improving the quality of life.” Not only do they cover losses, but they also invest the premiums they earn, mainly, due to regulations, in non-risky assets, such as government bonds, which in turn benefit the economies of the countries in which they do business.

The AIA emphasized the importance in two sectors – nontraditional products and the EU’s Solvency II regulations – as particularly important. “Our members not only write traditional insurance but also have the ability to offer nontraditional forms of coverage. For example, some write takaful, a coverage reflecting Islamic values. They also provide ‘inclusive insurance’, formerly called micro-insurance, offering coverage with small payouts and with premiums affordable for the very poor.”

Achieving U.S. and EU mutual recognition on regulations is also a high priority. The AIA said: “Europe’s new financial solvency system for insurers is set to go into effect at the beginning of 2014. Under it, a third country must be deemed equivalent for purposes of reinsurance, group capital and group supervision, if a company originating in that country is to be treated equally with European insurers in the European market. Omnibus II, the follow-on measure to Solvency II, is now being debated in Brussels, including how this equivalence process will work, with transitional provisions.”

The statement also made reference to the “intensive regulatory dialogue involving the Federal Insurance Office, National Association of Insurance Commissioners and State regulators to determine how differences between the two regulatory systems can be bridged so as to allow an equivalence finding for the U.S. While there is widespread hope on both sides of the Atlantic that this process will produce results, Congress should be monitoring the situation to assure that mutual recognition is the ultimate outcome and that trans-Atlantic insurance commerce is not disrupted.”

As the AIA has been engaged in discussions concerning the form and substance for revisions of global standards for insurers being conducted under the auspices of the International Association of Insurance Supervisors’ (IAIS), it sees the necessity of aligning them with applicable U.S. regulations, particularly the Dodd-Frank provisions.

The U.S. is home to some of the world’s biggest insurers, therefore it is particularly concerned with the criteria for determining what is a G-SIFI [globally systemic important financial institution]. “It would make no sense for insurers not deemed systemic in the world’s largest insurance market to face a contrary designation in the global market, using different, and perhaps inappropriate, criteria,” said the AIA, echoing similar concerns by other global insurance organizations.

Somewhat connected to this concern is the ongoing role of the Organization for Economic Cooperation and Development (OECD) countries (including the U.S.), who, the AIA said, “have agreed to implement sound regulatory principles embodied in the OECD’s Policy Framework for Effective and Efficient Financial Regulation. Among the OECD’s recommendations for regulating financial services, including insurance, are: precise identification of the problem, selection of the policy option that is least costly to the industry, but still effective, and periodic review of existing regulations.”

Problems have arisen, however, as, according to the AIA, “few countries, even OECD members, actually apply this framework and it seems not to be consistently followed by international standard setting bodies. We therefore request the Congress to inquire as to how the OECD framework is being followed in bodies in which the U.S. participates and by trading partners of the U.S.”

The AIA would also like the Congress to examine whether U.S. insurers suffer from “unfair competition” from “current or former state owned enterprises,” which, it charges are “allowed to compete unfairly with foreign insurers, including those based in the U.S. Often they are able to do so because they are subject to different and lower regulatory standards, because they enjoy cultural and historical advantage, or both. Examples include Japan Post and Korea Post.”

Snyder’s statement also criticizes recent moves in South America, notably in Brazil and Argentina, who have “backpedaled on liberalization in critical and severe ways. Argentina may be violating its WTO commitments and is harming the insurance sector, as it is other sectors, in the drive to force the localization of capital.” Brazil partially reversed the liberalization of its reinsurance market in 2007, when, in 2010 its insurance regulator placed restrictions on “intra-company transactions,” and required placing 40 percent of any reinsurance contract with local companies.

While the AIA told Congress that some progress was being made in China, notably on loosening capital requirements, and opening its personal auto market, it also cited the costly burdens of a regional licensing system and the slow pace of regulatory decision on new products as ongoing concerns.

India was criticized for refusing to lift or otherwise moderate its 26 percent foreign direct investment cap, which the AIA called “particularly egregious, considering the size and sophistication of the Indian insurance market and its desire to be a global leader.”

In an overall statement, the AIA expressed its concerns over the “growing trend to restrict the ability of insurers to analyze data outside the country of origin.” The statement explained that this would “add to operational costs and limit the competitive advantage our companies can achieve through centralized data processing and analysis. It is important therefore, that we assure that new privacy laws not inhibit the necessary transmittal and use of data for legitimate insurance purposes such as underwriting and claims settlement.”

The World Trade Organization (WTO) came in for some criticism as well. The AIA said that while it has “long been an active supporter of the multilateral trading system,” which it sees as effective in many ways, the “WTO has recently been ineffectual at achieving new market access. For this reason, we support reasonable efforts, such as a services plurilateral to try and end the impasse.”

In conclusion Snyder wrote: “We appreciate the attention of Congress to these international trade and related regulatory issues. Without this focus, we fear that the global expansion of U.S. insurance companies may be inhibited, thereby harming not only our economic interests but also stunting the economic development of strategic partners.”

Source: American Insurance Association

IJ Ed. Note: While the AIA’s position, taking aim at unnecessary and protectionist barriers to entry into the insurance markets of other countries is well taken, one of its observations notes China’s “costly burdens of a regional licensing system and the slow pace of regulatory decision on new products as ongoing concerns.”

The AIA could just as well have been talking about the U.S. where 50 state regulators plus the federal government are just as capable as China in erecting equivalent barriers. While some progress has been made, notably in more uniform regulations of the surplus lines industry , a lot more could be done, starting perhaps with the total elimination of the 100 percent deposit required for “alien reinsurers.”

While, as the AIA states, it supports the efforts currently underway at various levels aimed at repealing unnecessary laws, avoiding duplication and harmonizing the regulations governing market access, they are by no means gathering speed, and are unlikely to do so in an election year.

Cooperation on all of these matters is important for the health and growth not only of U.S. insurers, but also for the global insurance industry generally. Progress would benefit everyone involved – brokers, insurers, claims mangers, lawyers and accountants, but to achieve positive results cooperation is vital; however, cooperation is a two way street.