Insurance in the General Agreement on Trade in Services is one in a series of new American Enterprise Institute studies on negotiations to liberalize trade in services. Each study focuses on a particular service sector, in this case, insurance.

The General Agreement on Trade in Services (GATS) and its Financial Services Agreement (FSA) make services subject to the same trade rules as goods. They also reaffirm the importance and the inclusion of much needed services, such as insurance, in a global economy. Worldwide direct insurance premiums (i.e., insurance sold to the public and to noninsurance businesses) totaled more than $2.1 trillion in 1997, with life insurance premiums accounting for almost 60 percent and nonlife premiums just more than 40 percent. Regionally, North America is the world's largest insurance market (34.5 percent), followed by Europe (31 percent) and Asia (29 percent). The largest growth potential lies in developing countries in Latin America, Asia (outside of Japan), and Africa.

In this monograph, Harold D. Skipper, Jr., of Georgia State University analyses in depth the insurance industry worldwide and gives us clear descriptions of the various types of insurance services. He describes briefly the recent progress of GATS--in particular the provisions directly related to insurance services--and explains the most important provisions of the supplementary FSA adopted by the World Trade Organization (WTO) in 1998. The author also recommends detailed trade rules and regulatory principles to further liberalize insurance services. As a first step in upcoming negotiations, Skipper recommends an across-the-board standstill agreement for insurance in GATS, which would prevent any increase in the protection of domestic insurers.

According to the author, insurance plays an important role in economic development. It is wrong, he argues, to view insurers as merely "pass-through mechanisms for diversifying risk." Important as this function is, that view "masks other fundamental contributions that insurance makes to prosperity," including promoting financial stability, fostering trade and commerce, enhancing the mobilization of savings, managing risk more efficiently, and improving the efficiency with which capital is mobilized.

Three areas constitute the main priority for future GATS insurance negotiations:

1. Generic improvements. These changes should be applied across sectors to ensure consistency, in contrast to improvements dealing with each trade service separately, and could include more competitive rules for government procurement and decreased subsidies and protection for domestic firms.

2. Increased market access. Skipper lists market-access commitments made by developed and developing countries and recommends increasing market access through:

• greater commitments to upholding the right of establishment for foreign corporations;
• fewer restrictions in equity investment;
• allowing greater crossborder trade and investment in insurance services;
• fewer limits on the number of insurance suppliers in domestic economies;
• removing nationality and residency requirements;
• removing restrictions on land ownership;
• eliminating discriminatory tax laws;
• reducing barriers to real competition between foreign and domestic insurance companies in the economies of WTO members, particularly developing countries.

3. Better procompetitive regulatory principles. To achieve the goals of a competitive environment and a solvent insurance market, the author notes that the most important issues revolve around the creation of procompetitive regulatory rules that will facilitate fully contestable markets among WTO members. To this end, Skipper suggests regulatory principles that might form the basis for a separate addition to the GATS for insurance--similar to the annex for telecommunications services negotiated in 1998. These principles should be characterized by the following traits: adequacy, impartiality, minimal intrusiveness, and transparency. Among the guidelines:

• Governments should enact and enforce laws that provide an effective framework for competitive insurance markets.
• Governments should enact laws that establish reasonable solvency standards and regulations as the primary means of protecting the public.
• To create reasonable solvency regulations, governments should make public and enforce consistent rules and procedures for identifying and dealing with financially troubled insurers.
• Governments should establish an insurance regulatory body that operates in society's interests and has sufficient resources to efficiently, effectively, and impartially enforce the nation's insurance laws and regulations.
• Governments should apply and enforce insurance regulations consistently and impartially among competitors, regardless of nationality.
• Insurance regulation should be minimally intrusive, provide meaningful protection, and be limited to what is justified to accomplish its purpose.
• Governments should allow the market to determine what financial services products should be developed, the methods by which they will be sold, and the prices at which they will be sold.
• Governments should make existing laws and proposals for new laws easily available to the public, particularly to consumers, businesses, and insurers and other providers of financial services.

This American Enterprise Institute trade and services project was established in conjunction with a number of other research institutions, including the John F. Kennedy School at Harvard University, the Brookings Institution, and the U.S. Coalition of Service Industries.

To schedule interviews with the authors, please call Veronique Rodman, director of public affairs at AEI (telephone: 202.862.4871, e-mail: VRodman@aei.org).