International standards for insurance regulation are on the way, as Gordon J. Cloney reports.
In the course of the next five years expect evolution in insurance regulation. The framework within which this drama will play out is provided by the trend toward private markets, greater regulatory transparency, improved communication, and the new international organisations that offer forums for the exchange of ideas and methods among supervisory authorities. The trigger is globalisation and an emerging demand for security. The elimination of unnecessary differences in regulation and the related accounting, legal, financial and other technical infrastructure that underpins insurance will ease and speed efficiency in the delivery of such world class products.
Market pressure is certainly forcing such new regulation. Twenty years ago national markets demonstrated wide differences in the way insurance was regulated. This was rooted in differences in economic history and stages of development, in varying beliefs about the role of government in insurance and about insurance regulation, in ideological differences about the place of the private market, and in a much lower level of economic interdependence.
Since then these differences have narrowed and, in some cases, disappeared producing a shift favouring private markets. As political views about how the business of insurance might be carried out became more alike, greater consensus about how to regulate evolved. Also, the general growth in international economic interdependence caused insurers to operate in increasingly similar ways. This in turn created conditions where it became possible to talk about international standards for insurance regulation.
The scope of the underlying change is enormous. In the last decade governments of over 40 emerging countries changed national policy and embraced private insurance and the international market. Many industrial and emerging countries are passing responsibility for providing social insurance, for example pensions, health insurance, and workers' compensation, to the private sector. A most important regulatory change has been the movement away from systems favouring all encompassing strict control to regulation based on two key points: assuring company solvency and consumer protection, in particular in the personal lines.Against this background, trade liberalisation then opened the process of global standard making for insurance by setting standards in the international trade area. In late 1997 after a decade of negotiation, all major country markets took steps to guarantee fair regulatory treatment for foreign insurers under the General Agreement on Trade in Services (GATS) - a system of binding, enforceable trade rules. Market access and transparent, non-discriminatory regulation were assured by commitments governments made at that time. In a separate, parallel development over 70% of the world's insurance business has come to be transacted within regional arrangements which affect regulation, most notably in the European common market and to a lesser extent in North America under the North American Free Trade Agreement or NAFTA.
Most regulatory practices are still considered domestic matters subject to international trade rules only when a country discriminates in applying them to foreign insurers. Examples of such domestic policy areas are solvency regulation, areas of rate and form, product approvals, and protection for consumers. There are many other areas, of course, where there are large differences in the practices used by national regulatory systems but where the issue is not trade fairness. Not surprisingly there is a growing call for greater consistency among markets and for reform to eliminate overly burdensome regulation. Proponents argue that regulation where needed should be adequate but not excessive, costly, slow to administer, or otherwise bureaucratic and they feel a means is needed to move this regulatory evolution along.
How is this to be brought about? A new round of world trade negotiations gets underway next year and some US and European insurers have proposed that binding standards for insurance regulation be negotiated and enforced under the World Trade Organisation (WTO). However more sage observers point out that more trade negotiations do not seem to be the answer. It is highly unlikely that governments and legislatures will relinquish sovereignty over matters of public trust, fiduciary responsibility, and consumer protection to an international organisation which many see as strongly oriented to the objectives of multinational companies. Also, they point out, the existing WTO trade rules for insurance were only put in place in late 1997. The institution should be tested in practice and the many exemptions and loopholes in the present system closed before considering transforming the WTO into the arbiter for world regulation whether in insurance or any other industrial area.
Also, because a country's system for insurance regulation is a body of domestic policy designed to achieve domestic objectives, creating international agreement about how the business is best regulated requires a more diplomatic approach than that used for international trade negotiation which, being demand-driven, is confrontational and can turn negative and hostile. Regulatory standard-making calls for cooperation based on analysis, global benchmarking, and communication. In large part future efforts to build better regulatory systems will depend on insurance supervisors' professional commitment to improve the quality and efficiency of regulation. The key to cooperation is pursuing a common goal - this is seeing that sound insurance protection reaches the public at the most reasonable cost.This simple objective leads to a positive, apolitical guiding principle for analysis of regulatory practices and identifying areas where change and modernisation is needed. The principle is that when there are alternatives for regulating an aspect of the insurance business, a supervisory office should seek the regulatory practice that is most cost-effective and which least disturbs the ability of the market to respond to the insurance consumer's needs. The regulator's ability to find the best alternative is enhanced if access to the experience of other national markets is possible. If regulators share experience to find the best practice international cooperation results. And to the extent the best practice is used in different markets, global consistency in regulation will also follow.
The International Association of Insurance Supervisors (IAIS) and the regional associations of supervisors in Latin America, Africa and Asia are the logical institutions for building the new regulatory dialogue at the global and regional levels. The IAIS is already engaged in the process of identifying supervisory standards, advancing cooperation among regulators, and assisting in the professional training and technical preparation of its global membership.
The Latin American Association of Superintendents of Insurance, (ASSAL) is the natural regional organisation for adapting these global standards to Latin America. It is a forum that has scope and influence. Being regional, ASSAL also has the advantage of focusing on the needs in the Americas and the organisation can balance the region's national interests. In an important initiative ASSAL has recently introduced the practice of inviting private industry participation in its deliberations, a practice which hopefully will be transferred to its component national markets and emulated by their regulators through greater transparency and dialogue when developing local supervision.
The dialogue seems less advanced in Asia although a course like that present in ASSAL is emerging. In Africa, the African Insurance Organisation has similar objectives although the weak economies in much of the region suggest that for now creating norms for regulation will take second place to the more fundamental need for market development.
In sum, the dialogue for building a new, more globally consistent regulation is started. The process is young. Dramatically improved consistency among regulatory systems is not going to appear tomorrow, but it is on the way.
Gordon J. Cloney is chairman of the Institute for International Insurance Development.