Protectionism creates dangerous concentrations of risk, warns Insurance Europe

Insurance Europe has warned that protectionism can create dangerous concentrations of risk, and says that open (re)insurance markets are the only way to remove the danger. In a new insight briefing on protectionism, Insurance Europe sets out examples of current protectionist measures and the problems they create for the very economies they seek to protect.

“International (re)insurers play a crucial role in enabling economic growth around the world, by offering financial protection and dispersing insured risks across a global network. International (re)insurance means that the financial impact of natural and man-made disasters is not concentrated within the economies in which they occur. Of course, this is the central objective of insurance: to share risks, so that losses are more easily absorbed,” the briefing states.

It notes that the use of protectionist measures continues to increase in some jurisdictions, so free-trade environments for (re)insurers are under threat. “Regional protectionist measures in (re)insurance actually create dangers for the very economies they aim to protect. This is because they concentrate risk, rather than allowing it to be spread throughout the global reinsurance market, which is only possible if markets are open.”

An example of commonly used protectionist measures are compulsory cessions, or “rights of first refusal”, the briefing explains. These oblige local insurers to cede their risks to local, often state-owned, reinsurers. They are in force or under consideration in a wide range of African, South American and Asian countries. 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. This is because they concentrate risk in the jurisdiction’s economy, rather than allowing it to be spread throughout the global reinsurance market, which is only possible if markets are open.”

The briefing also points out that many protectionist practices also go against the spirit of free-trade agreements that various jurisdictions have in place. “It is hoped that these kinds of issues will be addressed by EU policymakers in forthcoming discussions on possible trade agreements, as well as in regulatory dialogues with other jurisdictions,” said Ms Mihai.

The briefing also notes that, while some countries are taking positive steps towards opening their markets, these steps are often limited, both in terms of scope and ambition. For example, Argentina recently introduced reforms that will gradually reopen the reinsurance market, but a complete liberalisation is not yet expected.

Ms Mihai added: “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.”

- Commercial Risk