APPENDIX 2
Joint memorandum by the Association of
British Insurers, Lloyd's and the International Underwriting Association
of London
1. INTRODUCTION
1.1 We, the Association of British Insurers
(ABI), Lloyd's and the International Underwriting Association
of London (IUA) welcome the opportunity to submit evidence to
the House of Commons Trade and Industry Committee on the European
Commission's negotiating strategy for the World Trade Organisation's
Hong Kong Ministerial in December 2005.
1.2 The UK insurance industry is the largest
in Europe, and the third largest in the world after the US and
Japan. The UK leads the world in terms of internationally traded
insurance, and in 2002 overseas markets accounted for nearly a
quarter of UK insurance premiums. ABI members are established
in all the major insurance markets in the world, including Europe,
the US, China, India and Brazil. In 2004, the UK insurance industry
contributed £6.4 billion in export earnings to the British
economy. The London Market is a distinct, separate part of the
UK insurance and reinsurance industry based in the City of London.
Gross premiums on the London Market were estimated at £24.6
billion in 2002, up a quarter on the previous year, and largely
derived from cross-border trading. The bulk of this premium is
divided between Lloyd's and insurance companies represented by
the IUA. Lloyd's operates in 200 countries and territories worldwide.
The current Lloyd's market comprises 62 syndicates with a total
capacity to accept insurance premiums of £13.7 billion in
2005. Approximately two thirds of Lloyd's premium income derives
from overseas business. These figures demonstrate the international
orientation of British insurance, and the contribution that these
overseas interests make to the British economy.
1.3 The UK insurance industry therefore
strongly supports the objectives of the Doha Development Round,
namely improved market access and increased business opportunities
in agriculture, NAMA (non-agricultural market access, ie manufactured
goods) and Services. Our hope is that the Round will deliver new
commercial opportunities, thereby safeguarding continued growth
in a key sector of the British economy.
1.4 We also believe that global trade liberalisation
makes a major contribution to fighting poverty, boosting economic
growth and integrating developing countries into the world economy.
According to a World Bank study, abolishing all trade barriers
could boost global income by $2.8 trillion and lift 320 million
people out of poverty by 2015. Eliminating all tariff and non-tariff
barriers could result in gains for developing countries of $182
billion in the services sector, $162 billion in manufacturing
and $32billion in agriculture.
1.5 For combined reasons of commercial opportunity
and development benefit, we therefore maintain that a conclusion
to the Doha Round without a substantive market-opening result
in the Services negotiations is unthinkable.
2. VALUE TO
THE UK OF
SERVICES LIBERALISATION
2.1 Services, and financial services in
particular, are key to the growth of the British economy. In 2003,
the UK was the second largest exporter of services in the world.
This is a far cry from the situation in the early 1990s, when
services exports were barely a third of the value of goods exports.
Today they exceed half the value of goods exports (excluding oil).
More specifically, the UK's trade surplus in insurance has grown
more than four times over the last decade, making it one of the
fastest growing sectors of British exports. No other advanced
country has enjoyed Britain's success in deriving a large increase
in export earnings from its financial sector. The UK's trade surplus
in financial services has more than doubled from £8 billion
in 1996 to £17 billion in 2004.
2.2 The British insurance industry is interested
in both cross-border provision of insurance and reinsurance, as
discussed above, and foreign direct investment, in other words
establishing a commercial presence in overseas markets. Again
the figures speak for themselves; according to the Office for
National Statistics, the highest earnings from UK foreign direct
investment abroad came from the financial services sector, accounting
for 22% of the total (2003 figures).
3. DEVELOPMENT
BENEFITS OF
SERVICES LIBERALISATION
3.1 There is compelling evidence of a correlation
between economic growth and poverty reduction on the one hand,
and trade liberalisation on the other:
— More globalised developing countries
generated growth averaging 5% a year in the 1990s against 1.4%
for less globalised countries. (Dollar & Kray, World Bank);
— Developing countries with the fastest
growth rates have achieved the greatest reduction in extreme poverty.
The share of population earning less than $1 a day halved from
30% to 15% in East Asia, and fell by a quarter from 42% to 30%
in South Asia between 1990 and 2001;
— One report indicates that countries
with fully open financial services sectors grow on average one
percentage point faster than other countries (August 2001, World
Bank Policy Research Working Paper No 2655).
3.2 The Services sector is the largest employer
and contributor to GDP for both developed and developing countries.
For instance, 70% of Mexican economic output is in the Services
sector; similarly two-thirds of the Mexican work force is employed
in Services. The same can be said of trends in the global flows
of foreign direct investment. In the early 1970s the services
sector accounted for only one-quarter of the world FDI stock;
by 2002 it had risen to 60% of the total. Furthermore, according
to a recent UNCTAD publication, developing country multinationals
in the services sector are expanding at a faster rate than their
developed-country counterparts. Surely then, if there are to be
improvements in economic growth, poverty reduction and sustainable
development, Services should be one of the priority areas.
3.3 Among the wide range of service sectors,
financial services stands out as one of the sectors of the economy
which is essential for development. An efficient financial sector
is crucial for growth and stability. The banking and securities
sectors play a key role in providing access to the capital needed
for growth. Insurance allows businesses to take on risk and expand
more quickly; it also provides a channel for the savings of the
middle-classes.
3.4 It is important to stress that developing
countries are best advised to undertake a planned and sequenced
programme of liberalisation, which takes into account special
domestic factors, as opposed to a sudden and rushed liberalisation.
Financial service providers are keen to invest, whether by establishing
overseas or by providing insurance and reinsurance on a cross-border
basis, in stable environments where the liberalisation timetable
has been carefully planned. It is fair to say that investing companies
are as much concerned with preserving a country's financial stability
as the national authorities.
3.5 There is no question of undue pressure
being put on the least-Developed Countries (LDCs) during the WTO
negotiations. The EU has made very few market opening requests
to LDCs. Instead, developed countries have pledged to increase
technical assistance and capacity building for those countries.
At the G8 Summit this summer, President Barroso pledged €1
billion a year to support the trading capacity of developing countries.
4. BRITISH INSURERS'
OBJECTIVES IN
THE DOHA
DEVELOPMENT ROUND
4.1 British insurers face barriers in many
markets to the transaction of insurance and reinsurance, both
for cross-border business and in the case of establishment overseas.
Barriers take many different forms (eg economic needs tests, discriminatory
laws against foreign suppliers, limits on shareholdings by foreign
insurers, national monopolies, excessive capital requirements
etc). These practices are not limited to developing countries,
and can still be found in developed markets also. We see the Doha
Development Round as an opportunity to remove these barriers.
US Market Access
4.2 The United States maintains laws at
State level which discriminate severely against non-US reinsurers.
Credit for reinsurance laws allow US insurers to take solvency
credit for the reinsurance they purchase from US reinsurers. By
contrast, no credit is allowed for reinsurance purchased from
non-US reinsurers on a cross-border basis—unless they deposit
collateral equal to the gross amount of their liabilities. The
credit for reinsurance laws take no account of the financial strength
of the non-US insurer, its reputation, rating, longevity of participation
in the US market, claims payment record, or the quality of its
home state regulatory system. The financial impact is that non-US
reinsurers—predominantly EU and UK based—are obliged
to hold collateral of in the region of $50 billion in the United
States. The cost of compliance for European reinsurers has been
estimated at $500 million annually. Lloyd's has estimated its
annual compliance costs at $150 million. The laws give US reinsurers
an unfair competitive advantage. The UK reinsurance industry has
been pressing for their reform for more than six years, to no
avail so far.
Advanced Developing Countries
4.3 British insurers have identified four
key markets in which they would like to see greater market access:
China, India, Brazil and Mexico. Low insurance penetration, large
populations and high economic growth rates make these markets
very attractive for our companies. However, these countries continue
to impose significant barriers to trade in insurance, discouraging
foreign investment and holding back the growth of an important
sector. Barriers to trade in services in these countries take
many forms including: foreign equity limits, high capitalisation
requirements, restrictions on investments from premium income,
branching restrictions, opaque licensing processes, compulsory
reinsurance with state-owned reinsurers, etc.
5. PROGRESS REPORT
ON THE
SERVICES NEGOTIATIONS
5.1 To date the Services offers have been
very disappointing. The offers on the table do not offer any new
commercial opportunities, and in some cases actually fail to bind
the existing level of market access. This gloomy assessment is
reflected in Director-General's Supachai's report to the Trade
Negotiations Committee in late July. Commissioner Mandelson went
even further, saying that he was very concerned with the lack
of quality of revised offers and with the low level of engagement
in service negotiations.
6. ANALYSIS OF
THE DEADLOCK
6.1 Why is progress so slow? There is widespread
acceptance of the benefits of Services liberalisation, including
among the advanced developing countries. Our assessment is that
the Services negotiations are held up for tactical reasons, linked
to the stalled progress in agriculture. Many of the leading parties
in these negotiations, the EU, US and to a lesser degree India,
face tough agricultural lobbies at home. Brazil and many of the
G90 developing countries on the other hand, have important interests
in access to developed countries' agriculture markets. Despite
some minor breakthroughs on a tariff cutting formula, much remains
to be done in the agricultural negotiations, both on market access
and on domestic support. The other, arguably more important areas
of the negotiations are being held up by the stalled agriculture
talks. This is where the EU and US should have shown leadership
by attempting to break the deadlock. This has not happened.
6.2 According to a UN study, the farm product
markets remain the most costly of all market distortions in world
trade. In developing countries, agriculture only accounts for
10% of trade and less than 5% of employment. Publicly, the Commission
seems to recognise these facts: Commission President Barroso recently
said: "The importance of trade in services, as opposed to
goods, is growing. And the EU holds strong comparative advantages
in this area which we should be exploiting." However, the
Commission's negotiating stance on agriculture belies its public
stance on Services. The Commission seems reluctant to accept the
consequences of the link explicitly drawn by advanced developing
counties between progress on agriculture and improved Services
offers on their parts. Admittedly the Commission's negotiating
position is not an easy one, with a large number of EU member
states publicly opposed to any further reductions in domestic
support for agriculture. Even so, the tactics of the Commission's
Services negotiators are puzzling. For example, their commitment
to "complementary approaches" to the Services negotiation
(see paragraph 7.1) is ill judged. The Commission's presentation
of its case is sometimes difficult to interpret as driven by a
commitment to Services liberalisation. We have been surprised
by the poor reputation of the Commission's negotiators among other
Services negotiators in Geneva.
7. RUN UP
TO HONG
KONG
7.1 The request/offer process of the GATS
has been criticised for not yielding results in the Services negotiations.
The European Commission has taken the lead in Geneva in exploring
"complementary approaches". A number of negotiating
parties have tabled formulaic proposals, such as benchmarking
or Model Schedules, designed to raise the quality of all offers
across the board. We have no objection in principle to these ideas,
so long as they contribute to the main objective at hand, namely
new commercial opportunities in Services markets. Complementary
approaches are only useful to the extent that they invigorate
the Request/offer process. Unfortunately, developing countries
have reacted negatively to the "complementary approaches",
which they see as unduly coercive. So there is a real risk here
that negotiating capital will be dissipated on sterile procedural
issues. In our judgement, it is not the request/offer process
which is holding up progress on Services, but the link to agriculture.
In conclusion therefore, discussions on complementary approaches
should not stand in the way of concluding the Round with a satisfactory
outcome in Services.
7.2 Recent soundings in Geneva suggest that
there has been no progress over the summer. Very little time is
now left for negotiation before Hong Kong. On the other hand,
grounds for some cautious optimism can be found in the determination
of Pascal Lamy, new WTO Director-General, to search for trade-offs
between the different strands of the negotiations. In addition,
representatives of India, Brazil, EU and US met in Paris on 24-25
September, and agreed to set up a new core group to steer the
Services negotiations. In the remaining weeks to the Hong Kong
ministerial, it is absolutely crucial that a breakthrough is made
in agriculture. But that will only occur if the EU and US begin
to demonstrate the political leadership needed to arrive at a
deal.
8. CONCLUSION
8.1 If Services fail to feature in this
trade round, it will be a long time before the multilateral trade
negotiation process is launched again. Furthermore, there are
lengthy implementation periods between rounds, and this current
round has already suffered crises and near-failure. A failure
in Hong Kong would hold back growth in the global economy, and
the likelihood is that countries would lose faith in the multilateral
process, and revert to bilateral negotiations which are both resource-intensive
(with a multiplicity of negotiations underway at any one time)
and potentially discriminating to countries which fall outside
a trading bloc. This will have a negative impact on developing
countries whose negotiating capacities are already limited. Failure
at Hong Kong would also have severe consequences for the reputation
of the WTO as an institution.
8.2 The British insurance industry strongly
urges the European Commission to demonstrate greater commitment
in resolving the impasse over agriculture, and achieving the ultimate
goal of a balanced outcome to the Doha Development Agenda. An
outcome which does not deliver new commercial opportunities in
Services is unthinkable. We also look to the British Presidency
to use its influence. In addition to greater political leadership
by the EU, which we hope will be reciprocated by the US, India
and Brazil, there will need to be renewed and sustained activity
at a working level in the coming months, both in capitals and
in Geneva. Services schedules are notoriously complex and lengthy;
it would be dangerous to leave the core of the work for the Hong
Kong Ministerial. At this critical stage in the negotiations,
we must not lose sight of the ultimate goal of improved market
access and increased business opportunities, and the challenging
road to getting there.
ABI
30 September 2005
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