Protectionist practices have a detrimental effect on the ability of the global insurance and reinsurance industry to close the protection gap between economic losses and those covered by insurance, according to reinsurer Swiss Re’s Chief Economist Kurt Karl.
As a direct result of protectionist regulatory and political practices global reinsurer Swiss Re finds it has a reduced ability to provide re/insurance protection in some markets, which means the company cannot help support the expansion of insurance in those regions as much as it would like, through provision of reinsurance capital to back local insurers.
Kurt Karl, Chief Economist and Global Head of Swiss Re Economic Research & Consulting at the reinsurance firm, explained during a briefing held in London yesterday that protectionism is detrimental to the industry’s goal of providing coverage to more people.
“As a global player you like to have access to markets with a fair and level playing field,” Karl explained.
“Capital requirements bother us the most,” he continued, going on to explain that some countries have installed capital rules making it more difficult for foreign reinsurance firms to operate there, unless they put up more capital than they would have to in other countries.
Astrid Frey, Deputy Head of Swiss Re Economic Research & Consulting, explained the trends that the reinsurance firm is seeing.
“There’s recently been a few worrying incidences of protectionist measures in the reinsurance industry,” Frey said, before going on to highlight China’s C-Ross system as one which treats reinsurance companies from different countries differently.
Frey continued; “Access to a global market is of a very high importance, essential for our business model to operate properly.”
The problem of protectionism is perhaps most acute with countries that see capital heading overseas, as it perhaps does not have major insurance or reinsurance players of its own. Meanwhile, large global re/insurance companies, such as Swiss Re, thrive using a business model of diversification and want to be as globally diverse as possible.
But with differing capital requirements in different countries the overhead can be significant and make even the largest reinsurers think twice about operating in some jurisdictions.
The result of restrictions of global reinsurance capital can be that less capacity is available to back local insurers, hindering market development and even making reinsurance more expensive in some markets that would really benefit from the provision of cheaper, or more efficient risk capital.
Karl highlighted; “We have to reduce our ability to provide protection in some countries, which means we fail in our key mission to provide protection and narrow the protection gap.”
It can be detrimental to countries not to allow global flows of capital to move into their markets as easily as others allow. It means the playing field is not level and that local insurers, corporations and residents could be paying more than they need to for reinsurance and insurance protection.
Frey said that the battle against protectionist regulations feels like it is “Two steps forwards, one step back,” implying that positive steps are being made to level the barriers to entry.
There is “No big shift towards protectionist regimes in reinsurance,” Frey explained, adding that largely countries have seen an “Overall liberalising of their insurance and reinsurance markets.”
But Swiss Re said this is an important trend that it monitors and Karl’s explanation that by installing protectionist regimes for reinsurance capital requirements countries could actually be hurting their own populations ability to acquire insurance coverage.
Of course large global reinsurers utilise their balance-sheet leverage, so that they only have to put down so much capital to underwrite a risk. The levels of capital differ from jurisdiction to jurisdiction, and the protectionist ones are those considered to have particularly high requirements or who offer different capital requirements to players from different countries.
Of course fully collateralised reinsurance capital from the insurance-linked securities (ILS) fund industry does not face these problems, as it is typically a case of putting down 100% collateral in a cash equivalent or Treasuries-backed trust.
Unfortunately the countries which have the most protectionist practices rarely offer an opportunity for ILS fund managers to capitalise on this, as the local insurers either do not need much reinsurance capital or do not yet have an appreciation for the benefits of fully collateralised protection.
Other kinds of protectionist practices are also evident these days, from preferring local reinsurers as we see proposed in India just this year, to preferential regulatory treatment as has been seen in the Middle East.
The dream of a level playing field is unlikely to ever exist, at least until we’re all transacting insurance risks over online exchanges, so the best that can be hoped for is that regulators see the benefits in allowing risk to be diversified globally, through a diverse and international risk capital base.
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