NATIONAL TREATMENT PRINCIPLE IN GATS:
A Study of Vietnam’s Insurance Services Market

Vu Nhu Thang

Nagoya University
CALE Books 3

NATIONAL TREATMENT PRINCIPLE IN GATS:
A Study of Vietnam’s Insurance Services Market

Vu Nhu Thang

Nagoya University
CALE Books3

Center for Asian Legal Exchange&
Graduate School of Law

Nagoya University
National Treatment Principle in GATS:
A Study of Vietnam’s Insurance Services Market
Vu Nhu Thang

Published August, 2008
Printed by
the Nagoya University Consumers’ Co-operative Association, Nagoya, Japan

Copyright © 2008
Center for Asian Legal Exchange&
Graduate School of Law
Nagoya University
All rights reserved. No part of this work may be reproduced copiedin any form or by any means without written permission of the publisher.

Furo-cho, Chikusa-ku, Nagoya 464-8601 JAPAN
Phone: +81(0)52-789-2325
Fax: +81(0)52-789-4902

Foreword
This book is a product of Dr. Vu Nhu Thang’s three-year research as a Ph.D candidate at
the Graduate School of International Development, Nagoya University.
Vietnam acceded to the World Trade Organization (WTO) in January 2007 and it
marked a milestone in the history of its Doi Moi and the process of its entry into the global
economy. While, as the 150th member of the WTO, Vietnam now can enjoy the benefit ofnon-discriminatory access to other members’ markets and, if any dispute, can take advantageof the WTO dispute settlement mechanism, it is also obliged to implement a lot ofcommitments it made upon accession, including tariff rate reduction, liberalization of service
markets and improvement of intellectual property protection.
Among others, the author focuses on the issues surrounding liberalization of theinsurance market in Vietnam after the WTO accession, especially the national treatment
principle of General Agreement on Trade in Services (GATS) and the so-called prudential
exception in its Annex on Financial Services. In spite of their importance, WTO case law has
not yet been so sufficiently developed on their interpretation as to give clear guidance tonegotiators, legislators and other practitioners who are involved with service negotiations aswell as domestic implementations of service commitments. Against such a background,PART I tries to clarify interpretations of the national treatment principle in GATS as well as
the prudential exception by transplanting the interpretation of the national treatment principle
in GATT and by relying on the interpretative approach adopted by panels and the Appellate
Body in the WTO dispute settlement cases. I believe it is the first comprehensive andsystematic research on these issues and is an invaluable contribution to our understanding of
the GATS obligations not only in service sectors in general but also in financial services inparticular.
Based on the achievement in PART I, PART II goes on to introduce the history ofVietnam’s insurance market, analyze Vietnam’s relevant commitments, and discuss whatchallenges it will face and how it should tackle them. PART II also offers a very concreteroadmap for reforms of insurance regulations, especially for introduction of necessary
prudential regulations. Given the fact that the Vietnamese Government will start to discuss
amendment of Insurance Law this year and that the National Assembly plans to discuss it in2009-2010, this book comes at a most opportune time and I am sure it can supply useful andreliable guidelines in the legislating process. Since the author has returned to the Ministry of
Finance, which is directly in charge of such reforms, this is also a must-read book not only for
Vietnamese but also for foreign businesses who would like to know which direction
Vietnamese regulations on insurance markets will take.
For three years, I have been enjoying advising, discussing with and learning from theauthor. I am very proud of being involved in education and capacity building process of sucha talented young person who is now one of distinguished WTO law experts.
Fujio Kawashima
Associate Professor of Law
Graduate School of International Development, Nagoya University

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Acknowledgements

My deepest gratitude goes particularly to my supervisor, Professor Fujio Kawashima,
who has spent with me a great deal of his time shaping my understanding of various aspectsof International Economic Law, reading my drafts, and providing suggestions, valuableadvice and critical comments with kind patience. I am also deeply grateful to Professor
Masanori Aikyo and Professor Hideo Yamagata for their thorough guidance on how to
improve my research.
A special note of thanks is extended to all my colleagues and friends in Hanoi forproviding me the relevant materials and data on Vietnam’s insurance market, and their long
distance support. Their e-contribution is highly appreciated.
I greatly appreciate Fordham Journal of Corporate and Financial Law, Manchester
Journal of International Economic Law, Forum of International Development Studies, andVietnam Law and Legal Forum for allowing me to incorporate my published articles in thisbook. I also wish to acknowledge the kind acceptance of the Center for Asian Legal Exchange,
Nagoya University to publish my doctoral thesis as a CALE book.
Last but not least, I owe my deep gratitude to my beloved parents for their greatest andwarmest encouragement; my dearest wife, Hien Anh, for her understating, patience, sacrifice,everlasting love and constant faith in me; and my lovely daughter and son, Hien Minh and
Quoc Minh, for their naïve inspiration and emotional support.
Vu Nhu ThangNATIONAL TREATMENT PRINCIPLE IN GATS:
A Study of Vietnam’s Insurance Services Market

Table of Contents

Foreword........................................................................................................................ i
Acknowledgements ...................................................................................................... ii
List of Figures............................................................................................................ viii
List of Tables ............................................................................................................. viii
List of Charts............................................................................................................. viii
List of Abbreviations .................................................................................................. ix
Executive Summary......................................................................................................x
INTRODUCTION ....................................................................................................................1
PART ONE: GENERAL ASPECTS OF THE NATIONAL TREATMENT PRINCIPLEIN INSURANCE SERVICES ..................................................................................................9CHAPTER ONE: Insurance Services under the World Trade Organization ..................10
1. A background on insurance and international trade in insurance services..............10
1.1 Concept of insurance ..................................................................................................10
1.2 Rationale of insurance regulation ..............................................................................11
1.3 International trade in insurance services ...................................................................14
2. The inclusion of insurance services into the World Trade Organization..................15
2.1 Before the Uruguay Round .........................................................................................15
2.2 The Uruguay Round....................................................................................................17
2.3 Trade in insurance services under GATS ...................................................................20(i) Scope of insurance services .....................................................................................20(ii) Modes of supply ......................................................................................................21(iii) Outline of GATS.....................................................................................................22
3. Concluding remarks .......................................................................................................24
CHAPTER TWO: Interpretation of the National Treatment Principle in GATS ...........25
1. Remarks about the national treatment principle in GATS ........................................25
2. Similarities between GATT and GATS with respect to national treatment .............27
2.1 Similarities ..................................................................................................................27
2.2 Possibilities of transplant ...........................................................................................29
3. Provision and case law of GATT ...................................................................................30
3.1 Internal taxation and regulation affecting trade in goods..........................................30
3.2 Likeness.......................................................................................................................32(i) Narrow interpretation in the first sentence of Article III:2 .....................................32

CENTER FOR ASIAN LEGAL EXCHANGE, NAGOYA UNIVERSITY CALE BOOKS 3(ii) Broad interpretation of likeness with reference to “directly competitive or
substitutable products”.................................................................................................34(iii) Broad interpretation of likeness in Article III:4 ....................................................36
3.3 “No less favourable” treatment..................................................................................37
4. National treatment principle in GATS: Interpretative issues ....................................40
4.1 Defining the scope of application of the national treatment principle .......................40
4.2 Broad scope of measures affecting trade in services..................................................43
4.3 Uncertainty in determining likeness ...........................................................................45(i) Like services.............................................................................................................45(ii) Likeness with reference to service suppliers and modes of supply.........................48
4.4 Broad coverage of “no less favourable” treatment....................................................50
5. Towards a two-stage approach: A balance between conditions of competition in
Article XVII and policy objectives in Article XIV...........................................................54
5.1 The recognition of national legitimate policy objectives............................................55
5.2 Necessity test – A problematic approach....................................................................57
5.3 Framing a two-stage approach...................................................................................60
6. Tentative conclusions on the national treatment principle in GATS.........................63
CHAPTER THREE: Special Factors in Interpretation of the National Treatment
Principle Applicable to Insurance Services ..........................................................................65
1. Literature review ............................................................................................................65
1.1 Interpretation of the “prudential exception”..............................................................65
1.2 The concept of “prudential” in the insurance sector .................................................67
1.3 The work of the international standard-setting organization.....................................69
2. Interpretative approach to the exception .....................................................................72
2.1 Annex on Financial Services: The prudential exception to national treatment .........72
2.2 WTO jurisprudence on treaty interpretation ..............................................................75
2.3 Applying the interpretative approach to the prudential exception .............................77
3. The prudential exception: Interpretative issues ..........................................................78
3.1 Determining legitimate policy objectives pursued by measures: the scope of“prudential reasons”........................................................................................................78(i) Ordinary meaning ....................................................................................................78(ii) Ordinary meaning “in the context” and “in the light of the object and purpose of
the treaty” .....................................................................................................................80(iii) Conclusion under Vienna Convention Article 31 ..................................................81(iv) Supplementary means of interpretation .................................................................81(1) Preparatory note ..................................................................................................81(2) Note 1998 by the WTO Secretariat.....................................................................83(3) Trade Policy Review ...........................................................................................84(4) Scheduling practices of WTO Members .............................................................85(5) Possibility of reference to the work of specialized international organizations..86(6) Scholarly works...................................................................................................87(v) Is a narrower or broader interpretation of the term “prudential reasons”
acceptable? ...................................................................................................................87(vi) Overall conclusion on the meaning of the term “prudential reasons”..................89
3.2 Identifying the connection between the prudential reasons and measures: “for” .....90(i) Is the “necessity” test appropriate? ........................................................................90(ii) An alternative interpretation by reference to “relating to” ...................................91

NATIONAL TREATMENT PRINCIPLE IN GATS:
A Study of Vietnam’s Insurance Services Market
3.3 Applying the anti-avoidance provision .......................................................................92
3.4 Burden of proof...........................................................................................................95
4. Reframing the two-stage approach: A balance between conditions of competition in
Article XVII and prudential reasons in the Annex on Financial Services ....................96
5. Concluding remarks .......................................................................................................99
CHAPTER FOUR: Post-Uruguay Round Negotiations on Insurance Services andNational Treatment Commitments in Schedules of Selected Countries..........................100
1. Post-Uruguay Round negotiations on insurance services: A brief history..............100
1.1 The Second Protocol.................................................................................................100
1.2 The Fifth Protocol.....................................................................................................101
2. Re-examining the scope of the national treatment principle ....................................103
2.1 Scheduling methodology ...........................................................................................103
2.2 Remarks about commitments on national treatment.................................................104
2.3 Scope of the national treatment principle under the Understanding on Commitments
in Financial Services ......................................................................................................107
2.4 Scope of the national treatment principle in the schedules ......................................109(i) Scenario (1)............................................................................................................109(ii) Scenarios (2) and (4) ............................................................................................110(iii) Scenarios (3) and (7) ...........................................................................................112(iv) Scenario (5) ..........................................................................................................113(v) Scenarios (6) and (8).............................................................................................113(vi) Scenario (9) ..........................................................................................................113
3. Revisiting likeness .........................................................................................................114
3.1 Reconfirming uncertainty of service classification...................................................114
3.2 Likeness by reference to modes of supply and “like” service suppliers...................117
4. Case study: China’s measure on non-life insurance services ...................................118(1) Whether a measure in question falls under the scope of Article XVII?............119(2) Likeness under Article XVII.............................................................................120(3) Does this measure modify conditions of competition against foreign insurance
services and service suppliers? ...............................................................................120(4) Justification under Annex paragraph 2(a) .........................................................121
6. Concluding remarks .....................................................................................................123
CONCLUDING OBSERVATIONS OF PART ONE........................................................124
PART TWO: VIETNAM’S INSURANCE SERVICES MARKET .................................126
CHAPTER FIVE: Development of Vietnam’s Insurance Services Market....................127
1. Economic development.................................................................................................127
1.1 Overview ...................................................................................................................127
1.2 State-owned enterprise reform and private sector development ..............................129
1.3 External trade and foreign investment......................................................................130
1.4 Financial market liberalization ................................................................................132
2. Vietnam’s insurance services market .........................................................................134
2.1 Before 1993...............................................................................................................134
2.2 Period of 1994-2000 .................................................................................................135
2.3 After 2001 .................................................................................................................137



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Some observations ......................................................................................................141
3. Legal framework...........................................................................................................141
3.1 Introduction of insurance regulations ......................................................................141
3.2 Vietnam Insurance Law ............................................................................................143
4. Concluding remarks .....................................................................................................146
CHAPTER SIX: Vietnam’s Commitments on National Treatment and Implications for
the Insurance Services Market ............................................................................................147
1. Vietnam’s commitments in insurance services ..........................................................147(i) Scope of business ...................................................................................................147(ii) Investment .............................................................................................................148(iii) Movement of natural persons ..............................................................................151(iv) National treatment................................................................................................151
2. Implications for Vietnam’s insurance services market .............................................151
2.1 More efficiency and stability.....................................................................................151
2.2 Facilitation of investment and external trade...........................................................153
2.3 Fierce competition ....................................................................................................154
2.4 Increasing regulatory transparency, equity and complexity ....................................155
3. Compliance with the national treatment principle....................................................156
3.1 Implementation of commitments in insurance services: experience of Japan, the EU
and China........................................................................................................................157
Some remarks..............................................................................................................158
3.2 Implementation of commitments under Vietnamese legislation ...............................158
3.3 Interpretative issues in the light of the national treatment principle .......................160(i) Scope of insurance sub-sectors ..............................................................................160(ii) Measures affecting trade in insurance services....................................................162(iii) Likeness................................................................................................................163(iv) The standard of “no less favourable” treatment .................................................167
4. Concluding remarks .....................................................................................................170
CHAPTER SEVEN: Enhancement of Vietnam’s Prudential Regulations .....................171
1. Technical provisions .....................................................................................................171
1.1 Are the technical provisions properly regulated? ....................................................171
Some remarks..............................................................................................................173
1.2 Could actuarial principles support compliance with regulation on technicalprovisions?......................................................................................................................173
1.3 A need to strengthen the role of actuary in Vietnam ................................................174
2. Solvency margin............................................................................................................175
2.1 Solvency margin under existing regulations.............................................................175
2.2 Insurance companies in financial difficulty..............................................................177(i) Minimum solvency margin .....................................................................................177(ii) Available remedial measures in case of financial difficulties ..............................180
Some observations ......................................................................................................183
2.3 Policyholder protection fund ....................................................................................183(i) A theoretical approach...........................................................................................183(1) Advantages ........................................................................................................183(2) Disadvantages ...................................................................................................185

NATIONAL TREATMENT PRINCIPLE IN GATS:
A Study of Vietnam’s Insurance Services Market(ii) Employing an adequate safety net: Foreign experience and lessons for Vietnam....................................................................................................................................186(1) United States .....................................................................................................186(2) Japan .................................................................................................................187(3) EU .....................................................................................................................189
Some observations ......................................................................................................189
2.4 Future regulations on solvency margin ....................................................................190(i) A call for more concrete determination of permissible assets ...............................190(ii) A need for the inclusion of claims criterion for calculating the minimum solvency
margin of non-life insurers .........................................................................................191(iii) A call for more detailed control levels.................................................................192(iv) Call for establishment of a policyholder protection fund ....................................193
3. Regulation of reinsurance services..............................................................................195
3.1 Current arrangement on reinsurance services .........................................................195
3.2 A need to consider reinsurance risk .........................................................................196
4. Investment rules............................................................................................................197
4.1 Vietnam’s current regulations ..................................................................................197
4.2 Foreign experience ...................................................................................................199
4.3 A need for more concrete investment rules...............................................................201
5. Regulation of insurance intermediation .....................................................................203
5.1 How regulations on insurance intermediation could enhance the solvency of insurers........................................................................................................................................203
5.2 A call for more concrete regulations on intermediation...........................................205
6. Regulation of insurance holding companies...............................................................206
6.1 Is the supervisory authority adequately empowered to supervise the solvency of
insurers? .........................................................................................................................206
6.2 Lessons from other jurisdictions...............................................................................208
6.3 A need for clearer power of the supervisory authority with regard to insurance
holding companies ..........................................................................................................210
7. Limits to the legal reform.............................................................................................210
7.1 Factors influencing the enhancement of prudential regulations ..............................210
7.2 Unsolved issues and future study..............................................................................212
CHAPTER EIGHT: Conclusions........................................................................................214
BIBLIOGRAPHY.................................................................................................................218

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List of Figures
Figure 1: Outline of GATS rules ..............................................................................................23
Figure 2: Scope of application of the national treatment principle...........................................43
Figure 3: Analytical framework for interpretation of the national treatment principle: Twostage approach...................................................................................................................61
Figure 4: Effective scope of the national treatment principle...................................................63
Figure 5: Analytical framework for interpretation of the national treatment principle in theinsurance services sector: Two-stage approach ................................................................97
Figure 6: Effective scope of the national treatment principle...................................................98
Figure 7: Analytical framework of the two-stage approach towards interpretation of thenational treatment principle: Example of China’s non-life insurance services ..............119
Figure 8: Roadmap for enhancing prudential regulations in Vietnam....................................211

List of Tables
Table 1: Modes of supply .........................................................................................................21
Table 2: Commitments on National Treatment: By sub-sectors and modes of supply ..........105
Table 3: Analytical scenarios on the scope of the national treatment principle .....................109
Table 4: Vietnam’s commitments in insurance services: past, present and future .................149
Table 5: Scheduled insurance services sub-sectors vs. Vietnam Insurance Law ...................161

List of Charts
Chart 1: Structure of Vietnam's insurance market players .....................................................137
Chart 2: Growth of Vietnam's non-life insurance market.......................................................138
Chart 3: Growth of Vietnam's life insurance market ..............................................................138
Chart 4: Investment sources by ownership .............................................................................139
Chart 5: Investment portfolios ................................................................................................140


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NATIONAL TREATMENT PRINCIPLE IN GATS:
A Study of Vietnam’s Insurance Services Market

List of Abbreviations

ACP: African, Caribbean and Pacific countries
BIDV: Bank for Investment and Development of Vietnam
c.i.f.
: cost, insurance, and freight
COMECON : Council for Mutual Economic Assistance
CPC: Central Product Classification
CVA: Canadian Value Added
DSU: Understanding in Rules and Procedures Governing the Settlement of Disputes
EC: European Communities
EEC: European Economic CommunityEU: European Union
EUR: EuroGATS: General Agreement on Trade in Services
GATT: General Agreement on Tariffs and TradeGDP: Gross Domestic Products
GNS: Group of Negotiations on Services
IAIS: International Association of Insurance Supervisors
ICP: Insurance Core Principle
MFN: Most-Favoured-Nation
MOF: Bo Tai chinh (Ministry of Finance) (Vietnam)
MTN: Multilateral Trade Negotiations
NAIC: National Association of Insurance CommissionersOECD: Organization for Economic Cooperation and Development
RBC: Risk-based capitalSC: schedule of commitments
SEACEN: Southeast Asia Central Banks
SOE: State-owned enterprise
The Annex: Annex on Financial Services, GATS
UN
: United Nations
UNCTAD: United Nations Conference on Trade and Development
US: United States
US$: United States dollars
US-VN BTA : Bilateral Trade Agreement between the United States and Vietnam
VND: Vietnamese currency (Dong)
WTO: World Trade Organization



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Executive Summary
The birth of the General Agreement on Trade in Services (GATS), after eight years ofnegotiations under the Uruguay Round, has reflected the endeavour by contracting parties of
the General Agreement on Tariffs and Trade (GATT) to extend the multilateral trading systemfrom goods to include services. Certain GATT principles and obligations are reworded toapply to the service realm, including the national treatment principle. GATS Article XVII on
National Treatment deals with discriminatory measures concerning the level playing field
between domestic and foreign services and service suppliers.
While national treatment in the context of trade in goods has been substantiallyexplored and interpreted, the jurisprudence on interpretation of this principle in GATS is lessdeveloped. As both GATT and GATS are subject to a single dispute settlement mechanism
under the WTO, there is clear rationale for transplanting GATT jurisprudence to the service
sector. Furthermore, the language of national treatment articles in GATT and GATS shares anumber of similarities, including likeness and the standard of “no less favourable treatment”.
However, the fundamental nature of intangibility and non-storability of services, which isdifferent from goods, has made the interpretation of national treatment principle more
complicated in the context of services.
The problems of uncertainty in interpretation of the national treatment principle in
GATS would cause concerns over the liberalization of services in general and insurance
services sector in particular by Members of the World Trade Organization (WTO). In contrast,
the incorporation of the Annex on Financial Services, which covers the prudential exception
to other obligations under GATS, including the national treatment principle, is proved to keep
the right balance between liberalization and flexibility of Members in regulating domestic
markets. A clear understanding of the prudential exception would contribute to facilitating ongoing negotiations on liberalization of financial services, including insurance services, byoffering a way of balancing between rights and obligations of WTO Members, and providing
a proper space for Members in introducing prudential regulations without prejudice to thepredictability and transparency of the multilateral trading system.
Therefore, the interpretation of the national treatment principle in the context of
insurance services is proposed to follow a two-stage approach to determine, firstly whether ameasure adopted by WTO Members accords less favourable treatment to foreign services andservice suppliers than the domestic like counterparts, and secondly whether that lessfavourable treatment, if found, could be justified under the prudential exception. Three
important understandings on the application of the national treatment principle in theinsurance services sector have been found.
First, the GATS national treatment principle is the object of both negotiations forliberalization and dispute settlement mechanism. A WTO Member, therefore, is obliged torespect the national treatment obligation as far as that Member inscribes which service sectors
and/or sub-sectors in its schedule as well as levels of commitment. However, the scope of thenational treatment principle in GATS addresses all discriminatory measures which do not fallwithin the scope of Article XVI on Market Access between foreign services and service
suppliers, on the one hand and domestic counterparts, on the other hand.
Second, similar to GATT national treatment in, the national treatment principle in
GATS consists of three core elements for interpretation, namely “measures” affecting theNATIONAL TREATMENT PRINCIPLE IN GATS:
A Study of Vietnam’s Insurance Services Market
supply of services, “like” services and service suppliers, and “no less favourable” treatment.
The WTO jurisprudence shows that the first element is broadly interpreted to encompass allmeasures directly and indirectly affecting trade in services. The possibilities of transplanting
GATT jurisprudence on interpretation of likeness to GATS would lead the second element toa broad scope of likeness due to the uncertainty in criteria for comparing foreign and domestic
services and service suppliers. The third element addresses a broad scope of discrimination,
both de jure and de facto. In parallel with a broad approach to the interpretation of “measures”
subject to GATS, the combination of uncertainty in interpretation of likeness and broad
coverage of “no less favourable” treatment would lead to a high possibility for Members toviolate national treatment in the context of services.
Third, to justify a measure which is found to violate the national treatment principle
affecting trade in financial services, including insurance services, a WTO Member is required
to satisfy a three-layer examination under the prudential exception. Under the first layer, thatmeasure must fall within the scope of the “prudential reasons” which could be understood toaddress the solvency situation of insurers to fulfill their obligations towards policyholders andother relevant persons, and towards the stability and integrity of the financial system as awhole. The second layer is to examine the connection between that measure and prudential
objectives through a “primarily aimed at” test. Under the third layer, that WTO Member must
prove that the application of the WTO-inconsistent measure does not constitute disguised
restrictions on trade in insurance services. Accordingly, when a measure is founddiscriminatory against foreign insurance services and service suppliers compared to domestic“like” counterparts in the context of the national treatment principle, by an objective
assessment, it would (i) not constitute a violation of this principle if it falls under the scope of“prudential reasons” and qualifies the anti-avoidance provision; or (ii) constitute a violation of
the national treatment principle if that measure does not fall within the scope of “prudential
reasons” or the application of that measure is proved to constitute a disguised restriction on
trade in insurance services.
As a WTO Member from January, 2007, in the insurance services sector, Vietnam
undertakes direct insurance, reinsurance and retrocession, insurance intermediation, andservices auxiliary to insurance for liberalization under the multilateral trading system. The fullnational treatment is inscribed in Modes 1, 2, and 3, and commitments with limitations inMode 4. It means that, with respect to all measures affecting trade in insurance services underthe meaning of GATS Article XVII, Vietnam is obliged to accord insurance services andservice suppliers of any other WTO Member treatment no less favourable than it accords to its
own like insurance services and service suppliers. While several inconsistent measures havebeen eliminated by the government right after the WTO accession, Vietnam is obliged torefrain from introducing any new measures which might constitute either de jure or de facto
against foreign insurance services and service suppliers.
However, the uncertainty in criteria for determining likeness of services and service
suppliers under the meaning of GATS Article XVII might raise several possible violations ofVietnam’s commitments on the national treatment obligation. Specifically, insurance
brokerage and agency services could be regarded as like services if only criterion of service
classification is taken into account for comparison. Similarly, the likeness might beestablished among those services auxiliary to insurance, such as consultancy, actuarial, risk
assessment and claim settlement. Accordingly, any different treatment, either de jure or defacto, against foreign services and service suppliers could be challenged by other WTO
Members.


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An overall evaluation of Vietnam’s commitments under the WTO accession showsthat Vietnam’s insurance services sector has become more liberal to foreign participation andcompetition. Liberalization of insurance services under the WTO could offer some
opportunities for further development of Vietnam’s insurance market. Nevertheless, somethreats of fierce competition and underdeveloped regulation should not be ignored, especiallygiven weaknesses in both insurance companies per se and the whole financial system. In orderto mitigate negative impacts of such threats, as well as maximize benefits of liberalization of
the insurance services sector under GATS, more complex regulations should be enhanced inorder to ensure the solvency of insurance companies for consumer protection as well as forthe systemic stability.
Under GATS, Vietnam is entitled to introduce prudential regulations to address thesolvency situation of insurance companies. Prudential regulations also exist in the Law on
Insurance Business of Vietnam. Compared to other jurisdictions, for example the EU, US andJapan, there are some problems in the current solvency system. First, while the technicalprovisions are properly regulated, the existing rules on actuary would not well supportcompliance with the regulations on technical provisions established by insurance companies.
Second, existing regulations would simplify the credit risk and liquidity risk of those assetsthat can represent the solvency margin. Reinsurance risk is not appropriately addressed by thecurrent regulations. In addition, what appear to be missing in the solvency regulations areconcrete remedial measures corresponding to different quantitative solvency control levels inorder to recover the solvency of a financially problematic insurance company. Third,
investment rules seem to overlook the concentration risk in respect to assets held by insurancecompanies. Fourth, while insurance intermediation might significantly affect the solvency ofan insurer, several specific measures addressing the credit risk of insurance brokeragecompanies as well as agents seem not to be strictly concretized. Last, regulatory weaknesses
also exist in the supervision of insurance holding companies.
Therefore, future solvency regulations should include: (i) enhancement of the actuarialrole to support compliance with regulations on technical provisions; (ii) clear identification of
permissible assets for calculating the solvency margin; (iii) incorporation of the reinsurance
risk into the determination of solvency margin of insurers; (iv) inclusion of claims criterion
for calculating the minimum solvency margin of non-life insurers; (v) more detailed
quantitative solvency control levels to enable an early intervention by the supervisory
authority in financially difficult insurers; (vi) concrete remedial measures corresponding toeach solvency control level; (vii) establishment of a policyholder protection fund; (viii)
introduction of more concrete quantitative limitations on maximum investment on eachcategory of assets; (ix) limited relaxation on investment abroad from the technical provisionsof insurers; (x) a more detailed requirement on the professional indemnity insurance to be
kept by insurance brokerage companies; (xi) a pre-determined specific amount to be depositedby insurance agents; and (xii) concrete requirements on calculation of the adjusted solvency
margin of an insurance holding company as well as group-wide information disclosure. Alllegal enhancements could protect the interests of consumers as well as improve publicconfidence, and consequently ensure the stability of Vietnam’s insurance services sector after
its accession to the WTO.
During the introduction of the above-said new prudential regulations, Vietnam should
refrain from any discriminatory measures, either de jure or de facto, against foreign insurance
services and service suppliers. Nevertheless, some measures might be found in violation of
GATS Article XVII due to uncertainty in the interpretation of the national treatment
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NATIONAL TREATMENT PRINCIPLE IN GATS:
A Study of Vietnam’s Insurance Services Market
obligation. In such a circumstance, it would be safe if Vietnam could prove that those new
regulations and measures in the insurance sector are “primarily aimed at” the solvency of
insurance companies in the meaning of paragraph 2(a) of the Annex on Financial Services. In
addition, Vietnam must ensure that the introduction and application of future solvency
regulations are in a manner of, inter alia, flexibility, consistency, necessity and transparency,
in order to avoid the possibility of violating the anti-avoidance provision under the prudential
exception.


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NATIONAL TREATMENT PRINCIPLE IN GATS:
A Study of Vietnam’s Insurance Services Market

INTRODUCTION

Insurance plays a crucial role in the economy (Skipper; and Outreville). By
transferring risk to insurers, consumers are able to mitigate financial losses due to theoccurrence of certain events. Insurance, especially life insurance, could be an importantchannel for mobilization of savings, which is then transferred to investment. By collecting
premiums when issuing insurance policies, insurers are required to invest the funds in order tobe able to satisfy future claims. Therefore, insurers, especially life-insurers who are involved
in long-term insurance contracts, would be active institutional investors. 1 They would
contribute to the efficiency of financial system by (i) reducing transaction costs, (ii)increasing liquidity, and (iii) facilitating economies of scale in investment. 2 In addition,
financial systems would also be enhanced by different risk management techniques offered byinsurers such as risk pricing, risk pooling and reduction.3
Trade in insurance can make various contributions to the development of domestic
markets. International spread of extremely large commercial risks, such as oil refineries andoffshore rigs, satellites, jumbo jets, is necessary (Skipper; Feketekuty). At the multilaterallevel, trade in insurance services is governed by the General Agreement on Trade in Services(hereinafter GATS) since 1995.
The birth of GATS, after eight years of negotiations under the Uruguay Round, hasreflected the endeavour by contracting parties of the General Agreement on Tariffs and Trade(hereinafter GATT) to extend the multilateral trading system from goods to include services.
Certain GATT principles and obligations are reworded to apply to the service realm,
including the national treatment principle. GATS provides a set of multilateral rules toaddress both discriminatory and non-discriminatory restrictions, which affect trade in services
in general and insurance services in particular.
The national treatment principle deals with discriminatory measures concerning thelevel playing field between domestic and foreign services and service suppliers. In contrast to
trade in goods, most restrictions on trade in services reside in national regulations(Feketekuty; Trebilcock and Howse). Since liberalization of trade in services ultimately
requires the removal of those restrictions, the national treatment principle may be considered
as one of the fundamental rules governing the multilateral trading system.
However, the application of the national treatment principle is conditional uponschedules of specific commitments by Members of the World Trade Organization (hereinafter
WTO). In other words, furthering trade in services largely depends on negotiations regarding
the undertaking of commitments on national treatment by WTO Members, which follows the
progressive liberalization approach. Contrary to GATT, where the national treatment
obligation is generally applied without making any prior commitment, the inclusion of the
1
Carter, Robert. 1990. Obstacles to International Trade in Insurance. In Edward P.M. Gardener, ed., The
Future of Financial Systems and Services. Essays in Honour of Jack Revell, Macmillan, London, p. 206.
Reprinted in Mervyn K. Lewis ed. 1999. The Globalization of Financial Services. UK: Edward Elgar Publishing
Limited, pp. 85-101.
2
Skipper, Harold D. Jr. 1997. Foreign Insurers in Emerging Markets: Issues and Concern. Washington,
D.C.: International Insurance Foundation (Occasional Paper No. 1), pp. 10-13.
3
Id. pp. 13-14.


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national treatment principle in specific obligations is a distinguishing feature of GATS. This
indicates that GATS national treatment does not apply automatically to all service sectors, but
only applies to scheduled sectors and/or sub-sectors that a Member specifically lists in its
commitments.
Moreover, the scope of national treatment in GATS addresses not only trade but also
investment since GATS encompasses the supply of services, inter alia, through commercial
presence of foreign service suppliers. Accordingly, understanding the national treatment
principle is necessary for dispute settlement procedures as well as scheduling national
commitments on specific sectors or sub-sectors. As predicted by Hoekman, interpretation ofcountries’ schedules would constitute “the main part” of the panel process, in addition to
fundamental principles.4
While national treatment in the context of trade in goods has been substantiallyexplored and interpreted, the jurisprudence on interpretation of this principle in GATS is lessdeveloped. As both GATT and GATS are subject to a single dispute settlement mechanism
under the WTO, there is clear rationale for transplanting GATT jurisprudence to the realm ofservices. Furthermore, the language of national treatment articles in GATT and GATS sharesa number of similarities, including likeness and the standard of “no less favourable” treatment.
Interpretation of the national treatment principle in GATS, including transplant of GATT
jurisprudence to GATS, has been discussed among scholars and practitioners (Mattoo;
Krajewski; Zdouc). However, the fundamental nature of intangibility and non-storability ofservices (Feketekuty; Nicolaides), different from goods, makes the interpretation of thenational treatment principle more complicated in the context of services.
With regard to liberalization of the insurance sector by WTO Members, in addition to
the national treatment principle in the legal text of GATS and their schedules of specificcommitments, the applicability of multilateral rules to this complicated sector is also
governed by the Annex on Financial Services (hereinafter the Annex), which constitutes anintegral part of GATS under Article XXIX. Under this Annex, government is not limited in
introducing prudential measures for consumer protection and systemic concern. The Annex
also defines financial services to cover all banking and other financial services, and all
insurance and insurance related services, which consist of: (i) direct insurance (life and nonlife); (ii) reinsurance and retrocession; (iii) insurance intermediation, such as brokerage andagency; and (iv) services auxiliary to insurance, such as consultancy, actuarial, risk
assessment and claim settlement services.
Literature review shows that liberalization in services in general and insurance
services in particular requires careful regulation, including increasing the strength and qualityof certain regulations, and introducing new rules that facilitate the transition to a more open
system (Krajewski; Gamberale and Mattoo; and Skipper). A more liberal insurance sector,
therefore, will require a more complex and effective regulatory and supervisory framework.
When applying the national treatment principle to liberalization of the insurance services
sector, as noted earlier, the Annex allows WTO Members to take prudential measures inregulating their financial systems, regardless of other obligations and commitments in GATS.
Paragraph 2(a) of this Annex has been characterized as the “prudential exception”, 5 and4

Hoekman, Bernard. 1994. General Agreement on Trade in Services. In OECD, The New World Trading
System: Readings. Paris: OECD, pp. 180-181.
5
Whether paragraph 2(a) of the Annex constitutes a “prudential exception” in the financial services
sector, including insurance services, shall be discussed in Chapter Three.

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NATIONAL TREATMENT PRINCIPLE IN GATS:
A Study of Vietnam’s Insurance Services Market
discussed among scholars (Key; Nicolaidis and Trachtman; Trachtman; Leroux; Mattoo;
Dobson and Jacquet; and Panourgias) with regard to three factors, namely the concept of“prudential reasons”, connection between the prudential objectives and measures, and theanti-avoidance provision. However, these discussions have not yet incorporated sufficient
analysis in the light of WTO jurisprudence, especially on interpretation approach. The issue ofinterpretation seems to be more difficult because there has been no WTO case so far relating
to financial services in general and insurance services specifically. Accordingly, these
uncertainties would discourage Members from undertaking commitments on national
treatment for further liberalization of trade in financial services, including insurance services.
Panourgias generally observed that the literature offers very limited clarification withregard to the term “prudential” as it applies to the financial sector.6 The need for clarifying
this “prudential exception”, especially the concept of “prudential reasons”, has become anissue of debate in the agenda of the Committee on Trade in Financial Services, and noagreement has been reached.7 Moreover, as the scope and character of prudential measures are
not specified, it is difficult to explain whether measures are permissible or not under the“prudential exception” during the on-going round of negotiations. 8 Therefore, a clear
understanding of the “prudential exception” would contribute to facilitating on-goingnegotiations on liberalization of financial services, including insurance services, by offering a
way of balancing between rights and obligations of WTO Members, and providing a proper
space for Members in introducing prudential regulations without prejudice to thepredictability and transparency of the multilateral trading system.
In the case of Vietnam, in 1986, the VI Congress of the Communist Party launched afundamental economic reform program - called doi moi (Renovation) - that marked thecountry’s transition from a centrally planned economy to a market-driven economy with asocialist orientation. Key elements of this reform include (i) state-owned enterprise reformand private sector development, (ii) external trade and foreign investment, and (iii)
liberalization of financial market. Along with the domestic economic reform, at the bilaterallevel, Vietnam has established and fostered economic relationships with other countries inorder to facilitate foreign trade relations and integration into the world economy. The roadtowards a membership of the WTO has been marked by observatory status in GATT sinceJune 1994. Vietnam became the 150th Member of the WTO in January, 2007.
Concerning the insurance services sector, Vietnam’s commitments on liberalization of
insurance services at the multilateral level are relatively liberal to competition by foreign
insurance services and service suppliers. Especially, commitments in insurance services seemto be more liberal than those in banking and securities services.9 Those commitments under6

Panourgias, Lazaros E. 2006. Banking Regulation and World Trade Law: GATS, EU and Prudential
Institution Building. Oxford and Portland, Oregon: Hart Publishing, pp. 11-15.
7Committee on Trade in Financial Services, Reports of the Meetings held on 28 September 2004 (WTO
Doc. No. S/FIN/M/46, 29 October 2004); 25 June 2004 (WTO Doc. No. S/FIN/M/45, 19 July 2004); 9 October2000 (WTO Doc. No. S/FIN/M/28, 20 November 2000); 13 July 2000 (WTO Doc. No. S/FIN/M/27, 23 August2000); and 25 May 2000 (WTO Doc. No. S/FIN/M/26, 29 June 2000).
8
Cornford, Andrew. 2004. The WTO Negotiations on Financial Services: Current Issues and Future
Directions. Geneva: UNCTAD (Discussion Papers No. 172), p. 15.
9
See Vietnam – Schedule of Specific Commitments, GATS /SC/142, 19 March 2007, pp. 42-47.
While Vietnam undertakes full national treatment with regard to Modes 1, 2 and 3 in insurance services
sector, it inscribes Unbound in both market access and national treatment columns on cross-border supply ofbanking and securities services, except for information transfer and advisory services. In addition, in the banking

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Vietnam’s schedule of specific commitments are legally binding to Vietnam, and require it toaccord foreign insurance services and service suppliers no less favourable treatment thandomestic counterparts under the meaning of GATS Article XVII on National Treatment. In
addition, Vietnam shall permit direct branches of foreign non-life insurers from 2012 inconformity with prudential regulations. 10 As a WTO Member, under GATS, Vietnam isentitled to introduce prudential regulations to address the solvency situation of insurancecompanies in order to ensure consumer protection and the stability of the whole financial
system.
However, as mentioned earlier, the interpretation of the national treatment principle inthe context of services, including insurance services and the “prudential exception” is lessdeveloped. On the one hand, this problem might create difficulties for practitioners andlegislators in Vietnam in regulating the insurance market pursuant to prudential objectives. On
the other hand, this problem might make Vietnam more vulnerable to violation of the GATS
national treatment obligation. Accordingly, understanding on the national treatment principle
is needed for Vietnam’s implementation of its commitments on liberalization of the insurance
services sector under the multilateral framework.
Therefore, the object of this study is to answer, considering the above issues, threequestions:x

How could the national treatment principle in GATS be understood and interpreted?

xWhat are the special factors in interpretation of the national treatment principle in thefinancial services sector generally and in the insurance sector particularly?

x

Based on the understanding of the GATS national treatment principle, what should bedone by Vietnam to comply with national treatment while regulating its insurance
services market with a vision of ensuring consumer protection as well as the stability
and integrity of the financial system?

In order to answer these questions, the study is divided into two parts. Part One on
general aspects of the national treatment principle in insurance services covers four chapters.
Part Two on Vietnam’s insurance services market consists of three chapters. The final chapter
is conclusions.
Chapter One includes a theoretical explanation on the concept of insurance as well as
the role of insurance services and trade in insurance services in economic development. Basedon a historical approach, this chapter also presents the inclusion of insurance services into themultilateral framework. This chapter points out that, at the conclusion of the Uruguay Roundin 1994, the liberalization of insurance services under GATS was only agreed on rules andspecial factors of this sector as provided in the Annex, but not specific commitments by WTO
Members.
Chapter Two starts with some remarks on the national treatment principle in GATS.
This chapter argues that in relation with Article XVI on market access, the scope of thenational treatment principle in GATS would address all discriminatory measures which do not
fall within the realm of Article XVI.
sector, under Mode 3, Vietnam still reserves several limitations on the national treatment principle concerning
conditions for establishment of branches of foreign banks, joint-venture banks, and wholly foreign owned banks.
10
Id. p. 38. See also WTO. Report of the Working Party on the Accession of Vietnam, WT/ACC/VNM/48,
27 October 2006, para. 494.

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NATIONAL TREATMENT PRINCIPLE IN GATS:
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Based on reviewing GATT jurisprudence in interpretation of the national treatment
obligation, this chapter demonstrates that although there are a number of similarities between
the language of GATT Article III and GATS Article XVII, the transplant to GATS raises thehigh possibility of violation of the national treatment principle. The chapter argues that thisproblem results from both the broad scope of likeness, on the one hand, and the broad
coverage of discrimination, on the other hand. A justification based on national legitimate
policy objectives is submitted to balance this broad obligation. However, as this principle isinterpreted in an objective manner, irrespective of national regulatory aims, the inclusion ofregulatory objectives into this principle is proved to be unacceptable. Looking at different
available approaches to reducing the uncertainty in likeness and limiting the broad scope of“no less favourable” treatment, the chapter comes up with a two-stage approach for theconfirmation of breach of this principle whereby Article XVII should be read in connection
with Article XIV on general exceptions, which provides a proper space for legitimate national
policy objectives.
Chapter Three explores the application of the national treatment principle to insurance
services. The Annex, which is only applicable to the financial services sector, is proposed toprovide a proper space for WTO Members to pursue their prudential objectives, and toconstitute a second stage in the two-stage approach towards the application of the national
treatment principle to financial services in general and insurance services in particular.
By exploring some interpretative issues on the applicability of this “prudential
exception” to trade in insurance services, this chapter argues that for a WTO Member toexercise the “prudential exception”, the Member is required to provide evidence that ameasure which is inconsistent with GATS obligations satisfies a three-layer examination.
First, that measure must be concerned with preservation of the solvency of insurance service
suppliers to fulfill their obligations towards policyholders and other relevant persons, as wellas towards the stability and integrity of the financial system as a whole. Second, a degree ofconnection between that measure and prudential objectives must be demonstrated through a“primarily aimed at” test. The third layer is to ensure that the application of that measure does
not constitute disguised restrictions on trade in insurance services. This understanding of
GATS “prudential exception” would maintain the balance between the rights of a Member toregulate its insurance services sector and the rights of other Members to rely on theperformance of that Member’s obligations and commitments with regard to liberalization of
trade in insurance services.
The agreement on liberalization of financial services sector, including insurance
services, was achieved by the end of 1997, rather than at the time of conclusion of the
Uruguay Round. Therefore, Chapter Four provides a brief history of the post-Uruguay Roundnegotiations on this sector. The main part of this chapter reviews specific commitments on
insurance services by the EC, US, Japan and China, in order to reexamine the interpretation of
the national treatment principle in Chapter Two with regard to the scope of national treatment
and criteria for examination of likeness among insurance services and service suppliers. An
example of China’s measure on the minimum capital requirement of branches of foreign nonlife insurance companies is analyzed and tested through the application of the two-stage
approach, framed in Chapters Two and Three, towards interpretation of the national treatment
principle in the insurance sector.
This chapter points out that the examination of the schedules of specific commitments
by the selected WTO Members reconfirms that the scope of application of the national


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treatment principle applies to those discriminatory measures that are excluded from the realmof Article XVI on Market Access. In addition, the determination of likeness in Article XVII
would be uncertain if only the criterion of services classification is taken into account.
As the first chapter in Part Two, Chapter Five provides descriptive backgrounds on
Vietnam’s economic development after the introduction of doi moi in 1986. The main part ofthis chapter presents an overview on Vietnam’s insurance services market and its regulatory
framework throughout three periods: pre-1993, 1994-2000, and post-2001. This chapter
points out that foreign participation has made a contribution to Vietnam’s economic
development as well as the insurance sector after doi moi. Moreover, a clear tendency towards
a level playing filed for all insurers, regardless of ownership and origin, has been introduced
over a period of time.
Chapter Six starts with a summary of Vietnam’s commitments on insurance services
in the WTO. The chapter observes that, in general, Vietnam’s commitments on liberalizationof insurance services are liberal to foreign participation and competition. While liberalizationof insurance services under the WTO could offer some opportunities for further developmentof Vietnam’s insurance services market, concomitant challenges of fierce competition should
not be ignored. The chapter also raises some issues on compliance with Vietnam’s
commitments on insurance services with respect to the national treatment obligation in the
Vietnam Insurance Law, namely the scope of insurance sub-sectors, measures affecting trade
in insurance services, likeness, and the standard of “no less favourable” treatment.
Chapter Seven analyzes the current solvency regulations under the Vietnam Insurance
Law. Based on experience of the US, EU and Japan, this chapter points out several problems
concerning compliance with regulations on technical provisions, assets representing thesolvency margin, reinsurance risk, concrete remedial measures corresponding to different
quantitative solvency control levels, investment rules, credit risk of insurance intermediation,and supervision of insurance holding companies. The interpretation of the national treatment
principle in GATS based on the two-stage approach in the insurance services sector shall shedlight on providing feasible suggestions for further enhancement of Vietnam’s prudential
regulations.
During the introduction of new prudential regulations, Vietnam is required to refrainfrom according any discriminatory measures against foreign insurance services and insurers.
However, some measures might be found in violation of GATS Article XVII due to theuncertainty in the interpretation of the national treatment obligation. The chapter, therefore,
offers different possibilities for justification under the “prudential exception”.
Finally, the concluding chapter draws on the analysis and findings presented in theprevious chapters with respect to the applicability of the national treatment principle ininsurance services as well as suggestions for further enhancement of the Vietnam Insurance
Law.
For the purpose of discussing and analyzing these issues, this study focusesparticularly on jurisprudence, as developed in the WTO dispute settlement mechanism, in
examination of the national treatment principle in GATS, and in its application to theinsurance sector. Several cases in both GATT and WTO jurisprudence with regard to national
treatment and exceptions are described and analyzed. The understanding on the national
treatment principle shall be supported by examining the practice of scheduling commitments


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NATIONAL TREATMENT PRINCIPLE IN GATS:
A Study of Vietnam’s Insurance Services Market
of WTO Members.11 The selected WTO Members are the European Community (hereinafterEC), Japan, the US, and China, who acceded to the WTO after the conclusion of GATS. In
addition, the study shall present a comparative study between Vietnam’s prudential
regulations in the insurance sector and those of other jurisdictions, for example, the US, EU
and Japan. Consideration of Vietnam’s insurance sector shall be centered on the period since
adoption of the doi moi policy. Although many other factors may affect trade in insurance
services, such as administrative issues, taxation, labour or land law, the study limits its scopeto specific problems in the Law on Insurance Business of Vietnam12 (hereinafter Vietnam
Insurance Law) with regard to the national treatment and prudential measures.
The selection of those above-said WTO Members for analysis is based on at least thefollowing three considerations.
First, the EC, US and Japan submitted their commitments during the Uruguay Round,and revised their schedules in the Second and Fifth Protocols in 1995 and 1997, respectively.
In addition, these countries are the most developed insurance markets in the world. The US is
the world’s largest insurance market with gross insurance premiums of US$ 1.06 trillion in
2003.13 The EU (15) and Japan are the second largest insurance markets in the world, justbehind the US.14
Second, China acceded to the WTO in 2001, after the completion of negotiations on
financial services, including insurance services. Vietnam may learn some lessons from
China’s compliance with its commitments in liberalization of insurance services. By including
China’s case, the selected countries cover both the existing WTO Members present during thenegotiation on financial services and a newly acceded WTO Member. This would provide aclear understanding on making commitments on the national treatment principle and offer
better interpretation for the application of this principle in scheduling practices.
Third, as insurance markets of the EC, Japan and the US are well developed, theirinsurance laws might provide good lessons for Vietnam in reviewing current solvency
regulations in the Vietnam Insurance Law. In regard to the US, because the insurance industry
is regulated at the state level rather than federal level, model laws which have been developedby the National Association of Insurance Commissioners (hereinafter NAIC) 15 and can be
adopted by states, shall be examined. 16 Among state laws, New York Insurance Law,
11

GATS, Art. XVII (1) and XX (1), (3).
Law on Insurance Business (Dec. 9, 2000) has become effective since 1 April 2001 (Vietnam).
13
Trade Policy Review – The United States, Report by the Secretariat, WT/TPR/S/160/Rev.1, 20 June
2006, p. 95.
14
Trade Policy Review – European Communities, Report by the Secretariat, WT/TPR/S/136, 23 June
2004, p. 120.
15The NAIC, which was established in 1871, is an organization of the state chief insurance regulatory
officials with a view to coordinating supervision and regulation. The coordinated activities include maintenanceof database, analysis of financial conditions of insurers, design of uniform statutory financial statements andaccounting rules for insurers.
See OECD. 2002. Insurance Solvency Supervision: OECD Country Profiles. Paris: OECD, pp. 295-96.
16
See Goddard, William. 2003. The Revolution of the Times: Recent Changes in U.K. Insurance
Insolvency Laws and the Implications of Those Changes Viewed from a U.S. Perspective. Connecticut
Insurance Law Journal, 10, pp. 160-161. See also Skeel, David A. Jr. 1998. The Law and Finance of Bank andInsurance Insolvency Regulation. Texas Law Review 76, p. 731.
The system of state regulations over insurance markets was developed from the Civil War when theSupreme Court ruled that insurance regulation did not fall in the federal authority, and was legalized by the
McCarran-Ferguson Act of 1945.
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nevertheless, shall be referred to as an example when appropriate because New York is amajor insurance market and home of many of the largest insurers. 17 Further, New York
Insurance Law is recognized as the most well-equipped and sophisticated insurance
legislation in the US.18
Moreover, most foreign insurance companies conducting insurance business inVietnam are from the US, EU and Japan. These countries, therefore, could be potential
complainants against Vietnam with regard to the national treatment and prudential regulations
on insurance services. Studying the experience of those countries in regulating their insurance
markets may enable Vietnam to reduce the possibility of invoking complaints by thosecountries under the WTO framework.

17
Macey, Jonathan R. and Geoffrey P. Miller. 1993. The McCarran-Ferguson Act of 1945: Reconceiving
the Federal Role in Insurance Regulation. New York University Law Review 68, p. 73.
18
Chang, Kuan-Chun. 2003. The Supervision of Financial Conglomerates in China in the Post WTO Era– The Challenges of Risk Concentration and Risk Contagion. University of Miami International andComparative Law Review 11, p. 17.


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NATIONAL TREATMENT PRINCIPLE IN GATS:
A Study of Vietnam’s Insurance Services Market

PART ONEGENERAL ASPECTS OF THE NATIONAL TREATMENT
PRINCIPLE IN INSURANCE SERVICES


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CHAPTER ONE
Insurance Services under the World Trade Organization
The national treatment principle is one of the key rules to liberalize trade in services ingeneral and insurance services in particular at the multilateral framework. However, before
analyzing this principle in detail, this chapter shall provide a general background on insurance
and international trade in insurance services. Using a historical approach, the chapter also
describes the inclusion of insurance services into the framework of WTO.
1. A background on insurance and international trade in insurance services
1.1 Concept of insurance
Insurance is characterized by Carter as a “means” of transferring risk from consumers
having exposure to possible financial losses as a consequence of occurrence of uncertain
events, to insurers, by paying a premium.19 Outreville defined insurance, from the consumer’s
point of view as “a mechanism (or a service) for the transfer” of risks of financial losses to theinsurer; and from the insurer’s point of view as a “pooling mechanism”, where the insurer
pools together a large number of risks in order to reduce the risk accrued to the insurer fromsupplying insurance services.20 Skipper considered insurance as both a risk-shifting and risksharing device:
For a consideration (premium), an individual or organization (the insured) is guaranteed to be21
reimbursed by the insuring organization (the insurer) if a covered event occurs.

Specifically, based on the law of large numbers, the insurer provides insurance for a sufficientquantity of similar risks with a reasonable probability of losses.22 In addition, the insurer may
manage risk by spreading it over other insurers through co-insurance mechanism or purchaseof reinsurance.23
For further clarity, it is necessary to see other ways of classifying insurance based on
different criteria.
(1) Social and private insurance: Skipper distinguished social insurance, whichemphasizes social equity such as income redistribution (retirement, disability, unemployment
benefits), where participation is compulsory and financed by taxes, on the one hand, andprivate insurance which is provided on individual interest, on the other hand. 24 Outreville
19

Carter (1990), p. 205.
Outreville, J. Francois. 1998. Theory and Practice of Insurance. Dordrecht/Boston/London: Kluwer
Academic Publishers, p. 131.
21
Skipper, Harold D. Jr. 2002. Liberalization of Insurance Markets: Issues and Concerns. In Robert E.
Litan et al. eds., Open Doors: Foreign Participation in Financial System in Developing Countries. Washington,
D.C.: Brookings Institution Press, pp. 105-106.
22
Id. p. 106.
23
Carter, Robert L. and Gerard M. Dickinson. 1992. Obstacles to the Liberalization of Trade in Insurance.
Great Britain: Harvester Wheatsheaf (Thames Essay No. 58), p. 15.
24
Skipper (2002), p. 106.
20


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NATIONAL TREATMENT PRINCIPLE IN GATS:
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clarified that, while social insurance, which is compulsory and determined by law, involves
fundamental risks that could not be afforded by consumers, private insurance operates on a
voluntary basis to cover particular risks.25 Between the two types are health insurance andworkmen’s compensation that can be provided by either government or private sector or both
combined.26(2) Life and non-life insurance: Birds and Hird classified those two types by theirdifference in the nature of uncertainty. In life insurance, the risk of death is certain (that is
why life insurance contracts are understood as contracts for contingency insurance) whereas it
is not the case in non-life insurance, where contracts are called contracts for indemnity.27 To
be more exact, Skipper defined life insurance as insurance on the person (life and/or personal
insurance) and non-life insurance to protect property (non-life or property/casualty or generalinsurance).28(3) Direct or primary insurance and reinsurance: Skipper mentioned that while theformer is sold to the public or non-insurance commercial and industrial organizations, direct
insurers, to hedge their own portfolios, purchase the latter, which may also be called
wholesale insurance.29(4) Retail and corporate insurance are classified by Skipper based on the nature of
consumers of the insurance contracts. Consumers can be individuals in retail insurance(home-owners insurance, automobile, individual life, retail non-life personal lines insurance)or businesses and other organizations in corporate insurance (product liability, businessinterruption, group life insurance or commercial lines insurance).30 As information asymmetryis greater in retail insurance, more stringent supervision by government should be recognizedin this area.31(5) First and third party insurance: According to Birds and Hird, first party insurance
is where consumers insure their own life or property such as life insurance, property insurance,
while third party insurance is a situation where consumers insure against their potential legal
liability to pay for damages to another, such as public liability, product liability.32
In addition, there are other activities such as insurance brokerage, loss adjusting, andrisk management consultancy, which are directly complementary to insurance. 33 Those
activities are provided by different entities, such as insurance brokers, loss adjusters andconsultants.
1.2 Rationale of insurance regulation

25

Outreville (1998), p. 199.
Skipper (2002), p. 106.
27
Birds, John and Norma J. Hird. 2001. Birds’ Modern Insurance Law. London: Sweet & Maxwell (Fifth
edition), pp. 9-10.
28
Skipper (2002), pp. 106-107.
29
Id. pp. 107-108.
30
Id. p. 107.
31
Id. p. 107.
32
Birds and Hird (2001), pp. 8-9.
33
Carter and Dickinson (1992), p. 14.
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Scholars have agreed that although the underlying rationale for financial regulation isto address problems of market imperfections, there is a significant difference between banking
and non-banking financial services. More specifically, the ultimate concern in regulation ofbanks is systemic issues, whereas this concern is less significant in regulation of non-banking
financial services.34 As the nature of banking business is to involve the transformation ofliquid liabilities to illiquid assets, the problem of asset-liability mismatch would result in bankruns.35 A failure of a bank would cause panicking consumers to withdraw their deposits fromother sound banks, and then make them insolvent because those sound banks could notconvert their illiquid to liquid assets in a short period of time in order to finance their liquidliabilities. In addition, this contagion effect is more problematic because banks are closelyinterconnected through clearing and payment systems. 36 The disruption of the payment
system, per se, may also be a fundamental source of systemic risk, as it would lead to panic
behaviour of consumers.37 Therefore, the main concern in banking regulation is to address thesystematic risk when cost of a bank failure does not limit to that bank itself, but leads to theinsolvency of other banks due to the contagion effect.
In theory, the potential of systemic risk might exist in the insurance sector throughreinsurance activities where the failure of the re-insurer would lead to direct insurers’
failures.38 In addition, in the international context, as a domestic re-insurer may retrocede apart of surplus or catastrophic risks to foreign re-insurers, any simultaneous postponement ofproviding those services by foreign re-insurers in the international insurance market would
lead to adverse effects on domestic primary insurers and consumers. 39 As pointed out by
several scholars, however, the empirical evidence has shown that this systemic risk does notexist in the non-life insurance sector.40 In other words, the failure of a non-life insurer would
hardly constitute an insolvency of other non-life insurers.41 On the other hand, instances ofsystemic risk could be found in life insurance where the failure of the two largest US life
insurers in 1991 – Executive Life and Mutual Benefit Life – led to the downgrades in ratingsof many other life insurers and increased concern that policy holders initiated runs on otherlow rated life insurers.42

34

Goodhart, Charles et al. 1998. Financial Regulation: Why, how and where now? London: Routledge, pp.

10-11.
35

Id. pp. 8-9.
Id. pp. 10-11.
37
Herring, Richard J. and Robert E. Litan. 1995. Financial Regulation in the Global Economy.
Washington, D.C.: The Brookings Institution, pp. 50-52.
38
Skipper, Harold D. Jr. 1996. International Trade in Insurance. In Claude E. Barfield, ed., Harmonization
versus Competition: International Financial Markets. Washington, D.C.: The AEI Press, pp. 188-190.
39
Herring and Litan (1995), pp. 73-74.
40
See Skipper (1996), pp. 188-190. See also Harrington, Scott E. 1991. Public Policy and PropertyLiability Insurance. In Richard W. Kopcke and Richard E. Randall, eds., The Financial Condition andRegulation of Insurance Companies. Boston: Federal Reserve Bank, p. 241.
41
See Skipper, Harold D. Jr. 1987. Protectionism in the Provision of International Insurance Services. The
Journal of Risk and Insurance 54(1), p. 80. See also Carter and Dickinson (1992), pp. 36-37.
A typical example is the suspension of London insurers and re-insurers with regard to Argentine commercial
vessels and aircraft during the Falkland Islands conflict. However, this threat is unlikely to be severe due to highavailability of alternative insurers and re-insurers in the international insurance market, and the fact that those
insurance policies were arranged through Argentine state-owned National Reinsurance Institute, which hadaccess to other sources of reinsurance.
42
Gart, Alan. 1994. Regulation, Deregulation, Re-regulation – The Future of the Banking, Insurance, andSecurities Industries. U.S.A.: John Wiley & Sons, pp. 190-205.
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NATIONAL TREATMENT PRINCIPLE IN GATS:
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The literature seems to be in agreement that, in contrast to banks, the systemic risk in
the insurance sector is less problematic. The main rationale for insurance regulation might beconsumer protection due to imperfect information (Mayer; Skipper; Spencer; and Goodhart etal.). The problem of asymmetric information occurs in the insurance sector and can be called
a “two-way information asymmetry”.43 On the one hand, it is very difficult for insurers toproperly assess a consumer’s risk and differentiate between high-risk and low-risk consumers
because consumers hold information as monopolists and try not to disclose their private
information. This situation leads to both adverse selection and moral hazard problems.44
On the other hand, although proper operations of a competitive market must be basedon well-informed consumers with regard to evaluation of services and service suppliers,
consumers find it difficult to access information on the soundness of insurance companies.45
In other words, insurers possess more information about their financial condition andinsurance products than consumers, especially individuals and small businesses, who are notin position to evaluate and judge such conditions. In principle, while this problem could be
addressed by the adequate dissemination of information, it seems to be too expensive anddifficult to equip the necessary information to different individual consumers.46 Consequently,
consumer protection considerations would correct this information asymmetry and minimize
loss to consumers from insolvent insurers. Therefore, unlike banks, it appears that theinsurance industry has only minimal exposure to systemic risks, while consumer protection
issues are more important in the insurance sector.
In addition to the problem of information asymmetry, Mayer (2001) stressed two
additional market failures, which may raise concerns on consumer protection in the insurance
sector, namely market manipulation (due to problems of private information and dominantpositions in a market) and contract failure through poor enforcement. 47 The problem ofmonopoly and oligopoly may arise in financial services when government imposes
restrictions on new entrants, and when there are only one or few service suppliers in amarket. 48 In the insurance market, there may be some explicit or implicit collusion withregard to pricing, or different national tax regimes, and licensing requirements.49

For example, in November 1992, Pennsylvania insurance regulators blocked 100,000 customers fromwithdrawing their money out of Fidelity Mutual Life Insurance Company in order to avoid a run on this insurer.
43
Spencer, Peter D. 2000. The Structure and Regulation of Financial Markets. Oxford: Oxford University
Press, pp. 66-67.
44
See Skipper (1996), pp. 191-192.
For example, a consumer, who is more knowledgeable than the insurer about his/her own health conditions,
can use this secret information for his/her best interests and against the interests of the insurer. Accordingly, theadverse selection occurs when low-risk consumers may be charged with high premium and high-risk consumers
charged with low premium. Moral hazard occurs when with their advantageous position regarding information,
consumers are discouraged from entering into loss prevention and risk management.
45
Gamberale, Carlo and Aaditya Mattoo. 2002. Domestic Regulations and Liberalization of Trade inServices. In Bernard Hoekman, Aaditya Mattoo, and Philip English, eds., Development, Trade and the WTO - A
Handbook. Washington, D.C.: World Bank, pp. 291-293.
46
Id.
47
Mayer, Colin. 2001. Regulatory Principles and the Financial Services and Markets Act 2000. In Eilis
Ferran and Charles Goodhart eds., Regulating Financial Services and Markets in the Twenty First Century.
Oxford: Hart Publishing, pp. 29-31.
48
White, Lawrence J. 1996. Competition versus Harmonization – An Overview of International
Regulation of Financial Services. In Claude E. Barfield ed., Harmonization versus Competition: International
Financial Markets. Washington, D. C.: The AEI Press Publisher, p. 12.
49
Skipper (1996), pp. 185-188.

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The problem of contract enforcement could be considerable in the insurance sector
because the nature of insurance is to recover financial losses due to the occurrence of certain
events. There may be a situation where the insurer, without being subject to strict information
disclosure on financial conditions or adhering to capital requirement standards, would tend tomisuse the collected premiums for purposes other than satisfying claim payments. 50 Any
delay or failure of payment would constitute a loss to consumers.
1.3 International trade in insurance services
The literature shares a lack of consensus on the definition of services in general(Trebilcock and Howse; Drake and Nicolaidis). However, the term “insurance” is always
quoted as an example to define the term “services”.51 As a service, insurance also shares thegeneral nature of services, namely intangibility 52 and non-storability. 53 Therefore, theproduction and consumption of insurance services seem to occur concurrently, and theyrequire a close connection between suppliers and consumers of services.
Trade in insurance is to encompass both cross-border trade and investment inimporting countries (Feketekuty; Carter; Carter and Dickinson; and Skipper). Due to theinvisible nature of services, where the sale of service requires substantial inputs in importing
countries, trade in services can not limit itself as pure trade as in case of goods, but must
extend to include other activities associated with international movement of people,
information, and goods as well as the use of facilities in importing countries.54Accordingly,
two distinct channels of supplying insurance internationally are cross-border trade, which
involves the supply of insurance by a foreign insurer located in one country to a domestic
consumer of another country across national borders, and establishment of the presence of aforeign insurer through branches, representative offices, subsidies or other forms, to supply
insurance in the consumer’s country.55
International trade in insurance services can make various contributions todevelopment of domestic markets. As noted by Skipper, because no one country’s market
could offer the necessary cover for extremely large commercial risks, such as oil refineries
and offshore rigs, satellites, and jumbo jets, an international spread of such large risks isrequired.56 Accordingly, insurance and trade in insurance would not only ensure the financial
stability of individuals, families, and organizations, but also enable business facilitation
through greater stability in business transactions.57 Moreover, there is a potential inflow of50

Herring and Litan. (1995), p. 62.
Drake, William J. and Kalypso Nicolaidis. 1992. Ideas, Interests, and Institutionalization: “Trade inServices” and the Uruguay Round. International Organization, 46(1), pp. 42-43. See also Aghatise, Esohe. 1990.
Services and the Development Process: Legal Aspects of Changing economic Determinants. Journal of World
Trade 24(5), p. 103.
52
Feketekuty, Geza. 1988. International Trade in Services: An Overview and Blueprint for Negotiations.
Cambridge, Massachusetts: Ballinger Publishing Company, pp. 27-36.
53
Nicolaides, Phedon. 1989. Economic Aspects of Services: Implications for GATT Agreement. Journalof World Trade 23(1), p. 106.
54
Feketekuty (1988), pp. 87-88.
55
Carter (1990), p. 206.
56
Skipper (1996), pp. 168-169.
57
Skipper (1997), pp. 9-10.
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funds to cover damage due to claim settlement and reduction of economic uncertainty, as well
as a surplus return of investment to pay life insurance policies.58
From the view of consumer’s choice, involvement in cross-border trade satisfies theirown interests such as cost savings (lower price or higher quality of services), highly
specialized services (for example, only Lloyd’s of London is able to provide liability
insurance on a mega tanker), or high connection with international transaction (export
insurance). 59 Concerning establishment of the presence of a foreign insurer, according toCarter and Dickinson, there are at least three reasons in favour of this channel in the context
of insurance, namely (i) acquiring precise information and knowledge, (ii) supporting
marketing purposes, especially in personal insurance, and (iii) offering services to theexporting country’s consumers who travel to the importing country.60
International trade in insurance services, nevertheless, is also subject to restrictions.
Some literature (Feketekuty; Trebilcock and Howse) has showed that restrictions on trade inservices generally exist in domestic regulations, but not in transparent form at the national
border gate like tariffs on trade in goods. 61 As cross-border transactions of services areintangible, an easy way to control foreign services and service suppliers is to regulate local
sale or consumption of imported services.62 Those restrictions may be either discriminatory or
non-discriminatory, or both. 63 An example of discriminatory restrictions is to prohibit aforeign insurer from providing life insurance policies, or only allowing domestic insurers to
supply insurance policies for car registration.64 Non-discriminatory restrictions may exist in acase of lack of transparency due to incompleteness of laws and regulations and/or nonparticipation of interested parties in designing proposed laws and regulations.65
In sum, international trade in insurance services could play a significant role indevelopment of a domestic insurance market. On the one hand, furthering trade in insurance
services requires removal of anticompetitive regulations, which pose unnecessary restrictions
on competition. On the other hand, as described earlier, as the most underlying rationale for
insurance regulation is to protect consumers against market imperfections, trade in insurance
services still needs domestic regulation. The next section shall examine how the two
objectives could be reconciled in the multilateral trading system.
2. The inclusion of insurance services into the World Trade Organization
2.1 Before the Uruguay Round
58

Carter and Dickinson (1992), pp. 33-35.
Feketekuty (1988), pp. 16-17.
60
Carter and Dickinson (1992), p. 17.
61
Feketekuty (1988), pp. 30-34; Trebilcock, Michael J. and Robert Howse. 2005. The Regulation ofInternational Trade. London and New York: Routledge (Third Edition), pp. 351-53.
62
Feketekuty (1988), pp. 30-35.
63
Id. pp. 131-133.
64
Feketekuty, Geza. 2000. Assessing and Improving the Architecture of GATS. In Pierre Sauve andRobert M. Stern eds., GATS 2000: New Directions in Services Trade Liberalization. Washington, D.C.:
Brookings Institution Press, pp. 90-91.
65
Skipper, Harold D. Jr. 2001a. Liberalization of Insurance Markets: Issues and Concerns. In OECD,
Policy Issues in Insurance: Insurance Regulation, Liberalization and Financial Convergence – Insurance andPensions. Paris: OECD, pp. 95-96.
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While GATT, which covers trade in goods and tariff reduction, has had a relatively
long history since 1947, services have been addressed comprehensively on a multilateral basis
only since the Uruguay Round negotiations (1986-1994) with a view to elimination or
reduction of restrictions on trade in services.
The initial step of introduction of services into the multilateral trade negotiations
occurred as early as 1954 when contracting parties of GATT considered the proposal on
applying the non-discriminatory principle to transport insurance because Article VII of GATT
on Valuation for Customs Purposes would include insurance costs of imported products.66
This consideration came up with a Recommendation on “Freedom of Contract in Transport
Insurance” in 1959, whereby countries were recommended, but not legally bound, indesigning national policies in transport insurance, to refrain from application of any measuresthat “would have restrictive effect on international trade”.67
However, due to the lack of availability of statistics on trade in services as well as thedisconnection between trade in goods and services, there was no significant progress innegotiations, except for research activities on trade in services, which continued until the endof the Tokyo Round (1973-1979).68 In addition, developing countries, led by Brazil and India,
opposed the inclusion of trade in services negotiation into the GATT agenda for a number ofreasons: (i) GATT rules were not appropriate for services, (ii) other issues, such as agriculture
and safeguard were more important than services, and (iii) there was a reluctance and concern
on opening service markets.69
There were, nevertheless, three main driving forces to include trade in services into
multilateral negotiations. Firstly, the rapid growth of international trade in services resulted
from technological advances, especially in electronics and computers, in the 1960s. 70 The
total global trade in services increased sharply from US$ 358 billion in 1980 to US$ 931
billion in 1992, with the average annual growth of 8.3 per cent. 71 The increasing growth ofservices’ share in international trade gave incentive to extend trade liberalization in goods toservices through GATT. 72 Secondly, in the US, domestic pressure stemmed from both
services industries (such as insurance, financial services, travel, and tourism) and theenforcement of the Trade and Tariff Act 1984, which requires the elimination or reduction of
barriers and distortions to trade in services as an objective in bilateral and multilateral

66

Footer, Mary E. and Carol George. 2005. The General Agreement on Trade in Services. In Patrick F. J.
Macrory, Arthur E. Appleton and Michael G. Plummer, eds., The World Trade Organization: Legal, Economic
and Political Analysis. New York: Springer (Volume I), p. 803.
67
Freedom of Contract in Transport Insurance: GATT Recommendation of 27 May 1959. Reprinted in
Carter and Dickinson (1992), pp. 153-154.
68
Footer and George (2005), pp. 803-804.
69
Jarreau, J. Steven. 1999. Interpreting the General Agreement on Trade in Services and the WTO
Instruments Relevant to the International Trade of Financial Services: The Lawyer’s Perspective. North Carolina
Journal of International Law & Commercial Regulation 25, pp. 12-13.
70
Reyna, Jimmie V. 1993. Services. In Terence P. Stewart, ed., The GATT Uruguay Round: A Negotiating
History (1986-1992). Deventer: Kluwer Law and Taxation Publishers (Volume II: Commentary), p. 2342.
71
Hoekman, Bernard. 2002. Assessing the General Agreement on Trade in Services. In Kym Anderson
and Bernard Hoekman, eds., The Global Trading System. London-New York: I. B. Tauris Publishers (Volume 3),
Table 4.1, p. 138.
72
Dobson, Wendy and Pierre Jacquet. 1998. Financial Services Liberalization in the WTO. Washington.
D.C.: Institute for International Economics, p. 71.

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negotiations. 73 Thirdly, in 1979, the US successfully convinced other members of theOrganization for Economic Cooperation and Development (hereinafter OECD) to conduct a
study of trade in services in order to define areas for follow-up negotiations.74 The proposal of
the US in 1982 to include a study of trade in services into a new round of multilateral tradenegotiation led to a compromise on voluntarily undertaking national studies of trade inservices and exchange of information.75
Before the Uruguay Round started, there was a prolonged and fierce debate onwhether to include trade in services in negotiations between developed and developing
countries.76 While the former supported the inclusion of services in multilateral negotiations,the latter concerned the appropriateness of the GATT framework with respect to services.
Even until the last meeting of the Preparatory Committee, in charge of preparing the
groundwork for new multilateral negotiations, held in July 1986, there was no solution for the
inclusion of trade in services in the next round.77 Nevertheless, services were finally includedin the Uruguay Round agenda under the Ministerial Declaration adopted at Punta del Este:
Ministers also decide, as part of the Multilateral Trade Negotiations, to launch negotiations on
trade in services.
Negotiations in this area shall aim to establish a multilateral framework of principles and rules
for trade in services, including elaboration of possible disciplines for individual sectors, with aview to expansion of such trade under conditions of transparency and progressive liberalization
and as a means of promoting economic growth of all trading partners and the development ofdeveloping countries. Such framework shall respect policy objectives of national laws andregulations applying to services and shall take into account the work of relevant internationalorganizations.
GATT procedures and practices shall apply to these negotiations.78

A Group of Negotiations on Services was established under the Ministerial Declaration inorder to deal with negotiations in services, which comprised a five-element agenda: (i)definition of services and collection of statistical data on trade in services, (ii) determinationof broad concepts underlying principles and rules applicable to trade in services, (iii)
definition of the scope and the multilateral framework for trade in services, (iv) determinationof existing international disciplines and arrangements relevant to trade in services, and (v)identification of measures and practices which facilitate or are detrimental to trade inservices.79
2.2 The Uruguay Round73

Reyna (1993), p. 2343.
Feketekuty (1988), pp. 191-192.
75
Ministerial Declaration, adopted on 29 November 1982, GATT Doc. No. L/5424.
76
Reyna (1993), pp. 2354-2356.
77
Id. pp. 2356-2358.
78
GATT. The Ministerial Declaration on the Uruguay Round, September 1986, Part II. Reprinted in
Terence P. Stewart, ed., The GATT Uruguay Round: A Negotiating History (1986-1992). Deventer: Kluwer Law
and Taxation Publishers (Volume II: Commentary), p. 10.
79
GATT. The Decision by the Group of Negotiations on Services on the programme for the initial phaseof negotiations on trade in services, 28 January 1987. Reprinted in Terence P. Stewart, ed., 1993. The GATT
Uruguay Round: A Negotiating History (1986-1992). Deventer: Kluwer Law and Taxation Publishers (Volume
III: Documents), pp. 24-25.
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The early negotiations reflected enormously different views of negotiating parties onfour fundamental issues: (i) the comprehensive coverage of all service sectors under theframework agreement or any sector exemption for future negotiations; (ii) the transplant of
GATT structure as well as principles, rules and concepts on trade in goods to a newframework; (iii) definition of services, speed of liberalization and exemption from multilateralprinciples; and (iv) the concern on facilitating participation of developing countries in theworld trading system.80 Those different views resulted from different goals of the four major
trading partners, namely the US, EC, Japan, and developing countries.
While the US followed liberalization of trade in services in general with protection insome service sectors, such as maritime and air transportation, Japan’s interests were mainly insome specific sectors such as transport, tourism and financial services.81 The EC’s goals wereto pursue a comprehensive coverage of service sectors to support better market access,including investment in supply of services.82
Concerns of developing countries were mainly on: (i) the prospects as well as thepotential impact of the future multilateral framework on trade in services, (ii) the risk of
reducing autonomy and limiting flexibility in pursuing macroeconomic and development
policies, and (iii) consideration for infant industry protection. 83 Therefore, developing
countries strongly motioned for a separation of services from GATT negotiations on goods.84
In the Mid-term Meeting, held in December 1988 and April 1989, the Ministers
agreed that “work should proceed, without excluding any sector of trade in services on apriori basis, with a view to reach agreement on the sectoral coverage under the multilateralframework.”85 However, there was no consensus on a general agreement on trade in services
separate from GATT until Switzerland and New Zealand proposed overall structures of a
"General Agreement on Trade in Services" in 18-22 September 1989. 86 Sector-specificdiscussions on financial services, including insurance, under the Uruguay Round began from
September 1989, and the negotiators agreed to establish additional working groups to deal
with individual service sectors, including financial services, in May 1990.87
Several meetings of the Working Group on Financial Services were held in the second
half of 1990 in order to clarify the applicability of the general agreement in financial services
sector, including insurance. Some delegations, for example, India, Brazil, Egypt, Pakistan,were concerned about the inclusion of the Annex on Financial Services into the generalframework, while others (for example, the EC, Yugoslavia, the US, Nordic countries, Japan,
Canada) expressed the necessity for this sectoral annex.88 In particular, negotiators called forpreserving the rights of national authorities to regulate financial services including insurance
80

Reyna (1993), p. 2360.
Footer and George (2005), p. 811.
82
Id. pp. 814-815.
83
Id. pp. 817-818.
84
Randhawa, P. S. 1987. Punta del Este and After: Negotiations on Trade in Services and the Uruguay
Round. Journal of World Trade Law 21(4), p. 164.
85
GATT. Mid-term Meeting document 5-9 December 1988 and 5-8 April 1989, Part II, para. 5. Reprinted
in Terence P. Stewart, ed., 1993. The GATT Uruguay Round: A Negotiating History (1986-1992). Deventer:
Kluwer Law and Taxation Publishers (Volume III: Documents), p. 61.
86
News of the Uruguay Round, 16 October 1989, Sec. “Services ... 18-22 September”, GATT Doc. No.
NUR 031.
87
Reyna (1993), pp. 2372-2373.
88
See Note on the Meeting of 19-20 October 1990, Working Group on Financial Services Including
Insurance, GATT Doc. No. MTN.GNS/FIN/4, 30 November 1990, paras. 2-12.
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NATIONAL TREATMENT PRINCIPLE IN GATS:
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for prudential objectives because these rights were regarded as essential for liberalizing this
sector under the multilateral trading framework.89
A draft text of GATS, consisting of thirty-five full-drafted articles, was submitted by
the Group of Negotiations on Services at the Ministerial Meeting in Brussels in December
1990. Although eight other annexes were identified and developed, the annex on the financial
services sector was left blank due to lack of agreement on its scope and content.90 The main
reason was the different interests of the EC and US with respect to financial services. While
the EC strongly supported an agreement including financial services, the US was reluctant toextend the scope of the final agreement to this important sector.91
Moreover, there were also several unsolved problems in the framework of GATS
concerning the applicability of the most-favoured-nation (hereinafter MFN) treatment as a
general obligation and any sectoral exemption from this principle, the scope of exceptions,and balance of payment provision.92 The concern of the US was on the problem of free ridersof the MFN principle because while national treatment and market access obligations werenegotiated on a sectoral basis, unconditional MFN would extend the commitments to all otherMembers.93
Until another draft of the multilateral framework agreement on services wasannounced in December 1991 by the Chairman of the Negotiation Committee, 94 massive
efforts were made to bring service negotiations back on track. The parties concentrated mostly
on three important areas, namely the overall framework, initial commitments, and sectoralannexes.95 This draft consisted of thirty-five articles and the fully drafted five annexes in thefields of MFN exemptions, telecommunications, movement of natural persons, financial
services, and air transport services. 96 An annex on financial services, which dealt withinsurance services and banking services, including securities, was incorporated in the draft
text of agreement in December 1991, and mainly as it is now in the final agreement.
Specifically, the drafted annex included a provision allowing parties to pursue prudential

89
EC (Note on the Meeting of 18-22 September 1989, the Group of Negotiations on Services, GATT Doc.
No. MTN.GNS/25, 23 October 1989, para. 98); the US (Note on the Meeting of 18-22 September 1989, theGroup of Negotiations on Services, GATT Doc. No. MTN.GNS/25, 23 October 1989, para. 75; Note on the
Meeting of 11-13 June 1990, Working Group on Financial Services Including Insurance, GATT Doc. No.
MTN.GNS/FIN/1, 5 July 1990, para. 86; Communication from the United States, GATT Doc. No.
MTN.GNS/FIN/W/2, 12 July 1990); Canada, Japan, India, and Switzerland (Note on the Meeting of 11-13 June
1990, Working Group on Financial Services Including Insurance, GATT Doc. No. MTN.GNS/FIN/1, 5 July
1990, paras. 79, 80, 81, and 87, respectively); and SEACEN (Southeast Asia Central Banks, comprising India,
Korea, Nepal, Malaysia, Myanmar, Philippines, Singapore, Sri Lanka, and Thailand) (Communication from the
Delegation of Malaysia, GATT Doc. No. MTN.GNS/FIN/W/3, 12 September 1990).
90
Draft Final Act Embodying the Results of the Uruguay Round of Multilateral Trade Negotiations, 3
December 1990, GATT Doc. No. MTN.TNC/W/35/Rev.1, Annex II.
91
Jarreau (1999), pp. 23-24.
92
Draft Final Act Embodying the Results of the Uruguay Round of Multilateral Trade Negotiations, 3
December 1990, GATT Doc. No. MTN.TNC/W/35/Rev.1, Annex II, Commentary, paras. 2, 3, 6 and 7.
93
Drake and Nicolaidis (1992), pp. 42-43. See also Aghatise (1990), p. 86.
94
Draft Final Act Embodying the Results of the Uruguay Round of Multilateral Trade Negotiations,
December 1991. Reprinted in Terence P. Stewart, ed., 1993. The GATT Uruguay Round: A Negotiating History(1986-1992). Deventer: Kluwer Law and Taxation Publishers (Volume III: Documents), pp. 795-850.
95
Reyna (1993), pp. 2396-2411.
96
In comparison with the second draft, this third draft did not contain annexes on maritime transport
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objectives in regulating their financial services, including insurance services. 97 The
incorporation of the annex on financial services would imply a balance between theliberalization of financial services under the multilateral framework and the concerns over thestability of financial markets as well as consumer protection.
Nevertheless, there was no progress in negotiations during 1992 and the first half of1993 because of different views with regard to market access negotiations and agricultural
subsidies. Additionally, uncertainty over the application of the MFN treatment, mainly fromthe US proposal on undertaking specific MFN exemptions in various service industries, led toreluctance by many parties to schedule initial commitments.98 The proposal of the US partly
resulted from the fact that commitments in financial services made by some countries(including Japan and developing countries in Asia and Latin America) did not satisfy the US
expectation on opening financial services markets.99
This deadlock, however, was solved by the meeting of the Group of Seven held inTokyo in July 1993, where the leaders stressed the top priority in conclusion of the Uruguay
Round, which could be achieved through “comparable market opening measures by otherparticipants” and constructive negotiations on all subjects.100 GATS was formally adopted by
the Trade Negotiation Committee in the Final Act of the Uruguay Round Multilateral Trade
Negotiations in December 1993,101 and then incorporated as Annex 1B into the Agreement
Establishing the World Trade Organization (hereinafter WTO agreement) approved by theministerial meeting at Marrakesh on 15 April 1994.102
2.3 Trade in insurance services under GATS
(i) Scope of insurance services
The Annex on Financial Services of GATS defines a financial service as “any serviceof a financial nature offered by a financial service supplier of a [WTO] Member” andspecifies that “financial services include all insurance and insurance related services, and allbanking and other financial services (excluding insurance)”, up to sixteen sub-sectors offinancial services.103 Insurance and insurance related services consist of:
(i)
(ii)
(iii)

Direct insurance (life and non-life);
Reinsurance and retrocession,
Insurance intermediation, such as brokerage and agency; and97

Draft Final Act Embodying the Results of the Uruguay Round of Multilateral Trade Negotiations,
December 1991. Reprinted in Terence P. Stewart, ed., 1993. The GATT Uruguay Round: A Negotiating History(1986-1992). Deventer: Kluwer Law and Taxation Publishers (Volume III: Documents), p. 829.
98
Reyna, Jimmie V. 1999. Services. In Terence P. Stewart, ed., The GATT Uruguay Round: A Negotiating
History (1986-1994). The Hague: Kluwer Law International (Volume IV: The End Game (Part I)), p. 793.
99
Jarreau (1999), p. 24.
100
Tokyo Summit Economic Declaration, A Strengthened Commitment to Jobs and Growth, GATT Doc.
No. MTN.TNC/W/114, 13 July 1993, para. 7.
101
Thirty-Sixth Meeting of the Trade Negotiations Committee on 15 December 1993, GATT Doc. No.
MTN.TNC/40, 21 December 1993, para. 7.
102
The Agreement Establishing the World Trade Organization, Marrakesh, 15 April 1994.
103
GATS, the Annex, para. 5 (a).

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NATIONAL TREATMENT PRINCIPLE IN GATS:
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Insurance-related services, such as consultancy, actuarial, risk assessment and claim
104
settlement services.

However, those insurance and insurance-related services must not be services suppliedin the exercise of government authority.105 The Annex provides some details on "services
supplied in the exercise of governmental authority" applicable in the financial sector, which
are excluded from the scope of GATS as follows:(i)

activities conducted by a central bank or monetary authority or by any other public
entity in pursuit of monetary or exchange rate policies;
activities forming part of a statutory system of social security or public retirement
plans; andother activities conducted by a public entity for the account or with the guarantee or106using the financial resources of the Government.

(ii)
(iii)

If a Member allows any of the activities referred to in the two last categories to be
conducted by its financial service suppliers in competition with a public entity or a financial
service supplier, those activities shall be subject to the scope of GATS and the Annex.107(ii) Modes of supply
Under GATS, trade in insurance services is defined through four modes of supply.108
Table 1 provides a summary on the distinctions among four modes of supply.
Table 1: Modes of supply
Supplier Presence
Service supplier
not present within
the territory of theMemberService supplierpresent within the
territory of theMemberOther Criteria
1. Service delivered within the territory of the Member,from the territory of another Member
2. Service delivered outside the territory of the Member,in the territory of another Member, to a service
consumer of the Member
3. Service delivered within the territory of the Member,through the commercial presence of the supplier
4. Service delivered within the territory of the Member,with supplier present as a natural person

Mode
1. Cross-border supply
2. Consumption abroad

3. Commercial presence
4. Presence of natural person

Source: Reproduced from Scheduling of Initial Commitments in Trade in Services, Explanatory Note, GATTDoc. No. MTN.GNS/W/164, 3 September 1993, para. 18.

Mode 1 deals with supply of a service from the territory of one Member into theterritory of any other Member (cross-border supply), which is similar to international trade ingoods in that a service product crosses a national frontier, and both the consumer and the
supplier remain in their respective territories when the product is delivered. Under this mode,
104
105
106
107
108

Id.
GATS, Art. I:3 (b).
GATS, the Annex, para. 1 (b).
Id. para. 1 (c).
GATS, Art. I:2 and the Annex, para. 1 (a).

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for example, consumers in one country are allowed to purchase insurance policies fromfinancial institutions located abroad supplying services across the border.
Mode 2 addresses the supply of services in the territory of one Member to the service
consumer of any other Member, which involves consumption abroad with the movement ofconsumers to the territory of suppliers, for example the purchase of personal accident
insurance by consumers while traveling abroad. The distinction between Mode 1 and Mode 2
is services provided to non-residents “from” the country of the service supplier (Mode 1) andservices supplied “in” the country of the service supplier (Mode 2), which requires the
movement of consumers.
Mode 3 allows the commercial presence of a supplier of one country in the territory of
another country. By including this mode in supplying services, GATS extends its scope toinclude investment. Commercial presence is defined to encompass “any type of business or
professional establishment”, which is undertaken through creation or acquisition, for example
juridical person, branch or representative office. 109 In addition, in order to be eligible forcommercial presence, this juridical person must be owned or controlled by the entity locatedin the exporting country.110
Mode 4 covers the supply of services through presence of natural persons of one
Member in the territory of another Member. Natural person is to cover both nationals as wellas permanent residents of WTO Members,111 who are either service suppliers or employees ofservice suppliers seeking to supply services abroad.112 Supplying services through this mode
involves the movement of natural persons of the service supplier across the border of WTO
Members.
(iii) Outline of GATS
GATS consists of three levels: (i) a set of general concepts, principles and rules thatapplies to measures affecting trade in services; (ii) specific commitments that apply to thoseservice sectors and/or sub-sectors listed in WTO Members’ schedules; and (iii) eight annexes
that take into account sectoral specificities and allow for temporary exemption to the MFN
obligation.
The framework agreement, which consists of thirty two articles (including Articles III
bis, V bis and XIV bis) divided into six parts, 113 set out general concepts, rules andobligations that apply to measures affecting trade in services. GATS deals with both
discriminatory and non-discriminatory restrictions on trade in services in general. A numberof rules address exclusively either discriminatory or non-discriminatory restrictions, whereas
109

GATS, Art. XXVIII (d).
GATS, Art. XXVIII (n) provides that, “owned” refers to ownership of more than 50 per cent of theequity interest of a company, and “controlled” means the power to name a majority of its directors or otherwise
to legally direct its actions.
111
GATS, Art. XXVIII (k) provides that permanent residents are covered provided the Member concerned(1) does not have nationals, or (2) accords substantially the same treatment to permanent residents as to nationals.
112
GATS, Annex on Movement of Natural Persons Supplying Services under the Agreement, para. 1.
113
The General Agreement on Trade in Services: Part I – Scope and Definition, Part II – General
Obligations and Disciplines, Part III – Specific Commitments, Part IV – Progressive Liberalization, Part V –Institutional Provisions, and Part VI – Final Provisions.
110


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some others concern both types of restrictions. Figure 1 describes several main rules andobligations of GATS dealing with trade restrictions in services.
Figure 1: Outline of GATS rules

GENERAL OBLIGATIONS
Art. III Transparency
Art. VI Domestic
Regulation
Art. VII Recognition

Art. II MFN

Non-discriminatory
restrictions

Discriminatory
restrictions

Art. XVI Market AccessArt. XVII National Treatment

SPECIFIC COMMITMENTS

There are several fundamental rules in GATS Part Two on General Obligations andDisciplines addressing the problem of non-discriminatory restrictions on trade in services,such as Article III on transparency regarding relevant domestic policy measures; Article VI on
domestic regulation, designed to ensure that regulatory measures affecting service trade areadministered in a reasonably objective and impartial way; and Article VII concerning
recognition of education or experience obtained, requirements met, or licenses or certificates
granted in other WTO Members.
Although discriminatory restrictions are dealt with by MFN and national treatment in
Articles II and XVII, respectively, only MFN is a general obligation. MFN obligation requires
a WTO Member to accord immediately and unconditionally to services and service suppliersof any other Member treatment “no less favourable” than that it provides to “like” services
and service suppliers of any other country. While the national treatment and market accessprinciples fall under GATS Part Three on Specific Commitments, only the latter extends its
scope to all measures that restrict either domestic or foreign services and service suppliers
from getting access to a market, whether on a discriminatory or non-discriminatory basis.
In addition, other articles relevant to this study are Article X, which permits
emergency safeguard measures in specific circumstances; Article XII, which allows for theapplication of restrictions on trade in services, including payments and transfers, in the eventof serious balance of payments and external financial difficulties; and Article XIV, which
provides exceptions as necessary to protect public order, human health, or secure compliancewith laws and regulations.


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At the end of the Uruguay Round, Members presented their schedules of specificcommitments with regard to liberalizing service sectors. However, the disagreement of the US
over financial services, including insurance services could not be resolved at the time of
conclusion of the Uruguay Round and led to the Second Annex on Financial Services. Thissecond annex allows Members a period of up to six months after the date of entry into forceof the WTO agreement, to (i) list measures relating to financial services inconsistent with the
MFN, and (ii) improve, modify or withdraw any specific commitment in their schedules on
financial services.114 Consequently, the agreement on liberalization of the financial services
sector, including insurance services, was achieved by the end of 1997, rather than at the timeof conclusion of the Uruguay Round.
Besides the two annexes on financial services and the annex on MFN exemption
mentioned earlier, other annexes address the movement of natural persons supplying services,
air transport services, negotiations on maritime transport services, telecommunications, andnegotiation on basic telecommunications.
3. Concluding remarks
GATS provides a set of multilateral rules to deal with both discriminatory and nondiscriminatory restrictions, which affect trade in services in general, and insurance services inparticular. The right to introduce prudential regulations, which is governed by the Annex, isvital for incorporating insurance services into the multilateral trading system. The inclusion of
insurance services into the multilateral framework, however, was agreed on regarding only
rules and specific factors of this sector provided in the Annex at the conclusion of the
Uruguay Round. WTO Members continued negotiations on specific commitments onliberalization of insurance services in the following several years. Accordingly, theapplicability of the national treatment principle in insurance services shall be analyzed indetail in the next three chapters relating to the framework of GATS, the Annex, and schedulesof specific commitments.

114

GATS, Second Annex on Financial Services.

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CHAPTER TWOInterpretation of the National Treatment Principle in GATS
Chapter Two starts with some remarks on the national treatment principle in GATS,
and then identifies the scope of this principle. This chapter also reviews GATT jurisprudence
in interpretation of the national treatment obligation. The main part of this chapter examines
possibilities of interpretation of the national treatment principle in GATS, and frames a twostage approach for such interpretation with a view to balancing liberalization of services under
WTO and legitimate national policy objectives.
1. Remarks about the national treatment principle in GATS
The national treatment principle is incorporated in GATS Part III on SpecificCommitments. Article XVII requires an importing country to treat foreign services andservice suppliers of any other Member no less favourably than its own “like” services andservice suppliers.115 The inclusion of the national treatment principle in specific obligations,
not general obligations like GATT, is a distinguishing feature of GATS, and implies that thenational treatment obligation does not apply automatically to all service sectors. Instead, itapplies to scheduled sectors and/or sub-sectors that a Member specifically lists in its
commitments, and is also subject to any limitations indicated in each of the four modes ofsupply.
This progressive liberalization has been criticized as the main structural weakness of
GATS, as national treatment is an object of negotiation rather than a general obligation.116 It
has been noted that the more Members exclude various sectors and sub-sectors from theirschedules or inscribe limitations on national treatment in scheduled sectors, the less effective
GATS will be in liberalization.117 In the words of Snape and Boswoth, this approach “inhibits
liberalization” because it gives incentives to governments to liberalize only sectors or subsectors subject to the least harm to their countries.118
Although the national treatment principle by itself is to deal only with some degree oftrade liberalization – discrimination between foreign and domestic source of supply, but notamong foreign services and service suppliers, the importance of the national treatment
principle in facilitating progressive liberalization in services in general and insurance services
in specific could be summarized by five attributes.
115

GATS, Art. XVII:1.
Sauve, Pierre. 1995. Assessing the General Agreement on Trade in Services: Half-Full or Half-Empty?
Journal of World Trade 29(4), p. 32. See also Hoekman, Bernard. 1994. General Agreement on Trade inServices. In OECD, The New World Trading System: Readings. Paris: OECD, pp. 180-181.
117
Hoekman, Bernard and Pierre Sauve. 1994. Liberalizing Trade in Services., Washington, D.C.: WorldBank (Discussion Papers 243), p. 33.
118
Snape, Richard H. and Malcolm Boswoth. 1996. Advancing Services Negotiations. In Jeffrey J. Schott,ed., The World Trading System: Challenges Ahead. Washington, D.C.: Institute for International Economics, p.
191.
116


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First, the primary concern of the national treatment is to address domestic law andregulations of Members with regard to treatment of foreigners.119 As mentioned in Chapter
One, section 1.3, most restrictions on trade in services are embedded in national domestic
regulations. At the time of negotiating a framework agreement, it was recognized that national
treatment in the service sector has significance because most services were subject to heavy
domestic regulation, monopolization or state control.120 National treatment of foreign services
and service suppliers, therefore, is a necessary condition to ensure a level playing field forforeign and domestic suppliers.
In addition, the scope of GATS seems to be broad in terms of measures affecting trade
in services. It covers not only measures in different forms, such as laws, regulations, rules,
procedures, decisions, administrative actions, but also regulations issued by different
authorities, including central, regional or local governments, as well as non-governmental
bodies exercising delegated governmental functions.121 It has been said that national treatment
would enhance further liberalization because restrictions on trade in services have beenclearly identifiable and subject to subsequent negotiations.122
Second, during the negotiation of GATS, many countries, including the EC anddeveloping countries, were in favour of future negotiations and implementation of the national
treatment obligation on a progressive basis rather than general obligation.123 According to
Hoekman, this was considered a trade-off with the extension of trade in services to all fourmodes of supply, which was supported by the US. 124 The adoption of a positive listing
approach, whereby WTO Members opt to inscribe specific sectors and sub-sectors in themultilateral commitments, mainly resulted from efforts of developing countries in lessening
the demands on liberalization from developed countries.125
The inclusion of national treatment in the specific commitments also recognizes theMember’s choice in specifying sector and mode of supply, and implies reduction ofmultilateral rules and exceptions for different service sectors.126 Therefore, the application of
the national treatment principle takes a long-term approach, and further liberalization inservices largely depends on negotiations with regard to making commitments on national
treatment.
Third, by making multilateral commitments on national treatment, Members wouldbind themselves to current as well as future liberalization, which constitute, at least, increased

119

UNCTAD. 1999. National Treatment. New York and Geneva: UN, pp. 7-13.
Reyna (1993), pp. 2376.
121
GATS, Art. I (3) (a).
122
Drake and Nicolaidis (1992), p. 93.
123
During the Uruguay Round negotiations, some GATT contracting parties, including Australia, New
Zealand, Japan, Switzerland, the US, supported an “automatic national treatment”, whereby national treatment is
obligatory once market access is granted. However, other parties, including Thailand, Singapore, India, Mexico,
Peru, and EC, were in favour of accepting the national treatment as an object of progressive negotiations.
See Note on the Meeting of 17-21 July 1989 of the Group of Negotiations on Services, GATT Doc. No.
MTN.GNS/24, 28 August 1989, paras. 202-218; Note on the Meeting of 11-13 June 1990, Working Group on
Financial Services Including Insurance, GATT Doc. No. MTN.GNS/FIN/1, 5 July 1990, paras. 46-53. See also
Reyna (1993), pp. 2375-2377.
124
Hoekman (1994), p. 179.
125
Dobson and Jacquet (1998), p. 75.
126
Drake and Nicolaidis (1992), p. 90.
120


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predictability of the existing applicable policies.127 Although lack of commitment does not
imply prohibition on supply of services, the absence of such commitment, nevertheless,means no guarantee of stability of such liberal trade in services.128
Commitments on national treatment would provide more transparency and stronger
attitudes towards foreign investors, and thus make the country more competitive for foreign
investment. 129 In other words, although limitations on national treatment may exist in
Members’ schedules of specific commitments, they may offer some certainty and security
towards foreign services and service suppliers. Furthermore, those limitations are only
applicable to existing discriminatory measures, and any limitations on national treatment not
inscribed into Members’ schedules would be found to be illegal later.130 Therefore, by making
commitments on national treatment, governments could liberalize their service markets undercontrollable sequencing.
Fourth, by reference to mode 3, GATS covers investment for supplying services. The
scope of national treatment in investment seems to be wider than that in trade because theinvestment involves a wide range of activities in importing countries, including know-how
technology, local production and distribution, capital financing and provision of services.131
In the context of GATS, economic activities are not limited only to “internal sale, offering ofsale, purchase, transportation, distribution or use” as stipulated in GATT Article III, they
encompass also “production” of services in other countries as provided in GATS Article
XXVIII (b). Therefore, making commitments on national treatment would require a “no lessfavourable” treatment not only between foreign and domestic like services, but also between
domestic and foreign service suppliers, who provide services through commercial presence.
Last, understanding the national treatment principle is necessary for both schedulingnational commitments on specific sectors or sub-sectors, and dispute settlement procedures.
Failure to implement specific commitments would lead to an obligation to compensate other
WTO Members who are denied from benefit.132 As noted earlier, examination of countries’schedules would be “the main part” of the panel process, in addition to interpretation of
fundamental principles.133
2. Similarities between GATT and GATS with respect to national treatment134
2.1 Similarities
127
Sorsa, Piritta. 1997. The GATS Agreement in Fianncial Services – A Modest Start to Multilateral
Liberalization. New York: IMF (Working Paper WP/97/55), pp. 11-12.
128
WTO. Undated. Market Access: Unfinished Business – Post-Uruguay Round Inventory and Issues.
Geneva: WTO (Special Studies 6), p. 101.
129
Kono, Masamichi et al. 1997. Opening Markets in Financial Services and the Role of the GATS.
Geneva: WTO (Special Studies), p. 5.
130
Drake and Nicolaidis (1992), p. 93.
131
UNCTAD (1999), p. 9.
132
Mattoo, Aaditya. 1999. Financial Services and the World Trade Organization: Liberalization
Commitments of the Developing and Transition Economies. Washington D.C.: World Bank (Working Paper
2184), pp. 29-30.
133
Hoekman (1994), pp. 180-181.
134
This section draws in part from Vu Nhu Thang. 2006a. Interpreting GATS National Treatment
Principle: Possibilities and Problems of Transplant from GATT. Forum of International Development Studies 32,
pp. 173-194.


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GATT national treatment requires Members to refrain from applying any law,regulation and requirement as well as internal taxes and charges, which may affect internalsale, offering for sale, purchase, transportation, distribution or use, on a discriminatory basis
between imported and like domestic products. This fundamental obligation is specified in
Article III on National Treatment on Internal Taxation and Regulation, paragraphs (1), (2) and(4):1.
The contracting parties recognize that internal taxes and other internal charges, andlaws, regulations and requirements affecting the internal sale, offering for sale, purchase,transportation, distribution or use of products, and internal quantitative regulations requiring
the mixture, processing or use of products in specified amounts or proportions, should not beapplied to imported or domestic products so as to afford protection to domestic production.
2.
The products of the territory of any contracting party imported into the territory of
any other contracting party shall not be subject, directly or indirectly, to internal taxes or otherinternal charges of any kind in excess of those applied, directly or indirectly, to like domestic
products. Moreover, no contracting party shall otherwise apply internal taxes or other internal
charges to imported or domestic products in a manner contrary to the principles set forth inparagraph 1.
4.
The products of the territory of any contracting party imported into the territory of
any other contracting party shall be accorded treatment no less favourable than that accorded tolike products of national origin in respect of all laws, regulations and requirements affecting
their internal sale, offering for sale, purchase, transportation, distribution or use. The
provisions of this paragraph shall not prevent the application of differential internaltransportation charges which are based exclusively on the economic operation of the means of
135
transport and not on the nationality of the product.

Similarly, GATS Article XVII on National Treatment requires a Member to treat
foreign services and service suppliers no less favourably than its like domestic services andservice suppliers:
1.
In the sectors inscribed in its Schedule, and subject to any conditions andqualifications set out therein, each Member shall accord to services and service suppliers of
any other Member, in respect of all measures affecting the supply of services, treatment no lessfavourable than that it accords to its own like services and service suppliers.
2.
A Member may meet the requirement of paragraph 1 by according to services andservice suppliers of any other Member, either formally identical treatment or formally different
treatment to that it accords to its own like services and service suppliers.
3.
Formally identical or formally different treatment shall be considered to be lessfavourable if it modifies the conditions of competition in favour of services or service
suppliers of the Member compared to like services or service suppliers of any other136
Member.

Although Article III applies to goods and Article XVII deals with services, the text of
the Article XVII:1 has more similarities to Article III:4 rather than Article III:2 of GATT, inthat it refers only to “like” services and service suppliers, but not to “directly competitive or
substitutable” services. In addition, the structure of Article XVII is completely different fromthat of Article III:2, which consists of two separate sentences. However, as Article XVII
covers all the measures affecting supply of services regardless of fiscal or non-fiscal measures,it seems to be similar to the combination of both Article III:2 and 4. In general, GATT Article
135
136

GATT, Art. III. (Asterisks omitted)
GATS, Art. XVII. (Footnote omitted)

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III and GATS Article XVII share three elements, in which Members are required to, (i) withrespect to all laws, regulations and requirements affecting internal sale, offering for sale,purchase, transportation, distribution or use (or all measures affecting supply of services), (ii)accord to foreign goods (or services and service suppliers) no less favourable treatment, and(iii) than that accorded to like domestic goods (or services and service suppliers).
2.2 Possibilities of transplant
In the context of services, the practice of panels and the Appellate Body indicate thatGATT jurisprudence on interpretation of Article III may be relevant to examining themeaning of GATS Article XVII.
Firstly, GATS and GATT fall within the same framework of the WTO Agreement, inwhich the former constitutes Annex 1B and the latter constitutes Annex 1A. Article XVI:1 of
the WTO Agreement reads:
Except as otherwise provided under this Agreement or the Multilateral Trade Agreements, theWTO shall be guided by the decisions, procedures and customary practices followed by the
CONTRACTING PARTIES to GATT 1947 and the bodies established in the framework of137
GATT 1947.

Although this does not indicate a clear and exact legal obligation to follow those decisions,procedures and customary practices developed in GATT, it is likely to suggest that GATT
provisions and jurisprudence relating thereto, including the national treatment, would be
relevant for interpretation of GATS provisions. Furthermore, as mentioned in Chapter One,section 2.1, the Ministerial Declaration of the Uruguay Round expressly indicated that GATT
practices were relevant to negotiating a multilateral framework on services. In addition, thenegotiating history shows a clear expression that some GATT principles and obligations areapplicable to the service realm, including transparency, MFN, and national treatment.138
Secondly, the Appellate Body in EC – Bananas provided a general approach to GATS
in that GATT jurisprudence could be relevant for the interpretation of analogous provisions in
GATS.139 The Appellate Body has compared GATT Article III and GATS Article XVII whenruling that the aims and effects test is not applicable to GATS Article XVII because there isno comparable provision similar to Article III:1 of the GATT as the grounds for this test.140
Thirdly, the Appellate Body also confirmed the conclusions of previous panels in
GATT on Article III as a strong support for its interpretation of the word “affecting” in thecontext of GATS Article XVII when scope of a measure in question is to be defined.141
Lastly, the Panel in Korea – Beef recalled that the main purpose of Article III:4 is toensure “the effective equality of opportunities” with regard to the application of laws,
137

WTO Agreement, Art. XVI:1
Note on the Meeting of 15-17 September 1987 of the Group of Negotiations on Services, GATT Doc.
No. MTN.GNS/10, 15 October 1987, paras. 11-19.
139
Appellate Body Report, European Communities – Regime for the Importation, Sale and Distribution of
Bananas [hereinafter EC – Bananas], WT/DS27/AB/R, adopted on 25 September 1997, para. 231 reasons that:…The Panel would have been on safer ground had it compared the MFN obligation in Article II of
the GATS with the MFN and MFN-type obligations in the GATT 1994…
140
Id. para. 241.
141
Id. para. 220.
138


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regulations and requirements, and this is also applicable to Article XVII:3 of GATS, which
explicitly provides that formally identical legal provisions would cause less favourable
treatment to imported products.142
However, there are some differences between GATT and GATS, which may
significantly limit the transplant of GATT jurisprudence to GATS. First, GATT covers tradein goods whereas GATS applies to the supply of services. The fundamental nature ofintangibility and non-storability of services make the interpretation of the national treatment
principle of GATS more complicated and difficult than that of GATT. Second, as noted in
section 2.1 of this chapter, the structure of GATS Article XVII is different to that of GATT
Article III. In addition, textual differences also exist between GATT and GATS. While GATT
Article III specifically refers to goods “imported into the territory of any other contracting
party”, GATS Article XVII seems to address all discriminatory measures between domestic
and foreign services and service suppliers. Third, as GATS covers investment for supplying
services, the scope of the national treatment principle extends not only to services but also toservice suppliers. Finally, GATS Article XVII is a negotiable obligation, which makeschedules of specific commitments of WTO Members become an integral part of the national
treatment principle.
Although legal evidences apparently demonstrate possibilities for transplanting GATT
jurisprudence to service sectors, the examination and interpretation of the GATS national
treatment principle should carefully take into account such limitations.
3. Provision and case law of GATT
3.1 Internal taxation and regulation affecting trade in goods
The first element of the national treatment obligation under GATT is whether ameasure in question falls under the scope of Article III. While Article III:2 deals with all
kinds of internal taxes and other internal charges, which discriminate between imported andlike (or directly comparative or substitutable) domestic products, Article III:4 deals with all
kinds of laws, regulations, and requirements, which have no fiscal nature, affecting internalsale, offering for sale, purchase, transportation, distribution or use of imported products.
With regard to measures covered by Article III:4, both panels and Appellate Body
have clarified their scope through a number of cases.
First, measures which affect internal sale, offering for sale, purchase, transportation,
distribution or use of imported products must be governmental. The Appellate Body in Korea– Beef has stated that Article III:4 covers only the governmental intervention that affects theconditions of competition between imported and like domestic products.143 Therefore, a dualor parallel system of beef distribution in the Korean market is not covered by the scope of this
Article as far as it purely resulted from the cost and benefit calculation of private

142
Panel Report, Korea – Measures Affecting Imports of Fresh, Chilled and Frozen Beef [hereinafter
Korea – Beef], WT/DS161/R, WT/DS169/R, adopted on 10 January 2001, para. 624.
143
Appellate Body Report, Korea – Beef, para. 149. (Original emphasis)


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entrepreneurs. 144 This indicates that any measure bearing non-governmental nature orfunctions would not fall within the scope of Article III:4.
Second, the scope of “laws, regulations and requirements” encompasses bothmandatory or compulsory rules, and voluntary but enforceable measures as well. In Canada –FIRA, the US contended that the written undertakings obtained by the government of Canada
under the Canadian Foreign Investment Review Act, obliging foreign investors to purchasegoods of Canadian origin or from Canadian sources, would be inconsistent with Article
III:4. 145 The Panel, in examining whether those purchase undertakings constituted “laws,
regulations and requirements” within the meaning of Article III:4, found that the word“requirements” could cover the existing purchase undertakings.146 The reasoning of the Panelis that those written purchase undertakings would be a criterion for governmental approval ofinvestment projects, and they could be legally enforced. 147 This broad interpretation was
repeated in EEC – Regulation on Imports of Parts and Components, where Japan contended
that the acceptance of undertaking to limit the use of imported parts and materials would
constitute a “requirement” within the context of Article III:4.148 The Panel considered that
grants of an advantage depending on the acceptance of undertakings by EEC enterprises tolimit the use of Japan-original parts and material constitute a “requirement” inconsistent with
Article III:4.149
Third, measures cover both substantive and procedural norms. In US – Section 337,
Section 337 was used as a means for the enforcement of the US patent law at the border under
the investigations and proceedings conducted by the US International Trade Commission
subject to the Administrative Procedure Act, while litigation under the US patent law wasbrought before federal district courts and subject to procedures of the Federal Rules of Civil
Procedure.150 The Panel concluded that the procedures under Section 337 were covered by thescope of “laws, regulations and requirements affecting the internal sale of imported products”
because (i) there is no distinction of laws, regulations and requirements in substance andprocedure under the text of Article III:4, and (ii) the substantive provisions would be
ineffective if there was a lack of the procedural provisions for enforcement.151
Last, measures include those directly regulating the provision of products, and thosethat govern other matters but indirectly affect the conditions of competition. In Italian
Discrimination against Imported Agricultural Machinery,152 the Italian government set up a
revolving fund allowing the Ministry of Agriculture and Forestry to provide special credit
terms for the purchase of Italian agricultural machinery, but not imported tractors and otheragricultural machinery. According to the Panel, the implication of the word “affecting” meansthat Article III:4 encompasses both laws and regulations which directly governed the144

Id.
Panel Report, Canada – Administration of the Foreign Investment Review Act [hereinafter Canada –FIRA], L/5504 – 30S/140, adopted on 7 February 1984.
146
Id. para. 5.4.
147
Id. para. 5.4.
148
Panel Report, EEC – Regulation on Imports of Parts and Components, L/6657 – 37S/132, adopted on
16 May 1990.
149
Id. para. 5.21.
150
Panel Report, United States – Section 337 of the Tariff Act of 1930 [hereinafter US – Section 337],
L/6439 – 36S/345, adopted on 7 November 1989.
151
Id. para. 5.10.
152
Panel Report, Italian Discrimination against Imported Agricultural Machinery, L/33 – 7S/60, adopted
on 23 October 1958.
145


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conditions of sale or purchase, as well as any law and regulation which might “adversely
modify the conditions of competition between the domestic and imported products in theinternal market”.153
The term “internal taxes or other internal charges” as mentioned in Article III:2 is not
limited only to taxes and charges themselves, but other measures that could lead to costburdens on the products. According to the Panel in Argentina – Bovine Hides, those measures
which are covered by Article III:2 must satisfy three conditions: (i) constituting taxes or othercharges of any kind, (ii) constituting internal measures and (iii) applying, directly or indirectly,
to imported and domestic products.154 In Argentine regulations, goods that are definitively
imported into Argentine territory are subject to (i) an additional amount, under Resolution
3431, in addition to the ordinary value added tax due on that import transaction, and this prepayment of value added tax may be credited on the subsequent re-sale of goods in cases
where the importer is a registered taxpayer;155 and (ii) a certain amount, under Resolution
3543, on account of the annual tax on income and this pre-payment of income tax can becredited against the amount that is due by the importer in the same fiscal period.156 The Panelfound that, although Resolutions 3431 and 3543 were mechanisms for the collection of thevalue added tax and income tax, they impose fiscal and payment obligations on importers,
which qualify as tax measures under Article III:2. 157 Therefore, the term “taxes or othercharges of any kind” would cover other measures, including "tax administration" measuresthat constitute an internal charge applicable to products.158
In summary, GATT jurisprudence has developed a broad approach to interpretation of
the scope of “laws, regulations and requirements” as well as “internal taxes or other internal
charges of any kind” to cover all measures, which potentially modify conditions ofcompetition among foreign and domestic products. This practice would bring about moresignificance on how likeness and the standard of “no less favourable” treatment areinterpreted.
3.2 LikenessThe second element in the national treatment obligation is whether imported anddomestic products are alike. The text of Article III has offered three approaches to interpreting
likeness in dispute settlement, namely (i) Article III:2, first sentence, (ii) Article III:2, second
sentence in connection with Ad Article III, paragraph 2 and Article III:1, and (iii) Article III:4.
(i) Narrow interpretation in the first sentence of Article III:2

153

Id. para. 12.
Panel Report, Argentina – Measures Affecting the Export of Bovine Hides and the Import of Finished
Leather [hereinafter Argentina – Bovine Hides], WT/DS155/R, adopted on 16 February 2001, para. 11.139.
155
Id. para. 6.6.
156
Id. para. 6.16.
157
Id. para. 11.143.
158
Id. para. 11.144.
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The first sentence of Article III:2 requires that no internal taxes or other internal
charges of any kinds shall be imposed on imported products in excess of those applied to likedomestic products. The panels and Appellate Body have opportunities to examine likeness indifferent cases, where they followed the narrow interpretation to this term. The word "like"
products (in the French text: "products similaires") is not limited to "identical" or "equal"
products, but it extends to products with similar qualities.159 Further, the Panel in Japan –Alcoholic Beverages viewed that the term “like” should be used in a narrow understanding ona case-by-case basis though products are not required to be identical in all respects,160 and thisview has been upheld by the Appellate Body.161
Both panels and Appellate Body have adhered to the following basic approach, which
includes three criteria set out by the Report of the Working Party on Border Tax
Adjustments162 in interpreting likeness in a narrow way: (i) the products’ end-uses in a given
market; (ii) consumers’ tastes and habits, which change from country to country; and (iii)
products’ properties, nature and quality. The fourth criterion is a uniform tariff classificationof products, which can be a relevant to confirming likeness. 163 Under this narrowinterpretation, the term “like” products requires two products to share “essentially the same
physical characteristics” even though the commonality of end-uses is a necessary, but not
sufficient, criterion to confirm likeness. 164 Consequently, the Panel in Japan – Alcoholic
Beverages found that vodka and shochu are like products as (i) their end-uses are identical;165(ii) there is no evidence from the traditional Japanese consumers’ habits to regard vodka as anunlike product;166 (iii) they shared most physical characteristics; and (iv) they were currently
classified in the same heading in the Japanese tariffs and covered by the same Japanese tariffbinding.167 The Appellate Body upheld the reasoning and this conclusion although it pointed
out that the reliance on tariff bindings would be risky because there is a major difference
between tariff classification nomenclature and tariff bindings made by Members.168
A different interpretation was adopted by the Panel in US – Malt Beverages, where thePanel found that likeness of products should be determined “not only in the light of criteria as
the products’ physical characteristics, but also in light of the purpose of Article III”.169 Thismeans that the Panel expressly referred to Article III:1, which provided that internal taxes andother internal charges should not be applied to imported or domestic products so as to afford
protection to domestic production, when it interpreted likeness in the first sentence of Article
159

Panel Report, Japan – Customs Duties, Taxes and Labelling Practices on Imported Wines andAlcoholic Beverages, L/6216 – 34S/83, adopted on 10 November 1987, para. 5.5.
160
Panel Report, Japan – Taxes on Alcoholic Beverages [hereinafter Japan – Alcoholic Beverages],
WT/DS8/R, WT/DS10/R, WT/DS11/R, adopted on 1 November 1996, para. 6.21.
161
Appellate Body Report, Japan – Alcoholic Beverages, p. 19.
162
GATT. Report of the Working Party on Border Tax Adjustments, (L/3464), adopted on 2 December
1970, para. 18.
163
Panel Report, EEC – Measures on Animal Feed Proteins, L/4599 – 25S/49, adopted on 14 March 1978,
para. 4.2; Panel Report, Japan – Customs Duties, Taxes and Labelling Practices on Imported Wines andAlcoholic Beverages, L/6216 – 34S/83, adopted on 10 November 1987, para. 5.6.
164
Panel Report, Japan – Alcoholic Beverages, para. 6.22.
165
Panel Report, Japan – Customs Duties, Taxes and Labelling Practices on Imported Wines andAlcoholic Beverages, L/6216 – 34S/83, adopted on 10 November 1987, para. 5.7.
166
Id.
167
Panel Report, Japan – Alcoholic Beverages, para. 6.23.
168
Appellate Body Report, Japan – Alcoholic Beverages, p. 23.
169
Panel Report, United States – Measures Affecting Alcoholic and Malt Beverages [hereinafter US – Malt
Beverages], DS23/R – 39S/206, adopted on 19 June 1992, para. 5.71.

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III:2. The main reason for this approach was, according to the Panel, that the determination of
likeness in the context of Article III should respect the “regulatory authority and domestic
policy options of contracting parties”. 170 This is referred to as “aims and effects” test for
determination of likeness. The next and last panel which introduced this interpretation in its
report, but not adopted, was the Panel in US – Taxes on Automobiles. This Panel consideredthat Article III:2 and 4 must be read in the light of the central purpose as stated in Article III:1,
which did not prohibit fiscal and regulatory distinctions applied so as to achieve other policy
goals.171
However, the Panel in Japan – Alcoholic Beverages has strongly rejected this “aimsand effects” test, which was upheld by the Appellate Body,172 in determination of the likenessbased mainly on three reasons. First, the ground for this test is based on the words “so as toafford protection to domestic production” which is found in Article III:1, while there is no
similar wording in the first sentence of Article III:2.173 Therefore, it would be unacceptable toconsider “so as to afford protection to domestic production” as a criterion in interpreting theterm “like” products in the context of the first sentence of Article III:2. Second, the adoptionof the “aims and effects” test would cause a burden upon complainants to show both the aim
and effect of a particular measure.174 This situation becomes more complicated when different
aims are involved, and there is no agreement on which aim or aims are decisive for this test.
Further, it seems to be infeasible for complainants to have access to the legislative history ofother Members in examining the aims of legislations. Third, if the “aims and effects” test
were applied in interpretation of the first sentence of Article III:2, this would nullify the list of
exceptions in Article XX of GATT as this test leads to non-exhaustive grounds for derogationof the obligations in Article III.175(ii) Broad interpretation of likeness with reference to “directly competitive or substitutableproducts”
The scope of products for comparison in the second sentence of Article III:2 isclarified by Ad Article III paragraph 2, which refers to “directly competitive or substitutableproducts”. 176 However, in contrast to the word “like”, the term “directly competitive or
substitutable” does not require that two products must share similar physical characteristics.177“Market place” requirement was established as a basis for comparison, in addition to physicalcharacteristics, common end-uses, and tariff classification, by the Panel in Japan – Alcoholic
Beverages and upheld by the Appellate Body.178 In other words, competition in a relevant
170
171
172
173
174
175
176

177
178

Id. para. 5.72.
Panel Report, United States – Taxes on Automobiles, DS31/R, 11 October 1994, unadopted, para. 5.7.
Appellate Body Report, Japan – Alcoholic Beverages, p. 21.
Panel Report, Japan – Alcoholic Beverages, para. 6.16.
Id.
Id. para. 6.17.
GATT Ad Article III Paragraph 2 reads:
A tax conforming to the requirements of the first sentence of paragraph 2 would be considered to
be inconsistent with the provisions of the second sentence only in cases where competition was
involved between, on the one hand, the taxed product and, on the other hand, a directly competitiveor substitutable product which was not similarly taxed.
Panel Report, Japan – Alcoholic Beverages, para. 6.22.
Appellate Body Report, Japan – Alcoholic Beverages, p. 26.

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market should be used as one means in evaluating whether products are directly competitiveor substitutable. This requirement shall be assessed based on many factors, including theelasticity of substitution.
Therefore, in assessing whether products are “directly competitive or substitutable”,
the Panel found that, in addition to other factors, the decisive criterion is whether those
products have common end-uses as showed by an elasticity of substitution.179 This analysis
was upheld by the Appellate Body.180 Elasticity of substitution, according to the Panel, wasevidenced by the fact that foreign produced whisky and shochu were competing for the same
market,181 and by the cross-price elasticity of demand because a change in demand for one
product would sensitively lead to changes in price of the other product.182
In addition, in Korea – Alcoholic Beverages, the Panel put more emphasis on the word
“directly” based on the reasoning that at some levels, there would be at least an indirectcompetition among products and services. The examination of whether two products orgroups of products have a direct competitive relationship would be evidenced by whether
consumers consider or are able to consider those two products or groups of products as“alternative ways of satisfying a particular need or taste”, including comparisons of their
physical characteristics, end-uses, channels of distribution and prices.183 The Appellate Body
agreed with the Panel that the nature, or quality of competition, and not its quantity, must beemphasized in determination of whether products are "directly competitive or
substitutable". 184 Accordingly, the Panel concluded that the imported (whiskies, brandies,cognac, rum, gin, vodka, tequila, liqueurs and ad-mixtures) and domestic (soju, both dilutedand distilled) products are directly competitive or substitutable based on evidence on thephysical characteristics, end-uses, channels of distribution and pricing.185
However, because the second sentence of Article III:2 specifically refers to Article
III:1, the second test must be confirmed concerning whether the internal measures applicable
to “directly competitive or substitutable” products are to afford protection to domestic
products. This test requires a separate examination of protective “purpose”.186 The structure of
Article III indicates that this test is only applicable to the second sentence of Article III:2, but
not the first sentence of Article III:2 nor Article III:4. In Canada – Periodicals, the protective
purpose in introducing Part V.1 of the Excise Tax Act was clearly mentioned in several
statements of Canada’s explicit policy objectives to afford protection to the production of
Canadian periodicals.187
Nevertheless, as the protective purpose of a measure is sometimes difficult to confirm,
the assessment of whether a measure “affords protection to domestic production” isadditionally evidenced by protective application through the examination of “the design, the179

Panel Report, Japan – Alcoholic Beverages, para. 6.22.
Appellate Body Report, Japan – Alcoholic Beverages, p. 26.
181
Panel Report, Japan – Alcoholic Beverages, para. 6.30.
182
Id. para 6.31.
183
Panel Report, Korea – Taxes on Alcoholic Beverages [hereinafter Korea – Alcoholic Beverages],
WT/DS75/R, WT/DS84/R, adopted on 17 February 1999, paras. 10.40 and 10.43.
184
Appellate Body Report, Korea – Alcoholic Beverages, WT/DS75/AB/R, WT/DS84/AB/R, adopted on
17 February 1999, para. 133. (Original emphasis)
185
Panel Report, Korea – Alcoholic Beverages, para. 10.98.
186
Appellate Body Report, Japan – Alcoholic Beverages, p. 28.
187
Appellate Body Report, Canada – Certain Measures Concerning Periodicals [hereinafter Canada –Periodicals], WT/DS31/AB/R, adopted on 30 July 1997, pp. 33-34.
180


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architecture, and the revealing structure” of that measure.188 This would indicate an objective
examination based on the appearance of measures in question. Consequently, the Appellate
Body in Japan – Alcoholic Beverages upheld the Panel's finding that the Liquor Tax Law had
been applied "so as to afford protection" by noting the correct reasoning of the Panel thatdomestically produced shochu is isolated from foreign competition because, on the one hand,foreign-produced shochu will face difficulties in penetrating the Japanese market and, on theother hand, the equality of competitive conditions between shochu and the rest of “white” and“brown” spirits is not ensured.189
Following the same approach, the Appellate Body in Korea – Alcoholic Beverages
upheld the Panel’s finding that the Korean measures afford protection to domestic production
on the grounds of (i) large differences in levels of taxation under the Korean tax law, (ii)discrimination in the design, architecture and structure of the Korean alcoholic beverages tax
laws, and (iii) the practical situation that most imported products were subject to a higher tax
burden than domestic products.190(iii) Broad interpretation of likeness in Article III:4
Based on the reasoning of the textual difference between Article III:2, which consistsof two separate sentences, and Article III:4, which applies only to “like products”, theAppellate Body in EC – Asbestos have followed a contextual interpretation of the meaning of
the word “like” in Article III:4.191 Accordingly, likeness in Article III:4 must be interpreted
differently from the narrow meaning in the first sentence of Article III:2, and calls for taking
into account the proper scope and meaning of Article III:1, which means “to ensure thatinternal measures not be applied to imported or domestic products so as to afford protection todomestic production”.192 By this interpretation, the scope of products would be enlarged, at
maximum, equal to the combined product scope of the two sentences under Article III:2, andconsequently, the determination of likeness under Article III:4 must be based on “the natureand extent of a competitive relationship between and among products”.193
In determining the competitive relationship between products, two criteria, namely
products’ end-uses and customers’ tastes and habits, are fundamental and relevant inassessment of likeness.194 While the products’ end-uses criterion will testify “the extent towhich products are capable of performing the same, or similar, functions”, the customers’
tastes and habits criterion will examine “the extent to which consumers are willing to use theproducts to perform these functions”.195 Therefore, the Appellate Body reversed the Panel’s
conclusion on the likeness between chrysotile fibres, on the one hand and polyvinyl alcohol,
cellulose and glass fibres, on the other hand, because of different “properties, nature and188

Appellate Body Report, Japan – Alcoholic Beverages, p. 30.
Id. pp. 31-32.
190
Appellate Body Report, Korea – Alcoholic Beverages, para. 150.
191
Appellate Body Report, European Communities – Measures Affecting Asbestos and Asbestoscontaining Products [hereinafter EC – Asbestos], WT/DS135/AB/R, adopted on 5 April 2001, paras. 93-94.
192
Id. para. 98.
193
Id. para. 99.
194
Id. para. 117.
195
Id. para. 117.
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quality” of those products, their difference in tariff classification, different end-uses, and lackof evidence on consumers’ tastes and habits.196
With respect to the likeness of chrysotile-fibre products and fibro-cement products, theAppellate Body reversed the conclusion of their likeness because there was no examination ofevidence on consumers’ tastes and habits, although they are in the same tariff classification.197
As noted earlier, the “aims and effects” test was introduced in US – Malt Beverages
for determining likeness of products based on the argument that under the light of Article III:1,
two products can not be regarded as like products as long as there is no protective purpose in
the differentiation between them. In the context of Article III:4, the Panel found that low
alcohol content beer and high alcohol content beer are not like products because there was noevidence that the choice of the particular level of alcohol content has the protective purpose oreffect. 198 However, the Appellate Body in EC – Bananas rejected the determination of
likeness in reference to “so as to afford protection to domestic production” as Article III:4 did
not mention Article III:1.199 It indicates that, for the purpose of Article III:4 it is sufficient toconfirm likeness of products on an objective assessment, regardless of regulatory purpose ofinternal measures concerned.
Another legal issue is whether the way of producing products could be taken into
account in assessing likeness of two products. In US – Restriction on Imports of Tuna, thePanel concluded that the US is under obligation to treat Mexican tuna no less favourably thanthat accorded to the US tuna regardless of vessel type because Article III:4 called for thecomparison of products as a product, not according to process or production method.200
In sum, the structure of Article III provides three different approaches forinterpretation of likeness between foreign and domestic products. Although the word “like” isanalogous between the first sentence of Article III:2 and Article III:4, the former is interpreted
in a narrow way, which requires, among other criteria, essential similarities in physicalcharacteristics.
The second approach is to refer to “directly competitive or substitutable” products
articulated by the second sentence of Article III:2, which covers examining the elasticity of
substitutability among products as well as the willingness of consumers to use alternative
products, and revealing protective purpose of a measure. In contrast, the interpretation of boththe first sentence of Article III:2 and Article III:4 would follow an objective assessment of
likeness regardless of regulatory purposes.
However, it is recognized by the Appellate Body that it is inappropriate to separate
likeness in Article III:4 from the general purpose of Article III:1. Therefore, the third
approach provided in Article III:4 is to have a broader meaning that covers the competitive
relationship among products concerned, which is substantially evidenced by two criteria of
products’ end-uses and consumers’ tastes and habits.
3.3 “No less favourable” treatment
196

Id. paras. 125-126.
Id. paras. 130-131.
198
Panel Report, US – Malt Beverages, paras. 5.74-75.
199
Appellate Body Report, EC – Bananas, para. 216.
200
Panel Report, United States – Restriction on Imports of Tuna, DS 21/R – 39S/155, dated 3 September
1991 (unadopted), para. 5.15. (Original emphasis)
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When measures are found under the scope of Article III and the likeness between
imported and domestic products is confirmed, a WTO Member will violate the national
treatment obligation if it accords imported products a less favourable treatment than that
accorded to domestic counterparts. The standard of Article III:4 requires Members, upon thecustom clearance of foreign goods, to ensure “effective equality of opportunities for imported
products in respect of the application of laws, regulations, and requirements affecting internalsale, offering for sale, purchase, transportation, distribution or use of products”. 201 In otherwords, this standard sets the obligation that domestic measures must be origin-neutral withrespect to imports and domestic products. Since the interpretation of the term “like” productsin the light of Article III:1 may lead to a relatively broad scope of likeness under Article III:4,
this element of “no less favourable” treatment must be satisfied before a measure can be held
to be inconsistent with Article III:4.202 It has been suggested that the Appellate Body would
desire to balance the broad scope of likeness by focusing on “no less favourable” treatment as
another condition in Article III:4.203
One legal issue is whether Article III:1 should be taken into account in interpretationof this standard. As mentioned earlier, the Appellate Body in EC – Bananas clearly rejected
the inclusion of Article III:1 in the interpretation of Article III:4 based on the ground that
Article III:4 does not specifically refer to Article III:1. It would mean that, similar to thesecond element of likeness, the standard of “no less favourable” treatment must be also
assessed in an objective manner regardless of legislative purposes or aims.204
According to the Appellate Body in EC – Asbestos, the term "no less favourable”
treatment should be understood and interpreted in the light of the general principle set out in
Article III:1, that internal laws, regulations and requirements "should not be applied toimported or domestic products so as to afford protection to domestic production".205 This,nevertheless, does not mean that a separate test should be introduced in examination of thestandard of “no less favourable” treatment in Article III:4. This implies that the protective
purposes of a measure concerned should be revealed, and they would be a relevant factor in
the examination of this standard. In different cases, Korea – Beef and Dominican Republic –Cigarettes, the Appellate Body clarified that the standard of “no less favourable” treatment
must be determined through examination of whether the measure at issue modifies conditionsof competition or not in the relevant market to the detriment of imported products.206
Another legal issue is that this standard does not allow offsetting the treatment
accorded to the like product in question with the treatment granted to another like product.
The argument of “balancing more favourable treatment of some imported products against
less favourable treatment of other imported products” is rejected in US – Section 337 because
it may lead to the situation of more favourable treatment in one case as a justification for less201

Panel Report, US – Section 337, para. 5.11.
Appellate Body Report, EC – Asbestos, para. 100.
203
Ehring, Lothar. 2002. De Facto Discrimination in World Trade Law: National and Most-FavouredNation Treatment – or Equal Treatment? Journal of World Trade 36(5), p. 944.
204
Id. p. 946.
205
Appellate Body Report, EC – Asbestos, para. 100.
206
Appellate Body Report, Korea – Beef, para. 137; Appellate Body Report, Dominican Republic –Measures Affecting the Importation and Internal Sale of Cigarettes [hereinafter Dominican Republic –Cigarettes], WT/DS302/AB/R, adopted on 19 May 2005, para. 93.
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favourable treatment in another case, which would make the conditions of competition
between domestic and imported products more uncertain.207
From GATT jurisprudence, there are two types of requirements under the standard of“no less favourable” treatment. The first requirement relates to a situation where any different
legal requirement applicable to imported products must accord no less favourable treatment tothose imported products. In this situation, a different treatment between imported and likedomestic products does not constitute a violation of the standard as long as this treatment is
not less favourable with regard to imported products.
In Canada – FIRA, the Panel found that the different treatment led to the modificationof conditions of competition in favour of domestic products because written undertakings byforeign investors to buy Canada-original goods were subject to no qualification, andaccordingly eliminated “the possibility of purchasing available imported products”.208 Even
though purchase undertakings were conditional on Canada-original goods being “available”,“competitively available”, or “reasonably available” in the market, treatment of imported
goods was also found less favourable as those undertakings would constitute a preference tothe domestic products.209 Regarding undertakings to buy products from Canadian suppliers,
although these requirements, even when subject to qualification of “competitive availability”
or “reasonable availability”, may have little influence on the choice of purchasing domestic or
imported products, this would exclude the possibility of purchasing imported goods directlyfrom foreign suppliers and entail giving preference to Canadian sources.210
The second requirement covers a situation whereby although domestic measures are
origin-neutral, they may have a discriminatory effect against imported products. In thissituation, Members are also required to refrain from application of formally identicalregulation, which may, in practice, lead to less favourable treatment to imported products.211
In Korea – Beef, despite upholding the Panel’s conclusion that under the Korean dual retailsystem, imported beef is treated less favourably than domestic beef, the Appellate Body reexamined the “no less favourable” treatment of the imported beef on the ground of assessing
whether the dual retail system, modifies the conditions of competition in the Korean market tothe detriment of imported products. 212 The reasoning of the Appellate Body was that byintroducing the dual system of distribution for beef, which required small retailers to opt for
selling either domestic or imported beef, the vast majority of individual retailers selected thedomestic beef, and the effect of this measure was the dramatic reduction of retailers forimported beef, that limited the access to normal retail distribution system and the competitive
conditions for imported beef.213
In sum, the core requirement of the third element of “no less favourable” treatment
under Article III:4 is to prohibit both formally identical and different legal treatment, which
actually modifies conditions of competition in favour of domestic products. This standard is
examined on objective grounds irrespective of national regulatory purposes.

207
208
209
210
211
212
213

Panel Report, US – Section 337, para. 5.14.
Panel Report, Canada – FIRA, para. 5.8.
Id. paras. 5.8-9.
Id. paras. 5.10-11.
Panel Report, US – Section 337, para. 5.11.
Appellate Body Report, Korea – Beef, para. 144. (Original emphasis)
Id. paras. 145-146.

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4. National treatment principle in GATS: Interpretative issues214
The previous section has reviewed GATT jurisprudence in interpreting the national
treatment obligation. After determining the applicable scope of the national treatment
principle in GATS, the transplant of jurisprudence from GATT to GATS with regard to threefundamental elements of this principle, namely scope of measures, likeness, and the standardof “no less favorable” treatment, shall be examined in detail.
4.1 Defining the scope of application of the national treatment principle
Clearly defining the scope of the national treatment principle is important for bothunderstanding this principle and scheduling national commitments in liberalization of services.
However, the scope of GATS Article XVII seems to be less predictable as it only requires
WTO Members to accord no less favourable treatment to foreign services and service
suppliers, rather than expressly indicating whether such foreign services and service suppliers
enter the domestic market or not. This is more complicated as far as Article XVI on Market
Access is concerned.215
One interpretation, which is based on the GATT approach, is that the scope of Article
XVII is limited to the post-entry stage of foreign services and service suppliers. As noted in
section 3 of this chapter, the wording of Article III of GATT extends the national treatment
obligation to foreign goods only at the post-entry stage because it clearly refers to “theproducts of the territory of any contracting party imported into the territory of any othercontracting party”. 216 It would mean that the national treatment obligation in GATS is
triggered upon the entrance of foreign services and service suppliers into domestic market.
This interpretation is probably supported by the text of Article XVI:2 (f) that calls forrefraining from limitations on the participation of foreign capital, which can be regarded as
relating to establishment, either in terms of a percentage limit on foreign shareholding or on

214

This section draws in part from Vu Nhu Thang (2006a), pp. 173-194.
Instead of defining the term “market access”, Article XVI provides a list of restrictive measures, which
Member countries, having undertaken commitments in a particular sector, are required to refrain from applying
less favourable treatment to services and service suppliers of other Members. There are six types of limitations
which are prohibited by GATS, namely: (a) limitations on the number of suppliers; (b) limitations on the total
value of service transactions or assets; (c) limitation on the total number of service operations or on the total
quantity of service output; (d) limitations on the total number of natural persons that may be employed; (e)measures which restrict or require specific types of legal entity or joint venture; and (f) limitations on theparticipation of foreign capital, either in terms of a percentage limit on foreign shareholding or on the total valueof foreign investment, either in the aggregate or by a single entity. The first four sub-paragraphs of Article XVI:2
deal with “quantitative” measures on market access, whereas Article XVI:2 (e) concerns restrictive measuresapplicable to specific forms of establishment, and Article XVI:2 (f) covers restrictions on the foreign capital
participation. Moreover, those restrictions are referred to a maximum limitation, but not minimum requirements.
While the first five sub-paragraphs deal with both discriminatory measures (prohibition of foreign services andservice suppliers) and non-discriminatory measures (prohibition of both foreign and domestic services andsuppliers), the last sub-paragraph addresses exclusively discriminatory restrictions against foreign participation.
See also Scheduling of Initial Commitments in Trade in Services, Explanatory Note, GATT Doc. No.
MTN.GNS/W/164, 3 September 1993, para. 5.
216
Emphasis added.
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the total value of foreign investment, either in the aggregate or by a single entity.217 In otherwords, the national treatment is applied only after commercial presence of foreign service
suppliers is established. However, as far as the text of Article XVII:1, which indicates “allmeasures” that might discriminate foreign services and service suppliers, is concerned, thisinterpretation proves to be less persuasive.
Another possible interpretation is that the national treatment principle extends to bothpre (the right to establish) and post-entry of foreign services and service suppliers. Taking into
account four modes of supply in services as described in Chapter One, section 2.3, the scopeof the national treatment principle applies not only to services (similar to foreign goods asprovided in Article III of GATT), but also to service suppliers (similar to investment). In
investment agreements, the national treatment obligation may apply to either postestablishment or both pre and post-establishment.218 The text Article XVII:1 seems to support
this argument of both pre and post-entry stages because it extends to “all measures”, which
could be interpreted to include measures affecting establishment of commercial presence
under Mode 3, and there is no clear distinction between frontier and internal measures.219
Pauwelyn goes further to underscore that as Article XVII could cover both internal
regulations and market access restrictions, all Article XVI measures fall within the scope of
Article XVII.220 It would indicate that national treatment overrides market access.
While Article XVI (f) exclusively deals with discrimination against foreigncounterparts, the other five limitations and measures apply to both foreign and domestic
services and service suppliers. This means that Article XVI deals with not only discriminatory
but also non-discriminatory measures relating to the entrance into a domestic market.
Therefore, the interpretation suggesting that national treatment overrides market accessapparently restrains the scope of Article XVI to only non-discriminatory measures. 221
Moreover, this interpretation disregards the scope of Article XVI:2, which also addresses
foreign service suppliers’ right to establish a commercial presence.
The scope of application of the national treatment principle would be more
complicated as far as quantitative and discriminatory measures are concerned. As the text ofArticle XVII:1 indicates all measures, it may be interpreted to cover all restrictions, regardlessof quantitative or non-quantitative discriminatory nature. However, the first four limitations
under Article XVI:2 exclusively relate to “quantitative” measures, both discriminatory and217

Mattoo, Aaditya. 1997. National Treatment in the GATS: Corner-Stone or Pandora’s Box? Journal ofWorld Trade 31, p. 117.
218
The typical example of the pre and post-entry national treatment obligation can be found in the North
American Free Trade Agreement. Article 1405 on National Treatment reads:
1. Each Party shall accord to investors of another Party treatment no less favorable than that it
accords to its own investors, in like circumstances, with respect to the establishment, acquisition,
expansion, management, conduct, operation, and sale or other disposition of financial institutions
and investments in financial institutions in its territory.
2. Each Party shall accord to financial institutions of another Party and to investments ofinvestors of another Party in financial institutions treatment no less favorable than that it accords to
its own financial institutions and to investments of its own investors in financial institutions, in likecircumstances, with respect to the establishment, acquisition, expansion, management, conduct,
operation, and sale or other disposition of financial institutions and investments.
Available at http://www.nafta_sec_alena .org – Last visited 5 October 2005.
219
Mattoo (1997), p. 115.
220
Pauwelyn, Joost. 2005. Rien ne Va Plus? Distinguishing domestic regulation from market access in
GATT and GATS. World Trade Review 4(2), p. 149. (Original emphasis)
221
Mattoo (1997), p. 116.

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non-discriminatory, on market access. According to Feketekuty, both Articles XVI and XVII
may address quantitative limitations on foreign services and service suppliers.222
Although the argument that the national treatment principle extends to both pre (theright to establish) and post-entry of foreign services and service suppliers has strong support
from the text of Article XVII, it would be inappropriate because this interpretation disregards
the scope of Article XVI. To be more specific, a definition of the scope of Article XVII,
which makes any sub-heading of Article XVI:2 redundant, would be unacceptable.
Consequently, the interpretation of the scope of Article XVII must take into account Article
XVI.
Due to the complicated combination of Article XVI:2, which deals with restrictions on
pre-entry stage on the one hand, and on both quantitative ((a), (b), (c), (d), and (f)), and nonquantitative ((e)) nature, on the other hand, an alternative reading of Article XVII is to
exclude all discriminatory and quantitative measures, which belong to the domain of Article
XVI, from the scope of the national treatment principle. It would mean that as the market
access article only deals with six types of limitations, Article XVII would encompass any
discriminatory measures, both non-quantitative and quantitative, other than such limitations
covered by Article XVI:2. Moreover, the scope of Article XVII would also extend to preentry stage as far as discriminatory measures do not fall under the ambit of Article XVI:2.223
Accordingly, all discriminatory measures, which fall within the overlapping area between
Articles XVI and XVII, shall be governed by Article XVI.
The interpretation, which excludes all measures under Article XVI from the scope of
Article XVII, nevertheless, apparently implies a hierarchy between Article XVI and XVII.
However, Article XX:2 provides that any measures inconsistent with both Articles XVI and
XVII shall be inscribed in the column relating to Article XVI. This would mean that thehierarchy between Article XVI and XVII has been established by GATS, whereby thenational treatment principle shall apply to all measures, which are excluded from the domain
of Article XVI, but not in the reverse way. According to Markus, Article XX:2 deals not onlywith scheduling commitments but also the substance of the relationship between market
access and national treatment, that strongly support a lex specialis relationship between
Article XVI and XVII.224 This interpretation would clarify the scope of the national treatment
principle, whereby discriminatory measures falling within the ambit of the market accessarticle are excluded from Article XVII.225
During the negotiations of a multilateral framework on services, many contracting
parties to GATT expressed the view that the scope of the national treatment principle would
222

Feketekuty (2000), p. 95.
There seems to be no clear distinction between pre and post entry stages in Article XVII. Somequantitative and discriminatory restrictions, but not maximum measures, which may also affect the rights ofestablishment of foreign service suppliers, shall not be addressed by Article XVI. For example, while bothforeign and domestic suppliers are allowed to supply services to a domestic market, foreign suppliers may pay
higher minimum capital requirements than domestic counterparts.
See Scheduling of Initial Commitments in Trade in Services, Explanatory Note, MTN.GNS/W/164, 3
September 1993, para. 5.
224
Krajewski, Markus. 2003. National Regulation and Trade Liberalization in Services: The Legal Impactof the General Agreement on Trade in Services (GATS) on National Regulatory Autonomy. The
Hague/London/New York: Kluwer Law International, p. 115.
225
Low, Patrick and Aaditya Mattoo. 2000. Is There a Better Way? Alternative Approaches to
Liberalization under GATS. In Pierre Sauve and Robert M. Stern eds., GATS 2000: New Directions in Services
Trade Liberalization. Washington, D.C.: Brookings Institution Press, pp. 450-451.
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mean that upon entry into the domestic market of other Members, services and service
suppliers would be treated in the same way as domestic counterparts in respect of all
measures.226 Furthermore, the Ministers in the Mid-term Meeting also stated that “national
treatment means that the services exports and/or exporters of any signatory are accorded in
the market of any other signatory”.227 This expressly indicates that the scope of the national
treatment principle only applies to those discriminatory measures which are not governed by
Article XVI on Market Access.
Figure 2 illustrates the effective scope of application of the national treatment
principle in relation to Article XVI on Market Access. Area (A) represents all discriminatory
measures under the broad interpretation of the term “all measures” under Article XVII. Area
(B) encompasses all discriminatory and non-discriminatory measures, which are governed by
Article XVI:2. The overlapping area between Articles XVI and XVII is named (b), which
deals with those discriminatory measures under Article XVI:2 (a)-(d), (e) joint venture, and(f). Accordingly, the scope of the national treatment principle has been equal to the area of[(A) – (b)], where (b) = six types of discriminatory limitations and measures.
Figure 2: Scope of application of the national treatment principle(B)
Market Access

(b)

(A)
National Treatment

Source: Rep roduced from the Council for Trade in Services,
WTO Doc. No. S/C/W/237, dated 24 M arch 2004

4.2 Broad scope of measures affecting trade in services

226

Note on the Meeting of 15-17 September 1987 of the Group of Negotiations on Services, GATT Doc.
No. MTN.GNS/10, 15 October 1987, paras. 11-19.
Although different views on automatic or negotiable national treatment, the negotiators agreed that theapplication of the national treatment should follow the application of the market access. Views of negotiators
were recorded: Australia and New Zealand (Note on the Meeting of 19-23 September 1988 of the Group of
Negotiations on Services, GATT Doc. No. MTN.GNS/17, 18 October 1988, para. 13); Singapore, Switzerland,
Peru, EC and Nordic countries (Note on the Meeting of 17-21 July 1989 of the Group of Negotiations on
Services, GATT Doc. No. MTN.GNS/24, 28 August 1989, paras. 201, 203, 205, 210, and 246); India and Brazil(Note on the Meeting of 23-25 October 1989 of the Group of Negotiations on Services, GATT Doc. No.
MTN.GNS/26, 17 November 1989, paras. 48 and 121, respectively); the SEACEN, Note on the Meeting of 1315 September 1990, Working Group on Financial Services Including Insurance, GATT Doc. No.
MTN.GNS/FIN/3, 16 October 1990, para. 4.
227
Mid-term Meeting in Montreal on 5-9 December 1988 and in Geneva on 5-8 April 1989, GATT Doc.
No. MTN.TNC/11, 21 April 1989, Part II, para. 7(c).

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In GATS context, a measure is defined to have extensive coverage, which
encompasses law, regulation, rule, procedure, decision, administrative action, or any otherform.228 Specifically, Article XVII also prohibits Members from application for any different
treatment in imposition or collection of direct taxes on foreign services or service suppliers.229
It would suggest that this broad scope of the term “measure”, regardless of fiscal or non-fiscal
measures, encompasses both, internal taxes or other internal charges as stipulated in GATT
Article III:2, and law, regulations and requirements as mentioned in GATT Article III:4.
Given the broad scope of this term and GATT jurisprudence of interpretation of Article III,the coverage of measures under GATS Article XVII would include, but not be limited to, any
measure bearing governmental nature, substantive and procedural, compulsory and voluntary
but legally enforceable, and taxes per se and tax administration measures causing financial
burden on foreign services and service suppliers.
The GATS case on EC – Bananas concerned Council Regulation (EEC) 404/93 (Title
IV) regulating banana trade with third countries, establishing three categories of imports: (i)traditional imports from twelve African, Caribbean and Pacific (hereinafter ACP) countries;(ii) non-traditional imports from ACP countries; and (iii) imports from third (non-ACP)
countries.230 While imports of bananas from the twelve traditional ACP countries enjoy dutyfree up to the maximum quantity fixed for each ACP country,231 imports of non-traditional
ACP bananas and bananas from third countries are subject to a tariff quota.232 Imports ofbananas from both traditional ACP and non-traditional ACP/third-country are subject tolicensing procedures.233 The allocation of import licenses for third-country bananas and nontraditional ACP bananas are based on a number of rules, including (i) operator categoryrules; 234 (ii) activity function rules; 235 and (iii) export certificates. 236 In addition, operators
who "include or directly represent" a producer adversely affected by a tropical storm and are
228

GATS, Art. XXVIII (a).
GATS, Art. XIV on General Exception, paragraph (d) reads that:
Members may adopt or enforce measures inconsistent with Article XVII, provided that thedifference in treatment is aimed at ensuring the equitable or effective imposition or collection of
direct taxes in respect of services or service suppliers of other Members. (Footnote omitted)
230
Panel Report, European Communities – Regime for the Importation, Sale and Distribution of Bananas,
WT/DS27/R/USA, adopted on 25 September 1997, para. III.7.
231
Id. para. III.8.
232
Id. para. III.9.
233
Id. para. III.16.
234
Id. para. III.21.
Under the EC's operator category rules, import licenses are distributed among three categories of operators
based on quantities of bananas marketed during the latest three year period: (i) entitlement of Category A operators that have marketed third-country and/or non-traditional ACP bananas – is 66.5 per cent; (ii)entitlement of Category B - operators that have marketed EC and/or traditional ACP bananas – is 30 per cent;and (iii) entitlement of Category C - operators who started marketing bananas other than EC and/or traditional
ACP bananas as from 1992 or thereafter ("newcomer category") – is 3.5 per cent.
235
Id. para. III.22.
Under the EC’s activity functions, the operator Categories A and B are further subdivided into three types ofqualifying entities, and fixed percentages of the licenses required for the importation originating in third
countries or non-traditional ACP countries at in-quota tariff rates are allocated to (i) "primary importer" with 57
per cent, "secondary importer or customs clearer" with 15 per cent, and "ripener" with 28 per cent.
236
Id. paras. III.25 and 7.378.
Pursuant to the Framework Agreement on Bananas (BFA), supplying countries that have country allocations
may deliver special export certificates for up to 70 per cent of their allocations. According to Article 3 ofRegulation 478/95, Category A and C operators are subject to the EC's requirement to match import licenceswith BFA export certificates, whereas Category B operators are not subject to a similar requirement.
229


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consequently unable to supply the EC market, are eligible for hurricane licenses, which allow
importation of bananas from any source.237
The Panel found that in the context of GATS, the term “measures affecting trade inservices” is construed as broadly as any measure affecting the supply of a service, either
directly regulating the supply of a service or governing other matters that affect trade inservices.238 Based on this reasoning, the EC measures implementing operator category rules,
activity function rules, export certificates, and hurricane licenses constitute measures affecting
the supply of services under Article XVII:1. 239 The Appellate Body upheld this broadinterpretation of the Panel and its conclusion that measures within the EC banana importlicensing regime fell within the scope of GATS, based on three grounds:240 (i) the ordinary
meaning of the word “affecting” would cover any measure having “an effect on”, and thiswould imply “a broad scope of application”; (ii) the previous panels in GATT also followed
this broad interpretation with regard to Article III; and (iii) while GATS Article XXVIII (c)provides three examples of “measures by Members affecting trade in services", it does not
limit the meaning of the term “affecting”.
In sum, the term “measures affecting trade in services” has been broadly interpreted
by WTO case law.
4.3 Uncertainty in determining likeness(i) Like services
Because the structure of GATS Article XVII:1, as described earlier, is different to
GATT Article III:2, which consists of two separate sentences, the first and second approaches
to interpreting likeness in Article III:2 would apparently be irrelevant. In addition, as noted
earlier, the word “like” in the first sentence of Article III:2 requires that two products must
share mostly the same physical characteristics. However, in case of services, the consensus
among scholars is that physical characteristics (properties, nature and quality) of products are
not a relevant criterion.241 Arguably, the main reason, as presented in Chapter One, section 1.3,
is the intangibility and non-storability of services. Therefore, the fundamental grounds of“physical characteristics” for comparison of likeness in a narrow meaning do not exist in thecontext of services. Furthermore, there is no similar wording in Article XVII with regard toboth “directly competitive or substitutive services” and “so as to afford protection to domestic
production” as grounds for the second approach of interpretation.
On the other hand, the structure and language of GATS Article XVII:1 are very
similar to GATT Article III:4 as both the former and latter refer to the terms “like” and “no237

Id. para. III.28.
Id. para. 7.285.
239
Id. paras. 7.316, 7.358, 7.377, and 7.391.
240
Appellate Body Report, EC – Bananas, para. 220.
241
Zdouc, Werner. 2004. WTO Dispute Settlement Practice Relating to the General Agreement on Tradein Services. In Federico Ortino and Ernst-Ulrich Petersmann eds., The WTO Dispute Settlement System 19952003. The Hague/London/New York: Kluwer Law International (Vol. 18), pp. 395-397. See also Mattoo (1997),
pp. 127-128.
238


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less favourable” treatment. With reference to GATT jurisprudence on likeness under Article
III:4, it requires that, in examination of competitive relationship among services, all evidence
relating to all four criteria should be assessed and weighted, and more emphasis should beplaced on products’ end-uses and consumers’ tastes and habits.
The first criterion of products’ end-uses seems to be the most suitable one forassessing likeness in the context of services.242 This would clarify the extent to which services
are able to carry out the same functions. In other words, two services providing different
functions would be regarded as unlike, such as life insurance and property insurance, because
the former involves risks occur to the physical body of persons, and the latter concerns risks
to assets.
However, there is no clarity on the threshold for the extent of similarity in functions. It
is arguable that similarity would cover a range from just one similar function to almost all
similar functions. While the first extreme would lead to a broad scope of likeness, the second
extreme would narrow down the scope of likeness. In case of the latter extreme, because
services are required to share commonality in almost all end-uses, it is submitted that thisextreme would suggest an elasticity of substitution, whereby any change in price of a service
would result in a change in demand for the other service. Unlike GATT Article III:2, second
sentence, where the introduction of elasticity of substitution is in conjunction with theassessment of protective aim to limit the scope of likeness, this criterion in GATS Article
XVII:1, as discussed latter, operates independently from regulatory purpose. Consequently, itleads to a broad scope of likeness.
The second criterion is consumers’ tastes and habits, which indicates the extent towhich consumers are willing to purchase those services. However, the weakness of thiscriterion is that consumers’ tastes and habits may be relevant in determination of service
likeness especially in “standardized service transaction”, but less appropriate to services
which require a high degree of co-production and interrelation between suppliers andconsumers in order to satisfy particular customers’ needs and preferences.243
As noted earlier, the third criterion of physical characteristics is inappropriate forcomparing services. Similar to GATT tariff classification in case of goods, service
classification could be used as the fourth criterion in assessment of likeness. With a view toincreasing clarity, it was recommended that the WTO Secretariat's revised Services Sectoral
Classification List (hereinafter WTO Classification) should be used as grounds forundertaking commitments in services in Members’ schedules. 244 This WTO Classification
identifies each sector and sub-sector corresponding to the United Nations Central Product
Classification (hereinafter UN CPC) numbers.245 But the main weakness of this criterion, as
shown by GATT jurisprudence, is that the classification list could be used as an indicative,
but not decisive, criterion in confirming likeness.246 Services classification, nevertheless, has

242

See Zdouc (2004), p. 395; Mattoo (1997), p. 128.
Zdouc (2004), p. 396.
244
Scheduling of Initial Commitments in Trade in Services, Explanatory Note, MTN.GNS/W/164, 3
September 1993, para. 16.
245
GATT. Services Sectoral Classification List, GATT Doc. No. MTN.GNS/W/120, 10 July 1991.
246
Panel Report, Japan – Alcoholic Beverages, para. 6.22; Appellate Body Report, Japan – Alcoholic
Beverages, p. 23; Appellate Body Report, EC – Asbestos, paras. 130-131.
243


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the merit of excluding likeness when two services fall into different sectors or sub-sectors,
though two services which fall into one sector or sub-sector may not be alike.247
In addition, there are a number of other concerns on the status of services
classification. Firstly, the sectoral classification in the WTO Classification is not exactly
identical to the UN CPC.248 Secondly, the UN CPC has been developed by the United Nations
for statistical purposes and not necessarily based on competitive relationships of services.249
In contrast, the tariff classification test in GATT Article III is more relevant in determining
likeness, as the Harmonized System is designed to collect taxes and charges at the border.
Thirdly, the UN CPC and WTO Classification are not legally binding on Members.250 As
Members are allowed to schedule their specific commitments on national treatment subject toconditions and qualifications, this may make the comparison on bindings more complicated
due to differences in understanding and classification lists.251
On the contrary, the approach of both the Panel and Appellate Body in EC – Bananas
to likeness seems to simplify this concern by relying on service classification list, rather thaneither the criteria of products’ end-uses or consumers’ tastes and habits. The Panel reasoned
that since the EC followed a services classification, which is largely based on the UN CPC,
for making their commitments, and specifically inscribed CPC 622 in schedulingcommitments on “wholesale trade services”, the interpretation of the EC's commitment inwholesale services should be based on UN CPC description.252 Based on this reasoning, thePanel found that because the “wholesale trade services” are classified in the UN CPC in a
category of the broader sector of “distributive trade services” described in a head-note tosection 6, the distribution of bananas falls within the scope of category CPC 622 “wholesaletrade services”. 253 Therefore, the Panel concluded that when supplied in connection withwholesale services, wholesale transactions, on the one hand, and different subordinatedservices, on the other hand, are “like” as specified in the head-note to section 6 of the UN
CPC, regardless of origin of bananas.254
The scope of likeness would remain broad as the Appellate Body strictly follows theobjective interpretation of likeness, regardless of national regulatory aims or purposes. In EC– Bananas, the EC justified its licensing for bananas, including the operator category rules,
the activity function rules and the special hurricane license rules, on the ground of pursuing“entirely legitimate policies” and not being “discriminatory in design and effect”. 255 The
Appellate Body, nevertheless, ruled out the “aims and effects” test in GATS because words
comparable to “should not be applied to imported or domestic products so as to afford
protection to domestic production”, as a basis for this test, are not found in the context of
GATS.256

247

Krajewski (2003), p. 102.
For example, the WTO Secretariat has pointed out four main differences between the WTO
classification and UN CPC with regard to insurance services. See section 4.1 of Chapter Four.
249
Krajewski (2003), p. 101.
250
Id.
251
Zdouc (2004), p. 397.
252
Panel Report, EC – Bananas, para. 7.289.
253
Id. paras. 7.290-7.293.
254
Id. para. 7.322.
255
Appellate Body Report, EC – Bananas, para. 240.
256
Id. para. 241.
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In summary, the transplant of interpretation of GATT Article III to GATS Article
XVII with regard to the second element suggests a broad scope of likeness due to theuncertainty in criteria for comparison and an objective assessment thereof. As the national
treatment principle in GATS is an object of negotiations, this uncertainty in determining
likeness would constitute a disincentive to WTO Members in undertaking commitments onservices liberalization.
(ii) Likeness with reference to service suppliers and modes of supply
The concern of likeness in the context of services would be more complicated whenservice suppliers and modes of supply are involved, as there is no GATT jurisprudence on
both matters.
The text of GATS Article XVII suggests that like services and like service suppliers
should be read concurrently, and therefore domestic measures could be considered inviolation of the national treatment principle when they treat like services less favourably even
if service suppliers were unlike. According to this interpretation, for the purpose ofcomparison, it is sufficient to determine likeness of services, regardless of whether service
suppliers are like or unlike. In other words, likeness of service suppliers is not taken into
account when determining likeness as a whole. The Panel in EC – Bananas seems to havefollowed this straightforward and broad interpretation in concluding that to the extent that
entities provide like services, they are like service suppliers,257 and as this reasoning was notappealed, the Appellate Body did not visit this matter.
However, there are some concerns with this interpretation. Firstly, as discussed earlier,the approach to evaluating likeness of services as the ground for assessment of service
supplier is uncertain because the determination of likeness of services is only based on thecriterion of service classification. In other words, the uncertainty of “like services” would leadto a broad coverage of likeness in services, consequently in service suppliers. Secondly, there
would be a broad scope of “like” service suppliers, as this approach does not make a
distinction between present and potential service suppliers, nor between natural and legal
persons.258 Thirdly, while basing determination of likeness in the context of GATS Article
XVII only on likeness of services would facilitate liberalization, it might put pressure on
domestic regulation.259 Fourthly, it would invalidate likeness of service suppliers as the textof Article XVII refers to like service “and” service suppliers.
A stricter interpretation is proposed by Trachtman to separate the evaluation oftreatment of services from the evaluation of treatment of service providers. Following thisinterpretation, there is no violation of the national treatment principle if like services aretreated differently based on the justification of different treatment with respect to different
service providers.260 Accordingly, in order to determine likeness as a whole for the purpose of257

Panel Report, EC – Bananas, para. 7.322.
Zdouc (2004), pp. 399-400.
259
Krajewski (2003), p. 104.
260
Trachtman, Joel P. 2003. Lessons for the GATS from Existing WTO Rules on Domestic Regulation. In
Aaditya Mattoo and Pierre Sauve, eds., Domestic Regulation and Service Trade Liberalization. Washington
D.C.: World Bank, Oxford University Press, pp. 62-64.
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Article XVII, the necessary step is to assess whether services are alike, and if they are, thenthe sufficient step is to assess whether service suppliers are alike.
This stricter interpretation has a number of advantages, including support fromnegotiating history. Firstly, this approach is consistent with Article 31(1) of the Vienna
Convention, which calls for the interpretation in “good faith”, and the ordinary meaning being
given to terms of treaty.261 Secondly, this stricter interpretation would narrow down the scopeof likeness in Article XVII, and then respect the regulatory autonomy of Members.262 Thirdly,
as described in Chapter One, section 1.3, the distinct nature of services is intangibility andnon-storability, and services are produced and consumed at the same time. Although under
GATT context, the process or production method seems to be not subject to the realm ofArticle III, it has been argued that, in case of services, it would not be necessary andsometimes impossible, to separate a service from specific service supplier.263 As far as theprocess of supplying services is concerned, this would constitute a relevant factor in
determining the actual characteristics of final service as a service product.264 Fourthly, thenegotiating history suggested that there is “inseparability” between service supplier andservice itself in the concept of national treatment.265
However, the stricter interpretation, for its part, leads to another legal issue of how
likeness of service suppliers is appraised. Following the four-criterion test in determination of
likeness of service suppliers, it has been suggested that the most appropriate criterion might
be the physical characteristics, though it is difficult to find the extent to which suppliers haveto share the same or similar characteristics or quality, such as size of company, andqualification of staff. 266 Further, this criterion would imply a non-exhaustive list of
characteristics for comparison. Zdouc also proposed that likeness of service suppliers must be
based on the combination of service-related and supplier-related factors.267
Although this, to some extent, might limit the broad scope of likeness of service
suppliers, the inherent problem is still unsolved due to the uncertainty of a set of supplierrelated factors. It is submitted that, as described earlier, a relevant factor for determination of
like service suppliers might be the process of supplying services. Furthermore, in Canada –Autos, the Panel concluded that Intermeccania (Canadian manufacturer) could not be
considered as a supplier of wholesale trade services of vehicles under the meaning of UN
CPC entry “6111 sale of motor vehicles, including automobiles and other road vehicles”,
because it manufactures and sells directly to consumers a small number of vehicles per
year.268 It would suggest that market place of the service supplier, including trading volume
and customer network, is also relevant for determination of likeness of service suppliers.

261

Vienna Convention of the Law of the Treaties, done at Vienna, 23 May 1969 [hereinafter Vienna
Convention], Art. 31(1).
262
Krajewski (2003), p. 57.
263
Id. p. 106.
264
Nicolaidis, Kalypso and Joel P. Trachtman. 2000. From Policed Regulation to Managed Recognition in
GATS. In Pierre Sauve and Robert M. Stern eds., GATS 2000 – New Directions in Services Trade Liberalization,
Washington D.C.: The Brookings Institution, pp. 252-253.
265
Draft Glossary of Terms, GATT Doc. No. MTN.GNS/W/43, 8 July 1988, NATIONAL TREATMENT.
266
Zdouc (2004), pp. 397-398.
267
Id. p. 401.
268
Panel Report, Canada – Certain Measures Affecting the Automotive Industry [hereinafter Canada –Autos], WT/DS139/R, WT/DS 142/R, adopted on 19 June 2000, para. 10.285.

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The second issue is whether modes of supply should be taken into account whenlikeness is assessed. As described in Chapter One, section 2.3, supply of services is exercisedthrough four modes of supply, namely: (i) cross-border supply, (ii) consumption abroad, (iii)commercial presences, and (iv) movement of natural persons. Mattoo argued that in order toensure the integrity of this principle, and better protection for foreign service suppliers, thenational treatment principle should be read independently from modes of supply. 269 This
would, for determination of likeness in Article XVII, mean that it is not required to examine
the different modes through which services are supplied. In addition, as noted earlier, thePanel in EC – Bananas confirmed the likeness of services based on the same sub-sector of the
CPC, and the likeness of service suppliers on the ground of the likeness of services. This
would imply that modes of supply are not a relevant factor in determination of likeness in thecontext of Article XVII.
This interpretation, nevertheless, would lead to a broad scope of likeness in Article
XVII, and challenge any domestic regulation, which differentiates among modes of service
supply. Zdouc and Krajewski share the view that the reference to modes of supply would limit
the broad scope of likeness.270 Moreover, the guidance on scheduling of initial commitments
in trade in services clearly explained that levels of commitments in Article XVII should
specify sector/sub-sector and mode of supply, and then when a Member has made acommitment on national treatment in Mode 1, this commitment alone does not extend toMode 4.271 Therefore, in a scheduled sector or sub-sector, there would be a case that Members
make full commitments on a mode of supply, but no commitment on other modes of supply.
This would indicate the intention of WTO Members to treat services and service suppliers
differently under different modes of supply with regard to national treatment. If likeness wasdetermined throughout all modes of supply, the meaning of commitments specified by modesof supply would be undermined.
In sum, the most relevant criterion for comparison of service suppliers is physicalcharacteristics. However, a lack of clarity on extent of similarity among service suppliers
would mean that likeness of services in GATS Article XVII remains uncertain. It is submitted
that, among other factors, the process of supplying services and market place of the service
supplier should be included for comparison.
4.4 Broad coverage of “no less favourable” treatment
The third element in the national treatment principle is the standard of “no lessfavourable” treatment. When measures are found under the scope of Article XVII and thelikeness between foreign and domestic services and service suppliers is confirmed, a WTO
Member violates the national treatment obligation if it accords foreign services and service
suppliers less favourable treatment than what is accorded to domestic counterparts. Because
the interpretation of the term “like services and service suppliers” is broad, it is submitted thatthe third element must be qualified in order to balance against the second element. There arethree important aspects in interpretation of this standard.
269

Mattoo (1997), p. 120.
Zdouc (2004), p. 402; Krajewski (2003), p. 102.
271
Scheduling of Initial Commitments in Trade in Services, Explanatory Note, MTN.GNS/W/164, 3
September 1993, paras. 19 and 21.
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Firstly, Article XVII:2 codifies GATT jurisprudence on the “no less favourable”
standard in goods, which covers both formally identical and different treatment. Moreover,
Article XVII:3 codifies the core requirement under the GATT “no less favourable” standard
in goods, which prohibits measures modifying conditions of competition. Consequently,
either formally identical or different treatment modifying conditions of competition in favourof domestic services or service suppliers, or at the expense of foreign services or service
suppliers, shall not be allowed. Therefore, the language of this Article is to prohibit both dejure and de facto discriminations.272
In examination of “no less favourable” treatment, the Panel in EC – Bananas followed
a two-step approach to examine (i) whether a measure constitutes formally identical ordifferent treatment among foreign and domestic origin under Article XVII:2, and (ii) whether
the application of these formally identical or different treatments modifies conditions ofcompetition for foreign services or service suppliers under the meaning of Article XVII:3. In
the first step, all four types of rules, namely operator category rules, activity function rules,
export certificates, and regulations on the issuance of hurricane licenses are considered notdiscriminatory against foreign like service and service suppliers on the basis of their origin,and thus arguably accords formally identical treatment to services and service suppliers
regardless of their origin, nationality, ownership or control.273
However, in the second step, the Panel concluded that while all four types of rules
operate in a non-discriminatory basis, in practice, they create less favourable conditions ofcompetition for like service suppliers of foreign origin. 274 The reasoning is that: (i) mostservice suppliers of EC origin are classified as Category B operators, who benefit from theallocation of 30 per cent of the licenses at lower in-quota duty rates under category operator
rules, hurricane licenses, as well as exemption from export certificates, while most service
suppliers of third-country origin fall under Category A; 275 (ii) though import licenses are
tradable and transferable, license transferees, who are usually Category A operators, do notbenefit from tariff quota rents granted to initial license holders (the sellers), who are usually
Category B operators;276 (iii) on the one hand, service suppliers of foreign origin who sell
third-country or non-traditional ACP bananas are subject to activity function rules, while like
service suppliers of EC origin who sell EC bananas are not required to do so, and on the other
hand, service suppliers of foreign origin do not enjoy equal competitive opportunities to makeclaims for performing ripening activities as service suppliers of EC origin do.277
De facto less favourable treatment was also found in the EC’s revised license
allocation system because foreign service suppliers “do not have opportunities to obtain
access to import licenses” on equal terms and conditions.278 In another case, Canada – Autos,
the conditions of competition were modified where the Panel found that the Canadian value
added (CVA) requirements extend an incentive to the beneficiaries of the import duty
exemption to purchase services supplied within the Canadian territory over "like" services
272

Appellate Body Report, EC – Bananas, para. 233.
Panel Report, EC – Bananas, paras. 7.326, 7.360, 7.379, and 7.392.
274
Id. paras. 7.341, 7.368, 7.380, and 7.393.
275
Id. paras. 7.335, 7.379, and 7.392.
276
Id. paras. 7.336 and 7.363.
277
Id. paras. 7.361 and 7.362.
278
Panel Report, European Communities – Regime for the Importation, Sale and Distribution of Bananas:
Recourse to Article 21.5 by Ecuador, WT/DS27/RW/ECU, adopted on 6 May 1999, para. 6.133.
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supplied in or from the territory of other Members through Mode 1 (cross-border supply) andMode 2 (consumption abroad).279
Secondly, in pursuant with GATT jurisprudence, the interpretation of modifying
conditions of competition has followed objective assessment regardless of regulatory
purposes. In the appeal, as mentioned earlier, the EC justified its licensing for bananas on the
grounds of pursuing “entirely legitimate policies” and not being “discriminatory in design andeffect”, where (i) the aim of the operator category system was to set up a mechanism forallocating the tariff quota among operator categories; (ii) the aim of the activity function rules
was to protect the banana ripeners against the concentration of economic bargaining power inthe hands of the primary importers as a result of the tariff quota; and (iii) the purpose of thehurricane licenses is to compensate operators who suffer damage caused by tropical storms.280
The Appellate Body, nevertheless, upheld the Panel’s conclusions based on the reasoning that
GATS had no words comparable to “should not be applied to imported or domestic products
so as to afford protection to domestic production”. 281 Therefore, this would imply that theattempt to introduce national regulatory purposes for justification of “less favourable”
treatment is legally unacceptable in the context of Article XVII. In other words, it suggeststhat the standard of “no less favourable” treatment must be subject to an objective
interpretation regardless of domestic policy aims.
Lastly, the standard of “no less favourable” treatment is further clarified by thefootnote 10 to Article XVII:1, which reads:
Specific commitments assumed under this Article shall not be construed to require any
Member to compensate for any inherent competitive disadvantages which result from theforeign character of the relevant services or service suppliers.

In Canada – Autos, Canada argued that disadvantages in conditions of competition towards
supply of foreign services, which were affected by the CVA requirements, inherently resulted
from the foreign characteristics of those services because the maintenance and repair work
exercised in Canada could not be supplied through Modes 1 and 2.282 The Panel found that
Canada’s argument was true because it required the physical presence of service suppliers.
Nevertheless, other services, including repair and maintenance-related services such as
consulting and advisory services, which were affected by the CVA requirements, could be
supplied through Modes 1 and 2.283 The less favourable treatment accorded to foreign services
could not be defended on the ground of “inherent competitive disadvantages which result
from the foreign character” because footnote 10 only discharges Members’ obligation of
making compensation for any disadvantages due to foreign nature with respect to theapplication of national treatment.284
According to Zdouc, in examination of de facto discrimination, footnote 10 called for
distinction between less favourable conditions of competition due to origin-neutral regulations,on the one hand and less competitive advantages due to foreign nature of services or service
suppliers, on the other hand.285 In order to appraise this distinction, Zdouc proposed a threeelement test: (i) measuring the inherent competitive disadvantages resulted from foreign
279
280
281
282
283
284
285

Panel Report, Canada – Autos, para. 10.307.
Appellate Body Report, EC – Bananas, paras. 242, 245, and 247.
Id. paras. 244, 246 and 248.
Panel Report, Canada – Autos, para. 10.298.
Id. para. 10.300.
Id. para. 10.300.
Zdouc (2004), pp. 412-413.

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nature of services or service suppliers, (ii) assessing the restrictive impact of national
regulation pursuing legitimate objectives on domestic services and service suppliers, and (iii)
ascertaining the restrictive impact of national regulation pursuing legitimate objectives on
foreign services and service suppliers; then the sum of elements (i) and (ii) must be comparedwith element (iii) to find out whether de facto discrimination exists.286 However, the main
problem is that it is impracticable to quantify these three elements in practice.287 In addition, it
seems to be very hard to introduce a separate test in appraising the legitimate objectives under
Article XVII because the “no less favourable” treatment operates in an objective manner.
Therefore, footnote 10 is not a justification for de facto discrimination under the
standard of “no less favourable” treatment.
Unfortunately, this analysis indicates that the standard of “no less favourable”
treatment as a countermeasure to balance the broad scope of likeness is proved to have abroad coverage of both de jure and de facto discrimination. In the event a measure in question
is found to modify conditions of competition in favour of domestic like services or service
suppliers, there is a breach of this standard regardless of national regulatory purposes.
Accordingly, the broad coverage of the “no less favourable” treatment would amount toanother disincentive to WTO Members in negotiation of services liberalization.
The following example may be useful to illustrate the aforementioned problems.288
Insurance agency services (CPC 8140) are allowed to supply in country B through either
entity (legal person) or individual (natural person) under the full commitment on the national
treatment obligation, i.e. no restrictions on the national treatment column in country B’s
Schedule of Specific Commitments. As noted earlier, supply of services by foreign entities incountry B is exercised through Mode 3 (commercial presence) while that by foreign
individuals is under Mode 4 (movement of natural persons). In order to obtain a license, entity
or individual, either domestic or foreign, who wishes to supply insurance agency services,must satisfy certain requirements, including training courses in country B and licensing fees,
which are different between agency entities and individual agents.
WTO Members, such as country A, may claim that those measures are inconsistent
with Article XVII because both suppliers are supplying like services (under the same CPC
8140) and de jure discrimination exists between Mode 4 and Mode 3.
In contrast, country B may argue that all foreign and domestic agency entities are
subject to the same licensing system, on the one hand, and all foreign and domestic individual
agents are subject to the same licensing system, on the other hand. Accordingly, there is nodiscrimination between domestic and foreign service suppliers under either Mode 3 or Mode 4.
While insurance agency services are codified as CPC 8140 for determination of likeness,there would be no competitive relationship between services supplied by agency entities andservices supplied by individual agents because of different characteristics, including prices,quality, customers’ services and network, and consequently different end-uses. Moreover, thecross-mode likeness of services was not established due to different service suppliers, i.e.
entities vs. individuals, and different modes of supply, i.e. Mode 3 vs. Mode 4. Therefore, thisde jure discrimination should be permitted by GATS because no likeness is confirmed.

286

Id.
Krajewski (2003), p. 111.
288
Further examples illustrated by Mattoo (1997), p. 128, concerning transport services; and Zdouc (2004),
p. 402, concerning different regulations on different modes of supply.
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However, from the point of view of country A, while there is no distinction among
service suppliers under either Mode 3 or Mode 4 on the basis of national-origin, therequirement of an additional license by country B would put foreign service suppliers, whohave been licensed by their home countries, including country A, at a disadvantage, and thus
could constitute de facto discrimination against foreign service suppliers.
In response, country B may state the position that even though the likeness of services
and service suppliers would possibly be established within either Mode 3 or Mode 4 under themeaning of Article XVII, all country B citizens, who have been trained abroad and licensed
by other WTO Members, including country A, to supply insurance agency services, must alsosatisfy those licensing requirements. Those licensing requirements might be consistent with
Article XVII because de facto discrimination against foreign service suppliers could not beestablished.
This example shows the strong possibility of violations of Article XVII because of theuncertainty in determining likeness as well as the broad coverage of “no less favourable”
treatment.
As mentioned earlier, one of the distinct features of GATS is the negotiable national
treatment, whereby Article XVII:1 specifically refers to “Schedule” and “conditions andqualifications”. The text of Article XVII:1 would suggest that WTO Members may employ
their schedules to limit such uncertainty of likeness and broad coverage of “no lessfavourable” treatment by introducing conditions and qualifications. As noted by Zdouc, WTO
Members, nevertheless, do not deal with likeness of services and service suppliers inscheduling their commitments.289 Concerning the standard of “no less favourable” treatment,a fundamental problem is that Members are only able to inscribe reasonably foreseeable
discriminatory measures, but not all discriminations.290 Moreover, the recourse to schedules
would be impossible for those Members, who have undertaken the full national treatment
obligation with regard to scheduled sectors and/or sub-sectors, e.g. insurance agency services
as shown by the above-said example. Probably, those WTO Members would be safe to relyon the predictability and certainty of interpreting the national treatment principle.
To sum up, the WTO case law and literature review reflect the fact that in parallel witha broad approach to the interpretation of “measures” subject to GATS, the combination of
uncertainty in interpretation of likeness and broad coverage of “no less favourable” treatment
would lead to a high possibility for Members to violate the national treatment principle in thecontext of services. Although different proposals have been made to improve the certainty indetermining likeness and limiting broad scope of discrimination, the problem has yet to besatisfactorily resolved. Consequently, uncertainty in interpretation of Article XVII would
discourage Members from undertaking commitments on national treatment for further
liberalization of trade in services.
5. Towards a two-stage approach: A balance between conditions of competition in
Article XVII and policy objectives in Article XIV291

289
290
291

Zdouc (2004), p. 403.
Krajewski (2003), p. 113.
This section draws from Vu Nhu Thang (2006a), pp. 173-194.

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5.1 The recognition of national legitimate policy objectives
While expanding the production of and trade in goods and services, Members arerecognized and ensured in pursuing their objective of sustainable development.292 Specificallyin the services sector, the establishment of a multilateral framework of principles and rules for
trade in services has led to the acknowledgement of the right of Members to regulate, and to
introduce new regulations for the supply of services within their territories in order to meetnational policy objectives.293 The negotiating history as discribed in section 1 of this chapter
has showed the concern of negotiators, especially from developing countries, for national
policy objectives, which resulted in the exclusion of the national treatment principle fromgeneral obligations. Furthermore, GATS specifies that the fundamental requirement ofprogressive liberalization of trade in services through multilateral negotiations is aimed atensuring the overall balance between rights and obligations of Members, as well as paying
due respect to national policy objectives. 294 Therefore, there is recognition for allowing
national legislators the freedom to pursue domestic policy objectives, while preserving
conditions of competition.
Although the national treatment principle in GATS has been interpreted, as discussed
earlier, in an objective manner irrespective of national policy aims, an introduction of asecond test, which respects national policy objectives, is necessary to secure balance between
rights and obligations of WTO Members. In GATT dispute settlement, to justify the breach of
Article III, Members have sought Article XX, which provides general exceptions.295 At the
292
293
294
295

WTO Agreement, the preamble.
GATS, the preamble.
Id.
GATT, Art. XX reads (Asterisk omitted):
General Exceptions
Subject to the requirement that such measures are not applied in a manner which would
constitute a means of arbitrary or unjustifiable discrimination between countries where the same
conditions prevail, or a disguised restriction on international trade, nothing in this Agreement shallbe construed to prevent the adoption or enforcement by any contracting party of measures:(a)necessary to protect public morals;(b)necessary to protect human, animal or plant life or health;(c)relating to the importations or exportations of gold or silver;(d)necessary to secure compliance with laws or regulations which are not inconsistent
with the provisions of this Agreement, including those relating to customs
enforcement, the enforcement of monopolies operated under paragraph 4 of Article II
and Article XVII, the protection of patents, trade marks and copyrights, and theprevention of deceptive practices;(e)
relating to the products of prison labour;(f)
imposed for the protection of national treasures of artistic, historic or archaeologicalvalue;(g)relating to the conservation of exhaustible natural resources if such measures are
made effective in conjunction with restrictions on domestic production or
consumption;(h)undertaken in pursuance of obligations under any intergovernmental commodity
agreement which conforms to criteria submitted to the CONTRACTING PARTIES
and not disapproved by them or which is itself so submitted and not so disapproved;(i)
involving restrictions on exports of domestic materials necessary to ensure essential
quantities of such materials to a domestic processing industry during periods when thedomestic price of such materials is held below the world price as part of agovernmental stabilization plan; Provided that such restrictions shall not operate to

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first layer, a discriminatory measure must be under any exceptional heading of “necessary”(Article XX (a), (b), and (d)); “relating to” (Article XX (c), (e), (g)); “for the protection of”(Article XX (f)); “in pursuance of” (Article XX (h)); “involving” (Article XX (i)); or“essential” (Article XX (j)). In a number of cases, panels and the Appellate Body haveinterpreted those exceptional headings with respect to “necessary” and “relating to”.296
However, those national policy goals must be legitimate, or in other words, theapplication of those measures must reflect non-protectionist aims. Therefore, in order toprevent any abuse or misuse of the exceptions, in the second layer, the discriminatory
measure also must satisfy the requirements imposed by the introductory clause (the chapeau)of Article XX. This chapeau indicates that the application of that inconsistent measure is notin a manner constituting a means of arbitrary or unjustifiable discrimination between
countries where the same conditions prevail, or a disguised restriction in international trade.297
This approach is clearly confirmed in US – Shrimp where the Appellate Body reasoned that
although Members are required to observe their obligations under the multilateral trade
regime, their rights must be respected in balance with the obligations to prevent misuse orabuse.298 While the first layer would suggest a balance between Article XX and other GATT
provisions, including the national treatment obligation, the second layer would imply aninternal balance within Article XX.299
The first case in GATS, which provoked Article XIV on general exceptions as
justification for a violation of other GATS articles,300 is US – Gambling, where the US sought
increase the exports of or the protection afforded to such domestic industry, and shallnot depart from the provisions of this Agreement relating to non-discrimination;(j)essential to the acquisition or distribution of products in general or local short supply;
Provided that any such measures shall be consistent with the principle that allcontracting parties are entitled to an equitable share of the international supply ofsuch products, and that any such measures, which are inconsistent with the otherprovisions of the Agreement shall be discontinued as soon as the conditions giving
rise to them have ceased to exist. The CONTRACTING PARTIES shall review theneed for this sub-paragraph not later than 30 June 1960.
296
A discriminatory measure is proved as “necessary” only if there were no alternative measures consistentor less inconsistent with the GATT, which a Member country could reasonably be expected to employ to pursue
its national policy objectives. This requires examination of existence of any least trade restrictive measure tofulfill the same policy goals. A discriminatory measure is proved as “relating to” only when it must be “primarily
aimed at” the conservation of an exhaustible natural resource.
See Panel Report, US – Section 337, para. 5.26; Appellate Body Report, EC – Asbestos, para. 172; Appellate
Body Report, Korea – Beef, paras. 163-166. See also Panel Report, Canada – Measures Affecting Exports of
Unprocessed Herring and Salmon, L/6268 – 35S/98, adopted on 22 March 1988, para. 4.6; Appellate Body
Report, United States – Standards for Reformulated and Conventional Gasoline [hereinafter US – Gasoline],
WT/DS2/AB/R, adopted on 20 May 1996, pp. 19-20; Appellate Body Report, United States – Import Prohibitionof Certain Shrimp and Shrimp Products [hereinafter US – Shrimp], WT/DS58/AB/R, adopted on 6 November
1998, paras. 141-145.
297
Appellate Body Report, US – Gasoline, paras. 8-9.
298
Appellate Body Report, US – Shrimp, para. 156.
299
See Gaines, Sanford. 2001. The WTO’s Reading of the GATT Article XX Chapeau: A Disguised
Restriction on Environmental Measures. University of Pennsylvania Journal of International Economic Law 22,
pp. 829-841.
In the words of Gaines, there is a dualism and integration in Article XX because Article XX balanced
against the rest of the GATT, and the chapeau balanced against exceptional headings of Article XX, andaccordingly, dual balances were integrated in the Article XX.
300
GATS, Art. XIV reads (Footnotes omitted):
General Exceptions

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to justify its discriminatory measures (the Wire Act, the Travel Act and the Illegal Gambling
Business Act) in connection with general exceptions by relying on Article XIV (a), necessary
to protect public morals or maintain public order, and Article XIV (c), necessary to securecompliance.301 A similar two-layer test was adopted to examine (i) whether the discriminatory
measures fall within any heading of exceptions under Article XIV, and (ii) whether thosemeasures satisfy the requirements of the chapeau of Article XIV.302
5.2 Necessity test – A problematic approach
To limit the high possibility of violation of the national treatment principle, based on
GATT jurisprudence on Article XX, it is advisable to read Article XVII in conjunction withGATS Article XIV, which deals with general exceptions, whereby legitimate regulatory
objectives and purposes of the measures shall be considered as a justification for the lessfavourable treatment against foreign services and service suppliers.303 In other words, the term“necessary” was integrated into Article XVII, which is called the necessity test.
GATT/WTO jurisprudence has developed this necessity test in the context of GATT
Article XX (b) and (d), GATS Article XIV (a) and (c). In US – Section 337, if a measureconsistent with other GATT provisions is not reasonably available, a requirement of “the leastdegree of inconsistency” was established in order to decide whether a measure was“necessary” under GATT Article XX (d).304 This requirement indicates that the necessity test
is met if there were no alternative measures that are consistent or less inconsistent with GATT
provisions.305 In following cases, a series of factors, which must be weighted and balanced in
Subject to the requirement that such measures are not applied in a manner which would
constitute a means of arbitrary or unjustifiable discrimination between countries where likeconditions prevail, or a disguised restriction on trade in services, nothing in this Agreement shall be
construed to prevent the adoption or enforcement by any Member of measures:(a)necessary to protect public morals or to maintain public order;(b)
necessary to protect human, animal or plant life or health;(c)necessary to secure compliance with laws or regulations which are not inconsistent
with the provisions of this Agreement including those relating to:(i) the prevention of deceptive and fraudulent practices or to deal with the effects ofa default on services contracts;(ii) the protection of the privacy of individuals in relation to the processing anddissemination of personal data and the protection of confidentiality of individual
records and accounts;(iii) safety;(d)inconsistent with Article XVII, provided that the difference in treatment is aimed atensuring the equitable or effective imposition or collection of direct taxes in respectof services or service suppliers of other Members;(e)inconsistent with Article II, provided that the difference in treatment is the result of anagreement on the avoidance of double taxation or provisions on the avoidance of
double taxation in any other international agreement or arrangement by which theMember is bound.
301
Panel Report, United States – Measures Affecting the Cross-Border Supply of Gambling and Betting
Services [hereinafter US – Gambling], WT/DS285/R, adopted on 20 April 2005.
302
Id. para. 6.449.
303
Mattoo (1997), pp. 131-133. See also Verhoosel, Gaetan. 2002. National Treatment and WTO Dispute
Settlement: Adjudicating the Boundaries of Regulatory Autonomy. Oxford: Hart Publishing.
304
Panel Report, US – Section 337, para. 5.26.
305
This requirement of the necessity test is also applicable to GATT Article XX (b).

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examination of the necessity test under the context of GATT Article XX(d), include (i)contribution of the compliance measures to the enforcement; (ii) importance of the common
interests or values; and (iii) impact of law or regulation on international trade.306
With respect to GATS Article XIV, the Appellate Body in US – Gambling underlined
its reasoning in EC – Asbestos and Korea – Beef that in the context of Article XIV (a), an
alternative measure that is reasonably available must be a measure that for the responding
Member would preserve its right to achieve its pursued policy objectives.307 Therefore, theunderlying meaning of the word “necessary” by the invocation of GATS Article XIV would
focus on finding the availability of other less trade restrictive measures in order to achieve
specific objectives.308
Accordingly, the approach to including the necessity test into the interpretation of
Article XVII suggests that the national treatment obligation should be understood andinterpreted by reference to the necessity of domestic regulatory objectives. WTO Members
are able to follow their domestic policy objectives as long as the applicable measures are notmore burdensome than necessary to achieve the corresponding objectives.309 This would callfor a two-layer test within Article XVII to examine, firstly, whether a discriminatory measureaccords less favourable treatment to foreign services and service suppliers than domestic likecounterparts, and secondly, whether the application of such a measure is necessary to achieve
national policy objectives. Although it would imply a balance between policy aims andconditions of competition within Article XVII, there are some concerns on this approach.
Firstly, as there is no GATT precedent in applying the necessity test in assessment of“no less favourable” treatment in Article III, it is very hard to expect that GATS jurisprudence
will pursue a different direction. Furthermore, because the term “necessary” does not appear
in either GATT Article III or GATS Article XVII, this indicates that there is no legal support
for the necessity test in the language of Article XVII. Verhoosel suggested that footnote 10 of
Article XVII would be relevant to imply a necessity test in this national treatment principle.310
Based on the concept of “inherent” stated in footnote 10, a panel would be required to assess
whether another measure aiming at the same objectives, if adopted, would result in the same
adverse effects.311 In other words, a measure “less inconsistent with GATS” must be analyzed
in order to determine whether those adverse effects inherently originate from the foreign

See Panel Report, Thailand – Restrictions on Importation of and Internal Taxes on Cigarettes, DS10/R –37S/200, adopted on 7 November 1990, para. 74.
306
According to the Appellate Body, the greater contribution, the more easily a measure might beconsidered to be “necessary”. In addition, the more vital or important those common interests or values are, theeasier it would be to accept as “necessary” a measure designed as an enforcement instrument. A measure with arelatively slight impact upon imported products might more easily be considered as “necessary” than a measurewith intense or broader restrictive effects.
See Appellate Body Report, Korea – Beef, paras. 162-163. The Appellate Body also adopted the same
approach to examining the necessity test in the context of GATT Article XX(b). See also Appellate Body Report,
EC – Asbestos, para. 172.
307
Appellate Body Report, United States – Measures Affecting the Cross-Border Supply of Gambling and
Betting Services, WT/DS285/AB/R, adopted on 20 April 2005, para. 308.
308
Id. para. 317.
309
Mattoo, Aaditya and Pierre Sauve. 2003. Domestic Regulation and Trade in Services: Looking Ahead.
In Aaditya Mattoo and Pierre Sauve, eds., Domestic Regulation and Service Trade Liberalization. Washington
D.C.: World Bank, Oxford University Press, p. 225.
310
Verhoosel (2002), pp. 90-91.
311
Id.

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character of services or service suppliers. If the answer were affirmative, the application of adiscriminatory measure would not constitute a violation of Article XVII.
However, in the words of Krajewski this analysis would be a “circular conclusion”
because the necessity test would be grounds for interpretation of both the national treatment
principle as well as an “inherent competitive advantage”.312 In addition, as described earlier,footnote 10 only exempts Members’ obligation to compensate for any disadvantages due toforeign nature with respect to the application of the national treatment principle, but not the
grounds for justification of any less favourable treatment accorded to foreign services orservice suppliers.
Secondly, if the necessity test was accepted, there would be no clear distinction
between Article VI:4, which addresses non-discriminatory measures and calls for the
introduction of future disciplines with respect to measures on qualification and licensing
requirements, procedures, technical standards that are not more burdensome than necessary toensure the quality of service, and Article XVII which deals with discriminatory measures.313
In other words, as any measure that is more burdensome than necessary would constitute a
violation of Article XVII, there would be no scope for introduction of such future disciplines.
Thirdly, as Article XIV deals with not only “necessary” ((a), (b), and (c)), but also
“inconsistent” ((d) and (e)), it would be inappropriate if only the necessity test was read in
Article XVII. In addition, as noted earlier, the chapeau of GATS Article XIV acts as a second
layer to examine necessity, where a discriminatory measure must qualify three standards
under the chapeau, namely arbitrary discrimination, unjustifiable discrimination and disguised
restriction.314 Therefore, the chapeau would constitute an integral part of the necessity test as
an anti-abuse provision under the context of Article XIV. In other words, the introduction of
the necessity test into Article XVII would be impartial as it ignores the importance of thechapeau under Article XIV.
Fourthly, if the necessity test were adopted in Article XVII, it would automaticallyinvalidate Article XIV in relation to Article XVII. For instance, if a discriminatory measure
were found necessary under Article XVII, there would be no need to examine the policy
purposes in Article XIV. On the other hand, if a discriminatory measure were foundunnecessary, it would be useless to re-examine policy purposes under both Articles XVII and
XIV.
It might be said that general exceptions, nevertheless, are still applicable to violationsof other provisions. 315 In response, this argument seems to be inappropriate, as theinterpretation rules of Vienna Convention require “good faith” and “ordinary meaning”.316 It
would be unreasonable for the reading of Article XVII to encompass Article XIV. In otherwords, other articles of GATS, including Article XVII must be interpreted with therecognition of the ordinary meaning of Article XIV. In addition, as Article XIV (d)312

Krajewski (2003), p. 111.
Id. p. 112.
314
Panel Report, US – Gambling, para. 6.581.
315
See Regan, Donald H. 2002. Regulatory Purpose and “Like Products” in Article III:4 of the GATT(With Additional Remarks on Article III:2), Journal of World Trade 36(3), pp. 454-455.
For example, in GATT context, Regan argued that while GATT Article XX is redundant in case of the
inclusion of regulatory aims into GATT Article III, it still applies to other GATT obligations.
316
Vienna Convention, Art. 31(1).
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specifically refers to Article XVII, the general exceptions must be a separate test applicable toother provisions, including the national treatment principle.
Lastly, the reference to the necessity of domestic regulatory objectives in Article XVII
would cause the survival of the “aims and effects” test, which was disregarded by both GATTand WTO jurisprudence.
5.3 Framing a two-stage approach
To limit the high possibility of violation of the national treatment principle while
respecting the objective assessment of Article XVII, an alternative approach is to read Article
XVII first, and then Article XIV. This means that the interpretation of Article XVII would
follow a two-stage approach to determine, firstly whether a measure accords less favourable
treatment to foreign services and service suppliers than the domestic like counterparts, andsecondly whether that less favourable treatment, if found, could be justified under Article XIV.
While the first stage is aimed at revealing any discrimination among like services and service
suppliers, and is neutral to regulatory aims, the second stage will determine whether theproven discrimination is justifiable in pursuit of legitimate national policy goals.
Accordingly, Article XIV will balance against the broad coverage of both “like”
services and the standard of “no less favourable” treatment under Article XVII. Specifically,
the second stage will act as countermeasures against the broad coverage of discrimination as
well as towards uncertainty in confirming likeness by balancing national legitimate policy
objectives with allegedly protective measures against foreign services and service suppliers.
However, in application of the second stage, WTO Members are required to qualify threestandards set by the chapeau as an anti-abuse provision. In its turn, this anti-abuse provision
would ensure the proposed balance between national policy objectives and conditions ofcompetition.317
Figure 3 summarizes the analytical framework for interpretation of the national
treatment principle by the two-stage approach. In short, this two-stage approach consists offour elements for analysis:(1) Confirming a measure in question falling under the scope of Article XVII (Box1);(2) Confirming the likeness between foreign and domestic services and service
suppliers (Box 2);(3) Ascertaining that the discriminatory measure accords to foreign services andservice suppliers irrespective of regulatory aims (Box 3); and(4) Ascertaining that the discriminatory measure is used to pursue national policy
objectives in a non-protectionist manner under any exceptional heading (Box4).
Therefore, when a measure is found to be discriminatory against foreign services andservice suppliers compared to domestic like counterparts in the context of Article XVII by theobjective assessment, it would (i) not constitute a violation of Article XVII if it qualifies the317

Panel Report, US – Gambling, para. 6.581.

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NATIONAL TREATMENT PRINCIPLE IN GATS:
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requirements for any exceptional heading and the anti-abuse provision under Article XIV; or(ii) constitute a violation of Article XVII if that measure does not fall into any exceptional
heading or protective intent is proved based on the examination of three standards under thechapeau. Accordingly, a WTO Member does not violate its obligation under the national
treatment principle as long as its measure does not constitute discrimination with protectionist
aims.
Figure 3: Analytical framework for interpretation of the national treatment principle:
Two-stage approach

Se r vi c e s and s e r v i c e s up p l i e r s fr o m
c o unt r y A ; and d o m e s t i c se r vi c e s
and s e r v i c e s up p l i e r s o f c o unt r y B(1) M e as ur e s
affecting supplyof services

Like

Unlike(2) Like ne s s of s e rvice s
垸 Competitive
relationship (products’
end-uses, consumers’ taste
and habits)
垸 Services classification
垸 Service supplier(physical characteristics,
process of supplying
services, market place)垸 Modes of supply(3) No l e s s fav o ur abl e t r e at me nt
垸 Different or Identical treatment
垸 Modifying conditions of competitions

Less favourable
treatment(4) Jus t i fi c at i o n und e r A r t .X IV
垸 Exceptional headings
垸 Chapeau

No lessfavourable
treatment

Legitimate
policy goals
and Not abuse

C o nc l us i o n: N o v iola tion

Illegitimate policy
goals or Abuse

C on clu sion : V iola tion

To continue the above-said example on insurance agency services supplied in country
B, as claimed by country A, the consequence of determining likeness by reference only toservice classifications and the broad coverage of discrimination would make licensing
requirements by country B inconsistent with Article XVII. However, country B could be safeby proving that, for example, those requirements are necessary to secure compliance with its
company and labour laws without any protectionist aims under Article XIV.
There are a number of advantages in following this two-stage approach.
Firstly, it would ensure the transparency and predictability of the multilateral trading
system, as well as protect WTO Members against the high possibility of violation of the


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national treatment principle. On the one hand, it secures the duties of Members to carry out
their obligations under GATS. On the other hand, it recognizes their rights in pursuing
legitimate policy objectives. As discussed earlier, due to uncertainty in the determination of
the national treatment principle in GATS, this approach would provide a reliable recourse forMembers to reduce the high possibility of violation.
It has been argued that it is very hard to examine the relationship between means andend, and this difficulty produces restrictions on a Member’s choice of policy objectives
because of the exhaustive list of Article XIV.318 In response to the first part of this argument,
it must be recalled that one of the principles in the WTO dispute settlement system is toachieve “a satisfactory settlement of the matter in accordance with the rights and obligations”
of Members under GATS.319 In other words, it is inevitable to examine the discriminatory
measure (the means) and national legitimate policy objectives (the end) and appraise theirrelationship. A determination of “the end” could be made by assessment of protective
application of that measure, which is “often discerned from the design, the architecture andrevealing structure”. 320 Moreover, GATT and WTO jurisprudence indicates that therelationship between means and end is manifested by the terms “necessary” and “relating to”,
inter alia, under exceptional headings.
The second part of this argument seems to be reasonable as Article XIV provides for
only five exceptions. However, on the one hand, the multilateral framework of principles
would be less effective if there were too broad exceptions, which would harm the“transparency and progressive liberalization”.321 In other words, the existing five exceptions
are enough. On the other hand, the existing provision of general exceptions should enjoy abroader interpretation so that they could be made truly “general”.322
Secondly, this approach is supported by the interpretation rules under Vienna
Convention Article 31(1), which require “good faith” and “ordinary meaning” of the terms.323
Therefore, both GATS Article XVII and XIV would be examined without detriment to eachother. In addition, the “object and purpose” of GATS are also taken into account ininterpretation of the national treatment principle by examining both the obligation ofMembers in ensuring the expansion of trade in services through the observation of multilateralframework of principles as well as their rights to regulate the supply of services to satisfy
national policy objectives.
Thirdly, this two-stage approach would be acceptable by panels and the Appellate
Body as it would ensure a fair dispute settlement process by balancing rights against
obligations of Members that is consistent with Article 3 (2) of DSU:
The dispute settlement system of the WTO is a central element in providing security andpredictability to the multilateral trading system. The Members recognize that it serves topreserve the rights and obligations of Members under the covered agreements, and to clarify
the existing provisions of those agreements in accordance with customary rules ofinterpretation of public international law. Recommendations and rulings of the [Dispute

318

Verhoosel (2002), pp. 51-52.
WTO. The Understanding on Rules and Procedures Governing the Settlement of Disputes [hereinafter
DSU], Art. 3(4).
320Appellate Body Report, Japan – Alcoholic Beverages, p. 30.
321
GATS, the preamble.
322
Gaines (2001), p. 833.
323
Vienna Convention, Art. 31(1).
319


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Settlement Body] cannot add to or diminish the rights and obligations provided in the covered
324
agreements.

Moreover, this approach would be consistent with the objective assessment of the national
treatment principle. The remaining duty is to examine two Articles together to determine
whether measures in question constitute a violation of Article XVII.
Figure 4: Effective scope of the national treatment principle
after employing the two-stage approach(C)
GeneralExceptions(c)(B) Market Access

(b)

(A)
National Treatment

Figure 4 illustrates the effective scope of application of the national treatment
principle after employing the two-stage approach for interpretation. As described earlier, in
relation to Article XVI on Market Access, the scope of the national treatment principle has
been equal to the area of [(A) – (b)]. The area of the general exceptions is named (C), which
deals with not only the national treatment and market access obligations, but also other GATS
articles. As far as Article XVII is concerned, the area (c) indicates those measures which
violate Article XVII but are justifiable by the general exceptions. The effective scope of thisprinciple is consequently narrowed down to the area of [(A) – (b) – (c)]. In other words, thegeneral exceptions would probably determine the exact scope of the national treatment
principle.325 By defining the scope of the national treatment principle, Members would be
more willing to inscribe their specific commitments for further liberalization of services.
6. Tentative conclusions on the national treatment principle in GATS

324

DSU, Art. 3 (2).
See McRae, Donald M. 2000. GATT Article XX and the WTO Appellate Body.” In Marco Bronckers
and Reinhard Quick, eds., New Directions in International Economic Law: Essays in Honour of John H. Jackson.
The Hague/London/Boston: Kluwer Law International, p. 232.
According to McRae (2000), nothing in GATT requires that the interpretation of the exceptional provision ismore stringent than substantive provisions. Exceptions to substantive obligations do not detract from thoseobligations, resulting in a suspension of treaty rights. They simply define the scope of those obligations.
(Footnote omitted)
325


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Three observations should be mentioned here as concluding remarks of this chapter.
First, there is no prevailing interpretation with respect to the scope of application of
the national treatment principle as far as market access is concerned. This lack of clarity
makes WTO Members unsure as to the extent to which they are obliged to extend thisprinciple as well as less secure in scheduling their commitments. The hierarchical relationshipbetween Article XVI and XVII is proved to be more persuasive, whereby the scope of thenational treatment in GATS is limited to all discriminatory measures which are excluded fromthe domain of Article XVI against foreign services and service suppliers.
Second, the national treatment principle consists of three elements, namely “measures
affecting the supply of services”, “like” services and service suppliers, and “no lessfavourable” treatment. The first element is broadly interpreted to include both regulations
governing the supply of services and other matters, which indirectly affect the supply ofservices. The uncertainty in criteria to compare foreign and domestic services and service
suppliers would lead the second element to broaden the scope of likeness. As theinterpretation by both panels and the Appellate Body is subject to an objective manner
regardless of regulatory aims, the third element fails to balance the broad scope of likenessdue to broad coverage of discrimination. This, in its turn, would result in a high possibility ofviolation of this principle by WTO Members.
Third, to avoid this problem, it is necessary for WTO Members to find an appropriate
way to balance their broad obligations under GATS. By relying on legitimate national policy
objectives provided by Article XIV, a two-stage approach is mapped for confirming theviolation of Article XVII. Under this approach, although a measure may be found to bediscriminatory against foreign services and service suppliers in the context of Article XVII byan objective assessment, it could not constitute a violation of Article XVII as far as themeasure is not discrimination with protectionist aims.


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CHAPTER THREE
Special Factors in Interpretation of the National Treatment Principle
Applicable to Insurance Services
Chapter Two has demonstrated that the two-stage approach is appropriate forinterpretation of the national treatment principle in the context of trade in services. As
described in Chapter One, the applicability of the multilateral rules to the insurance services
sector is governed by the Annex. The “prudential exception”, which is only applicable to thefinancial services sector, is proposed to constitute the second stage in the two-stage approach
towards interpretation of the national treatment principle in the insurance sector in order tocounterbalance the broad coverage of both likeness and the standard of “no less favourable”
treatment under Article XVII.
Therefore, the main objective of this chapter is to explore (i) the meaning of the“prudential reasons”, (ii) the relationship between measures at issue and the prudential policy
aims, and (iii) an appropriate test for anti-avoidance of this “prudential exception”. Those
special factors in trade in financial services, including insurance services, shall shed light on
the application of the two-stage approach towards interpretation of the national treatment
principle in the insurance sector.
1. Literature review326
1.1 Interpretation of the “prudential exception”
In the literature, there is a clear tendency to classify paragraph 2(a) of the Annex as an
exception. This provision is informally called “prudential carve-out”327, “prudential carve-out
exemption”328, “an exception for prudential measures”329, or “prudential exceptions”330. The
term “carve-out” means that prudential measures are not subject to schedules and not regarded
as a departure from WTO Members’ commitments on national treatment.331 Although there
are several discussions on the “prudential exception” in GATS (for example, Jarreau; Condon;and Skipper), most of them are restrained in the description of paragraph 2(a) as it appears in
the Annex, rather than providing a detailed analysis on the application of this exception in thecontext of liberalization of financial services, including insurance services. Moreover, no326

This section draws in part from Vu Nhu Thang. 2007a. Applicability of GATS Prudential Exception to
Insurance Services: Some Interpretative Issues. Manchester Journal of International Economic Law 4(2), pp. 88123.
327
See Dobson and Jacquet (1998), pp. 76-77; Nicolaidis and Tratchman (2000), pp. 255-256; Skipper,
Harold D. Jr. 2001b. Insurance in the General Agreement on Trade in Services. Washington, D.C.: The AEI
Press, pp. 32; Key, and Sydney J. 2003. The Doha Round and Financial Services Negotiations. Washington,
D.C.: The AEI Press, p. 35.
328
Panourgias (2006), p. 56.
329
Leroux, Eric H. 2002. Trade in Financial Services under the World Trade Organization. Journal ofWorld Trade 36(3), p. 430.
330
Jarreau (1999), p. 110.
331
Dobson and Jacquet (1998), pp. 76-77.

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legal analysis has been developed yet with regard to how paragraph 2(a) of the Annex could
constitute a “prudential exception”. Few other discussions provide a very limited
interpretation on special factors of this provision, namely the concept of “prudential reasons”,
the connection between the prudential objectives and measures, for which justification issought, and anti-avoidance provision (Key; Nicolaidis and Trachtman; Trachtman; Leroux;
Mattoo; Dobson and Jacquet; and Panourgias).
Concerning the concept of “prudential reasons”, there seems to be no consensus on thescope of prudential measures. While Leroux noted that the two examples on prudential
measures, namely protection of four types of persons and assurance of the financial system’s
integrity and stability, cover almost the entire scope of the prudential carve-out, 332 there is nofurther explanation for this interpretation nor discussion of the remaining measures which fallwithin the scope of this “prudential exception”. Although the Annex provides an illustrative
list for the term “prudential reasons”, the word “including” in paragraph 2(a) would suggestthat those two examples clarify some but not all prudential measures. Skipper has offered a
few clues for the broadness of the “prudential exception”, where the justification in insurance
services is mainly the concern of consumer protection.333 Particularly, Mattoo noted that thosemeasures under the “prudential exception” are to safeguard the solvency and health offinancial institutions.334 It would imply that the concept of “prudential reasons” must relate to
the solvency of insurers. In the words of Key, different countries may have different
prudential regulations, which may lead to restrictions on trade in financial services.335
With regard to the relationship between prudential objectives and measures at issue,
Mattoo suggests that prudential measures must be “not more burdensome than necessary”.336
This suggestion, however, does not address the rationale for application of the necessity test
to this “prudential exception”. In a more concrete analysis in the context of the banking sector,
Panourgias noted that there must be a “rational link” between means and ends,337 and if theterm “prudential reasons” is broadly interpreted, a “least WTO inconsistent alternative” test
should be incorporated.338 In contrast, Key, while dealing with the “prudential exception” inbanking and securities sectors, has mentioned that these prudential measures are not subject tosuch a necessity test.339 However, Key does not offer further explanation on the connection
between the measures in question and prudential reasons.
Alternatively, Nicolaidis and Trachtman have proposed a possible interpretation
analogous to Article XX (g) of GATT (measures relating to the conservation of exhaustible
natural resources), whereby in order for a measure to be considered under the “prudential
exception”, it would need to be “primarily aimed at” prudential regulation. 340 Theynevertheless admit that this might be just one possibility and leave this issue for further
research. As of yet, there is no further explanation on the rationale for such an interpretation.
The literature, therefore, has offered no consensus on interpretation of the connection between
prudential objectives and measures.
332
333
334
335
336
337
338
339
340

Leroux (2002), p. 430.
Skipper (2001b), pp. 45-46
Mattoo (1999), p. 7.
Key (2003), p. 51.
Mattoo (1999), p. 7.
Panourgias (2006), pp. 61-62.
Id. pp. 77-80.
Key (2003), pp. 35-37.
Nicolaidis and Trachtman (2000), pp. 255-256.

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Concerning the anti-avoidance provision, although some interpretations have been
proposed, they are unclear and insufficient. Key noted that a measure could be challenged
under the anti-avoidance provision on the basis that it may be used as a means of avoiding theMember's commitments or obligations under the GATS.341 Specifically, Key suggested thatthe application of a prudential measure inconsistent with GATS provisions and commitments
might be challenged on whether its purpose is really trade restrictive or not.342 This might
imply a necessity criterion for determining the anti-avoidance provision. However, Key gives
no explicit rationale for the adoption of this necessity criterion. Leroux suggests that this antiabuse provision should be understood at minimum as ‘good faith” in adoption and applicationof prudential measures as shown by GATT jurisprudence on Article XX.343 The suggestion of
Leroux is more relevant to good faith in application and performance of the treaty as provided
in Vienna Convention Article 26 with respect to the anti-avoidance provision.344 Alternatively,
Trachtman noted that the words “they shall not be used” suggest intent to escape from GATS
obligations. Therefore, while prudential regulatory needs are a basis for an exception asprovided in the Annex, they may not be “intentionally used” to evade GATS obligations.345 In
other words, WTO Members shall be denied this “prudential exception” where there is an“intent” to avoid commitments on the national treatment principle. However, there is nosuggestion on how to determine such intent.
In short, the literature contains only limited interpretations of this “prudential
exception” in financial services in general and insurance services in particular, as well as inrelation with the national treatment principle. Interpretative issues regarding the “prudential
exception”, more specifically on each of three factors above, remain open. A fundamental
legal point here is whether a measure found inconsistent with GATS obligations, including
the commitments on the national treatment principle, is justified on the grounds of this“prudential exception”. A clear determination of the scope of prudential measures would becritically important for both scheduling commitments on the national treatment principle andexamining whether a measure in question violates GATS obligations or not. The next two
sections shall review the literature on the meaning of “prudential” as well as work of aninternational standard-setting organization in the insurance sector.
1.2 The concept of “prudential” in the insurance sector341

Key (2003), pp. 35-37.
Key, Sydney J. 2005. Financial Services. In Patrick F. J. Macrory, Arthur E. Appleton, and Michael G.
Plummer, eds., The World Trade Organization: Legal, Economic and Political Analysis. New York: Springer(Volume 1), p. 965.
343
Leroux (2002), p. 431.
344
The Appellate Body in US – Shrimp, para. 158, has implicitly recognized the principle of pacta suntservanda, as stipulated in the Vienna Convention, Article 26, in the context of exercising treaty’s rights under
GATT Article XX.
For detailed discussion on the distinction of good faith in treaty application and interpretation in the contextof GATT/WTO, see Waincymer, Jeff. 2002. WTO Litigation: Procedural Aspects of Formal Dispute Settlement.
London: Cameron May, pp. 498-500; see also Cottier, Thomas and Krista N. Schefer. 2000. Good Faith and theProtection of Legitimate Expectations in the WTO. In Marco Bronckers and Reinhard Quick, eds., New
Directions in International Economic Law: Essays in Honour of John H. Jackson. The Hague/London/Boston:
Kluwer Law International, pp. 47-68.
345
Trachtman, Joel P. 1995. Trade in Financial Services under GATS, NAFTA and the EC: A Regulatory
Jurisdiction Analysis. Columbia Journal of Transnational Law 34, pp. 71-72.
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As reviewed in Chapter One, section 1.2, literature agreed that although systemic risk
might occur in the insurance sector, the underlying rationale for insurance regulation isconsumer protection. Concerning the concept of “prudential”, the literature review shows thatprudential concerns are typically a characteristic of the financial sector in general, and theinsurance sector in particular, which address the solvency of insurers per se in order to assure
consumer protection. According to Revell, prudential regulation is concerned with balance
sheet controls to ensure liquidity and solvency.346
More specifically, Spencer observed the prudential concerns in the insurance sector
from the shareholder’s point of view, where prudential regulation is aimed at preventing themanagement from excessive risk-taking in order to ensure that insurers have enough financial
reserves to satisfy potential claims of policyholders and possible losses. In a circumstance
where the insurer is financially troubled, insurance managers might engage in high-risk
activities if there is no preventive regulation and supervision on excessive risk-taking
conducts, since profits from those risky investments could bring the insurer, which is likely tofail, to a better financial position, while any more loss would not make shareholders worse
off.347 Accordingly, properly regulated capital requirements would limit management’s highrisk activities, and ensure that shareholders suffer the cost of losses just as they benefit fromgains.348
Harrington explained from the point of view of consumers that the underlying problem
in information asymmetry, which brings about the case for solvency regulation on non-life
insurers, is the insolvency risk of insurers. Consumers who are uninformed about an insurer’s
financial situation will tend to choose insurers with low prices, unaware that the insurer may
face a high insolvency risk.349 Because of imperfect consumer information, consumers areunable to judge the safety and soundness of financial institutions with which they are
dealing.350 This problem might be more exaggerated when all consumers are uninformed, safe
and sound insurers would be kicked out from the insurance market by financially weak
insurers who charge lower insurance premiums. 351 Solvency regulations are designed toprotect safe and sound insurers against risk from insolvent insurers, and ultimately avoid
losses incurred by policyholders due to the failure of insurers. 352 Regulations, including
reserve regulations, investment restrictions, are designed to prevent insolvency of insurers andexcessively risky investment and property management by insurers.353
Another problem which raises prudential concerns is the case of long-term contracts,
especially in life insurance, since consumers would suffer a high cost in case of failure of
insurers. According to Goodhart et al., even in the absence of any systemic risk, prudential
regulation remains necessary to protect consumers against unsafe and unsound financial
institutions “vis-à-vis consumer protection”, where the consumer may face losses when an
346

Revell, Jack R. S. 1981. The Complementary Nature of Competition and Regulation in the Financial
Sector. In Albert Verheirstraeten, ed., Competition and Regulation in Financial Markets. New York: St. Martin’s
Press, pp. 16-17.
347
Spencer (2000), p. 69.
348
Id.
349
Harrington (1991), p. 240.
350
Goodhart et al. (1998), pp. 13-14.
351
Harrington (1991), p. 240.
352
Id. p. 241.
353
Brannon, Gerard M. 1991. Public Policy and Life Insurance. In Richard W. Kopcke and Richard E.
Randall, eds., The Financial Condition and Regulation of Insurance Companies. Boston: Federal Reserve Bank,
pp. 206-207.

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institution fails.354 As far as the insurance sector is concerned, the value of the contracts to theconsumer is determined by the institution’s behaviour and performance.355 Those prudential
concerns are distinct from systemic consideration, where the latter deals with the safety andsoundness of the entire system. While both prudential and systemic regulations are necessary
to protect consumers and the system, as well as those financing the safety net andcompensation schemes, systemic regulation goes beyond concerns about each individual
financial institution, and extends to the system as a whole. Systemic regulation is necessary
due to the potentially high social costs incurred when a financial institution fails.356
In summary, the literature shows that prudential concerns in the insurance sector are toprotect consumers against failure of insurers. They emphasize the financial situation of
insurance companies, and include regulations on reserves and investment regime. In otherwords, a set of regulations and supervision is designed by government to ensure soundmanagement of insurers with a view to reducing the likelihood of institutional insolvency, andconsequential losses to policyholders. There is a significant difference between prudential
concerns and systemic considerations, whereby the latter address the security and integrity of
the whole financial market, which may be endangered by insolvent insurers.
1.3 The work of the international standard-setting organization
In the financial sector, financial standards are developed by several internationalorganizations, such as the Basel Committee on Banking Supervision, the International
Association of Insurance Supervisors (hereinafter IAIS), and the International Organization of
Securities Commission. International standards for insurance services are designed by the
IAIS, which was established in 1994. The IAIS represents insurance regulators andsupervisors of some 180 jurisdictions in more than 130 countries, as well as more than 80
observers representing industry associations, professional associations, insurers and reinsurers, consultants and international financial institutions. 357 The IAIS was formed topromote cooperation between insurance regulators and supervisors in improved supervision of
the insurance industry on domestic and international levels.358 To do so, the IAIS issues threelayers of norms, namely global insurance principles, standards and guidance papers.
The first layer consists of principles that are fundamental to effective insurance
supervision and identify areas where the insurance supervisors should have authority orcontrol. Those principles form the basis for developing standards and guidelines. There are six
groups of principles with respect to Insurance Core Principles & Methodology, Supervisionof International Insurers and their Cross-border Business Operations, Conduct of Insurance
Business, Supervision of Insurance Activities on the Internet, Capital Adequacy and Solvency,
and Minimum Requirements for Supervision of Re-insurers.359

354

Goodhart et al. (1998), p. 5.
Id. pp. 13-14.
356
Id. p. 5.
357
IAIS. Annual Report 2004-05, September 2005, p. iv.
358
See IAIS website, available at http://www.iaisweb.org – Last visited 22 May 2006.
Other objectives are (i) to promote the development of well-regarded insurance markets, and (ii) tocontribute to global financial stability.
359
Id.
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The second layer includes eleven detailed insurance standards on particular issues,
which describe best or most prudent practices with regard to licensing, on-site inspections,derivatives, asset management, group coordination, exchange of information, evaluation of
the reinsurance cover, supervision of re-insurers, disclosure concerning technical performanceand risks for non-life insurers and re-insurers, fit and proper requirements and assessment for
insurers, and disclosure concerning investment risks and performance for non-life insurers
and re-insurers.360
The third layer under the principles and standards is ten guidance papers, which aredesigned to assist supervisors in effective supervision of insurance markets.361
The most important work of the IAIS that might be relevant to the discussion on themeaning of “prudential” is Principles No. 1, named Insurance Core Principles andMethodology, which set out grounds for developing other principles, standards, andguidelines. 362 There are twenty-eight insurance core principles (hereinafter ICP) covering
seven broad topics serving as a basic benchmark for insurance supervisors in all jurisdictions:
1. Conditions for effective insurance supervision (ICP 1);
2. The supervisory system (ICP 2-5);
3. The supervised entity (ICP 6-10);
4. On-going supervision (ICP 11-17);
5. Prudential requirements (ICP 18-23);
6. Markets and consumers (ICP 24-27); and7. Anti-money laundering, combating the financing of terrorism (ICP 28).
Six core principles, which are classified as “prudential requirements” are risk
assessment and management, insurance activity, liabilities, investments, derivatives andsimilar commitments, and capital adequacy and solvency. Those prudential requirements aredesigned to assure the fulfillment of insurers’ obligations under “all reasonably foreseeable
circumstances”.363
Firstly, insurers are required by the supervisory authority to be able to identify therange of risks that they face and to assess and manage them effectively.364 In addition toreviewing the risk management process exercised by insurers, the supervisory authority isempowered to develop prudential regulations and requirements to contain risks absorbed byinsurers, such as underwriting risks and risks related to evaluation of technical provision,
market risk, operational risk, etc.365
Secondly, the supervisory authority requires insurers to have strategic underwriting
and pricing policies, to establish and maintain an adequate level of premiums. A clear strategy

360

Id.
Id.
362
IAIS. Insurance Core Principles and Methodology, approved in Singapore in 30 October 2003
[hereinafter IAIS (2003)].
363
IAIS (2003), para. 15, p. 32.
364
IAIS (2003), ICP 18 on Risk Assessment and Management, p. 32.
365
Id.
361


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to mitigate and diversify risks that they underwrite, in particular through reinsurance
arrangements is also required.366
Thirdly, insurers are required by the supervisory authority to observe standards forestablishing adequate technical provisions and other liabilities in order to satisfy their
obligations arising out of insurance contracts.367 Moreover, the supervisory authority shall beempowered to assess the adequacy of the technical provisions and to require that theseprovisions be increased if necessary.368
Fourthly, the supervisory authority has the power to regulate standards on investment
activities, which include requirements on investment policy, asset mix, valuation,
diversification, asset-liability matching, and risk management.369
Fifthly, insurers are required to comply with standards on the use of derivatives andsimilar commitments, which address restrictions in their use and disclosure requirements, aswell as internal controls and monitoring of the related positions.370
Lastly, insurers have to comply with the prescribed solvency regime that enables theinsurer to absorb significant unforeseen losses. 371 This solvency regime shall deal withvaluation of liabilities, including technical provisions; quality, liquidity and valuation ofassets; matching of assets and liabilities; suitable forms of capital; and capital adequacy
requirements.372
In addition, under the heading of “markets and consumers”, another four core
principles are developed in order to address issues of market conducts essential forsupervision of the insurance sector, and that may have a “reputation risk” or “prudential”
impact on insurers.373 Thus, these four core principles might indirectly affect the financial
health of insurers.
Firstly, as insurance intermediaries, such as agents and brokers, may serve as animportant interface between consumers and insurers in distributing insurance services, thesupervisory authority shall be empowered to set requirements for the conduct of insuranceintermediaries, which may cover licensing requirements or registration, professional
knowledge and ability, sufficient safeguards, and information disclosure.374
Secondly, insurers and intermediaries, including foreign insurers supplying products
on a cross-border basis, are required to comply with minimum requirements in dealing with
consumers in the consumers’ jurisdiction. 375 This core principle is designed to protect theinterests of consumers and to strengthen their confidence in the insurance market.376

366
367
368
369
370
371
372
373
374
375
376

IAIS (2003), ICP 19 on Insurance Activity, p. 33.
IAIS (2003), ICP 20 on Liabilities, p. 34.
Id.
IAIS (2003), ICP 21 on Investments, p. 35.
IAIS (2003), ICP 22 on Derivatives and Similar Commitments, p. 37.
IAIS (2003), ICP 23 on Capital Adequacy and Solvency, p. 39.
Id.
IAIS (2003), para. 16, p. 40.
IAIS (2003), ICP 24 on Intermediaries, pp. 40-41.
IAIS (2003), ICP 25 on Consumer Protection, p. 41.
Id.

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Thirdly, in order to facilitate transparency and protect the benefit of policyholders,insurers are obliged to disclose relevant information on their business activities and financial
position, as well as the risks to which they are exposed.377
Lastly, to combat fraud in the domestic insurance market, insurers and intermediaries
are required to take the necessary measures to prevent, detect and remedy insurance fraud.378
This core principle is aimed at minimizing and avoiding reputation costs and financial
losses.379
The work of the IAIS in the insurance sector shows two implications for the conceptof “prudential”.
Firstly, prudential concerns address three aspects of the financial health of insurers,
namely liabilities, assets, and investment activities. All six core principles addressing
prudential requirements are aimed at assuring the safety and soundness of insurers, and thenensuring normal operations of insurers, whereby they are able to absorb risks insured andother risks, and to fulfill claims of policyholders. In other words, the term “prudential” as it
applies to the insurance sector represents the concerns regarding financial matters of insurers
in order to assure their solvency.
Secondly, concerns regarding the integrity of the insurance market as well as
promotion of public confidence are relevant to the financial health of insurers. Misconduct of
insurance intermediation might undermine the solvency of insurers and consequently disrupt
the stability of the insurance market as a whole. Any fraud or information asymmetry may
also affect the public confidence in the insurance market, and then the operations of insurers.
2. Interpretative approach to the exception380
2.1 Annex on Financial Services: The prudential exception to national treatment
As described in Chapter One, section 2.2, the inclusion of the Annex reflects the needfor more specific application of GATS to the complicated financial services sector. This
Annex binds all WTO Members since the Annex is an integral part of GATS under Article
XXIX. Paragraph 2(a) of the Annex provides that:
Notwithstanding any other provisions of the Agreement, a Member shall not be prevented
from taking measures for prudential reasons, including for the protection of investors,
depositors, policy holders or persons to whom a fiduciary duty is owed by a financial service
supplier, or to ensure the integrity and stability of the financial system. Where such measures
do not conform with the provisions of the Agreement, they shall not be used as a means of381
avoiding the Member's commitments or obligations under the Agreement.

A legal concern here is whether Annex paragraph 2(a) would constitute an exception
to other obligations under GATS based on prudential reasons. The word “notwithstanding”
appeared in the first sentence of paragraph 2(a) seems to permit Members to deviate from
377
378
379
380
381

IAIS (2003), ICP 26 on Information, Disclosure & Transparency Towards the Market, p. 42.
IAIS (2003), ICP 27 on Fraud, p. 43.
Id.
This section draws from Vu Nhu Thang (2007a), pp. 88-123.
GATS, the Annex, para. 2 (a).

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their GATS obligations and commitments in pursuit of prudential reasons. The Panel in EC –Tariff Preferences has interpreted the ordinary meaning of the word “notwithstanding” as “inspite of, without regard to or prevention by”, which provides an authorization for deviationfrom certain rules establishing obligations. 382 In addition, in US – Shirts and Blouses,
according to the Appellate Body, two criteria must be satisfied in order to determine whether
a rule constitutes an exception, namely (i) it is not a positive rule establishing obligations in
itself, and (ii) it authorizes a limited derogation from obligations under certain other GATT
provisions.383
In terms of the first criterion, other GATS provisions require obligations to be
implemented by WTO Members. For example, as discussed in Chapter Two, the national
treatment principle obviously is a positive rule establishing obligation in GATS, which
requires Members to grant foreign services and service suppliers no less favourable treatment
than they accord to their domestic counterparts. Meanwhile, the first sentence of paragraph2(a) under the Annex does not provide any obligation requiring Members to take prudential
measures. In other words, it is the right of Members to introduce or refrain from introducing
such prudential measures.
With respect to the second criterion, Annex paragraph 2(a) enables WTO Members to
adopt legitimate domestic policy to regulate their financial markets. However, in exercising
this prudential right, the second sentence of paragraph 2(a) under the Annex set out an antiavoidance provision, whereby Members are not allowed to employ this right to “avoid” their
obligations and commitments. In other words, prudential right must not be excercised in amanner of defecting GATS obligations and commitments. Accordingly, Annex paragraph 2(a)would apparently indicate a limited derogation from obligations under other provision of
GATS, including the national treatment principle and national commitments on this principle.
Therefore, based on WTO jurisprudence, Annex paragraph 2(a) probably constitutes
an exception to other GATS provisions, whereby WTO Members may pursue prudential
objectives to regulate their financial systems, including insurance market. The interpretationof Annex paragraph 2(a) as the prudential exception is supported by the Explanatory Note forthe scheduling of initial commitments in trade in services during the Uruguay Round,
whereby prudential measures constitute an exception to GATS, and apply only to the financial
services. 384 This is also confirmed by the following scheduling guidelines for negotiating
future commitments on services, which adopted by the Council for Trade in Services in2001.385

382

Panel Report, European Communities – Conditions for the Granting of Tariff Preferences toDeveloping Countries [hereinafter EC – Tariff Preferences], WT/DS246/R, adopted on 20 April 2004, para. 7.36.
383
Appellate Body Report, United States – Measure Affecting Imports of Woven Wool Shirts and Blouses
from India [hereinafter US – Shirts and Blouses], WT/DS33/AB/R, adopted on 23 May 1997, p. 16.
384
The Appellate Body explicitly regarded this Expanatory Note as “supplementary means” ofinterpretation under Vienna Convention Article 32. See Appellate Body Report, US – Gambling, para. 197.
Under Scheduling of Initial Commitments in Trade in Services, Explanatory Note, GATT Doc. No.
MTN.GNS/W/164, 3 September 1993, para. 13 provides that:…[A]ny prudential measure justifiable under paragraph 2:1 of the Annex on Financial Services
constitutes an exception to the Agreement and should not be scheduled. The prudential measure
exception applies only to financial services as listed in the Annex, and not to other service sectors...
(Emphasis added)
385
Council for Trade in Services. Guidelines for the Scheduling of Specific Commitments under the
General Agreement on Trade in Services (GATS), WTO Doc. No. S/L/92, 28 March 2001, para. 20:

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The application of Annex paragraph 2(a), nevertheless, does not mean an erosion of
the application of other positive rules establishing obligations, including the national
treatment principle. As noted by the Panel in EC – Tariff Preferences, the relationshipbetween exceptions and other provisions establishing obligations is not mutually exclusive.386
This would indicate that Annex paragraph 2(a) and the national treatment principle apply
concurrently to a measure in question, and Annex paragraph 2(a) prevails as far as the conflict
between provisions is concerned.387
An important aspect of the prudential exception is that it is different from Safeguard
for the Balance of Payment in Article XII.388 Although both are exceptions to other provisions
in GATS, 389 and the application of the two measures is not allowed to pursue protective
purpose, 390 there are two major differences between the prudential exception and thesafeguard for balance-of-payment. Firstly, the adoption of restrictions on trade in services forprotecting the balance of payment is conditional on the event of or threat to serious balance of
payment and external financial difficulties.391 When such context lapses, safeguard measures
are not relevant, and those restrictions must be progressively removed.392 In contrast, as an
exception, those prudential measures are adopted regardless of any context and time
restriction. The second significant difference is that while measures falling under Article XII
are subject to consultation, 393 prudential measures are applied without such an obligation.
This means that WTO Members can flexibly adopt and introduce prudential regulations attheir own discretion.
In addition, this prudential exception is also distinguished from Emergency Safeguard
Measures as provided in Article X. Although under GATS Article X:1, multilateralnegotiations on emergency safeguard measures were scheduled to be completed after three
years from the date of entry into force of the WTO Agreement, there has been no agreement…[A]ny prudential measure taken in accordance with paragraph 2(a) of the Annex on Financial
Services constitutes an exception to the Agreement and should not be scheduled. Notwithstanding
any other provisions of the Agreement, a Member shall not be prevented from taking measures forprudential reasons in accordance with paragraph 2(a) of the Annex on Financial Services...
(Emphasis added)
386
Panel Report, EC – Tariff Preferences, para. 7.44.
387
Id. para. 7.45 reads as follows:… [T]aking the example of the relationship between [GATT] Article XX and Article…III…, thejurisprudence demonstrates that the two apply concurrently to a given measure…. [P]anels and theAppellate Body have consistently begun the examination of the consistency of the challenged
measure with Article…III… After finding violations under [that] provision, the panels and theAppellate Body then went on to examine whether the measure could be justified under
Article XX… Accordingly, the relationship between Article XX…, on the one hand, and…Article III…, on the other, is one where both categories of provisions apply concurrently to thesame measure, but where, in the case of conflict between these two categories of provisions,
Article XX… prevails…
388
During the Uruguay Round negotiations, the Malaysian delegation expressed that with regard tobalance-of-payment considerations, measures might also include prudential concerns.
See Note on the Meeting of 13-15 September 1990, Working Group on Financial Services Including
Insurance, GATT Doc. No. MTN.GNS/FIN/3, 16 October 1990, para. 4.
389
Scheduling of Initial Commitments in Trade in Services, Explanatory Note, GATT Doc.
No.MTN.GNS/W/164, 3 September 1993, para. 13.
390
GATS, Art. XII:3.
391
GATS, Art. XII:1.
392
GATS, Art. XII:2 (e).
393
GATS, Art. XII: 4 and 5.

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NATIONAL TREATMENT PRINCIPLE IN GATS:
A Study of Vietnam’s Insurance Services Marketof emergency safeguard measures so far. 394 However, looking at GATT Article XIX on
Emergency Action on Imports of Particular Products, the application of safeguard measures
must be conditional upon: (i) increased quantities in any imported products, (ii) serious injury
to domestic producers, (iii) a “causing or threatening” linkage between (i) and (ii), and (iv) a
limited period of time. 395 Accordingly, emergency safeguard measures are temporary
exceptions, whereas the prudential exception is a permanent exception to generally applicable
rules. 396 Moreover, safeguard measures are contingent upon a particular occurrence or
circumstance.397
2.2 WTO jurisprudence on treaty interpretation
As noted in Chapter Two, section 5.1, panels and the Appellate Body have provided ageneral approach towards interpretation of general exceptions in GATT Article XX andGATS Article XIV. The first case in the WTO invoking GATT Article XX after a measure
being found to be inconsistent with Article III:4 is US – Gasoline.398 Because the Appellate
Body found that the Panel was incorrect when overlooking “a fundamental rule of treaty
interpretation”, it quoted Article 31(1) of the Vienna Convention as a principal approach
towards interpretation of GATT Article XX on General Exceptions. 399 Furthermore,according to the Appellate Body, this general rule of interpretation has attained the status ofcustomary rules of interpretation of public international law in accordance with DSU Article 3(2).400 Article 31 of the Vienna Convention, which sets out the general rule for interpretation,reads that:
1. A treaty shall be interpreted in good faith in accordance with the ordinary meaning to begiven to the terms of the treaty in their context and in the light of its object and purpose.
…
3. There shall be taken into account, together with the context:(a) any subsequent agreement between the parties regarding the interpretation of thetreaty or the application of its provisions;(b) any subsequent practice in the application of the treaty which establishes theagreement of the parties regarding its interpretation;(c) any relevant rules of international law applicable in the relations between theparties.

Therefore, pursuant to Article 31(1) of the Vienna Convention, the general approach tointerpretation of exceptions under GATT Article XX must be that the words of a treaty are to
be given their ordinary meanings in their context and in the light of the treaty’s object and394

This deadline was rescheduled until the conclusion of the Doha round.
See Fifth Decision on Negotiations on Emergency Safeguard Measures adopted by the Council for Trade inServices on 15 March 2004, WTO Doc. No. S/L/159, 17 March 2004.
395
GATT, Art. XIX.
396
See WTO Secretariat. Note on Emergency Safeguard Measures under Article X of GATS, WTO Doc.
No. S/WPGR/W/1, 6 July 1995; Note on Safeguard and Services. GATT Doc. No. MTN.GNS/W/70, 13
September 1989. See also GATS, Art. XII:2 (e).
397
WTO Secretariat. Note on Emergency Safeguard Measures under Article X of GATS, WTO Doc. No.
S/WPGR/W/1, 6 July 1995, para. 5.
398
Appellate Body Report, US – Gasoline.
399
Id. p. 15.
400
Id. p. 16.

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purpose.401 A similar approach has been adopted by the Panel and Appellate Body in US –Gambling in the context of services when interpreting GATS Article XIV.402 As a general ruleof interpretation in the Vienna Convention, interpretation must give meaning and effect to allterms of a treaty.403 The starting point for interpretation of the exception is the dictionary
meaning of the terms concerned.404 Moreover, footnote may add clarification to the dictionary
meaning.405
The next issue is what would constitute “context” and “object and purpose” forinterpretation under Article 31(1) of the Vienna Convention. With regard to the context of
exceptions, the Appellate Body in US – Gasoline further determined the context of GATT
Article XX to include, inter alia, Article III on National Treatment, and conversely thecontext of Article III includes Article XX. 406 In addition, the preamble of the WTO
Agreement was also examined by the Appellate Body as a context for interpretation of theterm “non-discriminatory” in the Enabling Clause (as an exception to GATT Article I:1).407
The scope of “in the light of its object and purpose” has been clarified by theAppellate Body to cover the object and purpose of Article XX per se.408 While the Appellate
Body in US – Shrimp underscored that the Panel was wrong in looking at the object andpurpose of GATT 1994 and the WTO Agreement as a whole, not that of GATT Article XX,409
the Panel in EC – Tariff Preferences noted that object and purpose of GATT 1994 and theWTO Agreement are relevant for interpreting the anti-abuse provision in the exception.410
In addition to the fundamental rule of interpretation set out in Article 31(1), otherrelevant rules of international law, as appropriate, could be employed for interpretation inpursuant with Article 31(3)(c) of the Vienna Convention, including the doctrine of abus dedroit, in order to prohibit abusive exercise of a State’s rights.411
Although the Appellate Body in US – Gasoline did not directly refer to Article 32 of
the Vienna Convention, it asserted that the purpose and object of the chapeau is to prevent“abuse of the exception”, and this finding is supported from the “drafting history of Article
XX”. 412 This interpretative approach would implicitly recall that in examination of themeanings of general exceptions, Article 32 on supplementary means of interpretation of theVienna Convention may be relevant. In the following case, the Appellate Body expressly
401

Id. p. 16; Appellate Body Report, US – Shrimp, para. 114; Appellate Body Report, Korea – Beef, para.

159.
402

Panel Report, US – Gambling, paras. 6.463-470; and AB Report, US – Gambling, para. 299.
Appellate Body Report, US – Gasoline, p. 21. See also Panel Report, US – Gambling, para. 6.462.
404
Appellate Body Report, US – Gasoline, p. 19; Appellate Body Report, Korea – Beef, para. 160; Panel
Report, US – Gambling, paras. 6.463-468.
Dictionaries utilized by Panels and the Appellate Body have included The New Shorter Oxford English
Dictionary (Clarendon Press, 1993), Black’s Law Dictionary (West Publishing, 1995), The Shorter Oxford
Dictionary (2002).
405
Panel Report, US – Gambling, paras. 6.467-468.
406
Appellate Body Report, US – Gasoline, p. 16.
407
Appellate Body Report, EC – Tariff Preferences, para. 246.
408
Appellate Body Report, US – Gasoline, pp. 16-17; Appellate Body Report, Korea – Beef, para. 159;
Panel Report, Canada – Measures Affecting Exports of Unprocessed Herring and Salmon, L/6268 – 35S/98,
adopted on 22 March 1988, para. 4.5.
409
Appellate Body Report, US – Shrimp, para. 116
410
Panel Report, EC – Tariff Preferences, paras. 7.156-158.
411
Appellate Body Report, US – Shrimp, para. 158. Citing to and quoting B. Cheng, General Principles of
Law as applied by International Courts and Tribunal (Stevens and Sons, Ltd., 153), Chapter 4, p. 125.
412
Appellate Body Report, US – Gasoline, p. 20.
403


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referred to Article 32 of the Vienna Convention to confirm the interpretation of the terms,
which are reached by the application of Article 31(1).413 Article 32 of the Vienna Convention
reads:
Recourse may be had to supplementary means of interpretation, including the preparatory
work of the treaty and the circumstances of its conclusion, in order to confirm the meaning
resulting from the application of article 31, or to determine the meaning when theinterpretation according to article 31:(a) leaves the meaning ambiguous or obscure; or(b) leads to a result which is manifestly absurd or unreasonable.

Moreover, the Panel in US – Gambling also referred to examples of Trade Policy
Review of some WTO Members in order to support its interpretation of the term.414 Those
examples are instructive to supplementary means of interpretation,415 and consequently makethe reasoning of panels and the Appellate Body more legitimate.
In summary, under DSU Article 3(2), interpretative rules of public law under Articles
31 and 32 of the Vienna Convention have been incorporated into WTO jurisprudence as
customary rules for interpreting exceptions in WTO agreements, including GATS.
2.3 Applying the interpretative approach to the prudential exception
As described earlier, the general approach adopted in the WTO dispute settlement
towards interpretation of exceptions is the interpretative rules set out by Articles 31 and 32 of
the Vienna Convention. Those rules of interpretation of public law are applicable to the WTO
agreements, including GATS, under DSU Article 3 (2).416 Therefore, it is submitted that thoseinterpretative rules are also applicable to the interpretation of the Annex as well as WTO
Members’ specific commitments regarding financial services, since both of them are an
integral part of GATS, which is a part of covered agreements in DSU. In addition, paragraph
4 of the Annex reads:
4. Dispute Settlement
Panels for disputes on prudential issues and other financial matters shall have the417
necessary expertise relevant to the specific financial service under dispute.

Paragraph 4 implies that disputes on prudential matters, including justification for violation of
any GATS articles based on the prudential exception, shall be subject to the WTO disputesettlement mechanism. In other words, the prudential exception is also governed by DSU
Article 3 (2).
Accordingly, an interpretative approach of the prudential exception must be consistent
with the general approach towards the interpretation of exceptions in GATT and GATS. As
fundamental rules of interpretation, there must be an examination of the ordinary meaning of
the terms “in their context and in the light of the treaty’s object and purpose” under Article 31of the Vienna Convention. The issue of interpretation of the prudential exception in financial
services, including insurance services, however, seems to be vaguer as there are few cases in
413
414
415
416
417

Appellate Body Report, US – Shrimp, para. 157.
Panel Report, US – Gambling, para. 6.471.
Id.
DSU, Appendix 1.
GATS, the Annex, para. 4.

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GATS where decisions have been made, and none of them is related to financial services or toinsurance services in particular. Ortino commented that too narrow an approach as well as
overlooking all relevant elements for general rules of treaty interpretation, would be risky
when assessing the meaning of a treaty provision for the first time.418 Therefore, it may besafe and appropriate to see the object and purpose of GATS and the WTO Agreement for theinterpretation of this prudential exception as complementary to the object and purpose of
Annex paragraph 2(a). Supplementary means of interpretation as provided in Article 32 of theVienna Convention shall be relevant to clarify and confirm the meaning resulting from theapplication of interpretative rules.
3. The prudential exception: Interpretative issues419
The following shall examine the interpretation of the prudential exception in threelayers: (i) the scope of “prudential reasons”, (ii) the relationship between the prudential
objectives and measures, and (iii) the anti-avoidance provision.
3.1 Determining legitimate policy objectives pursued by measures: the scope of “prudential
reasons”
If a discriminatory measure in the insurance services sector, which is found under themeaning of Article XVII, does not fall within the scope of “prudential reasons”, that measure
is not justifiable and will be in violation of the national treatment principle. Therefore, thefirst interpretative layer is required to examine the scope of “prudential reasons” in GATS.
(i) Ordinary meaning
The Annex does not state how measures are determined to be for “prudential reasons”.
Pursuant with Article 31(1) of the Vienna Convention, the general rule for interpretation isthat a treaty shall be interpreted in good faith by starting with the ordinary meaning to begiven to the terms of the treaty, in their context and in the light of its object and purpose.
According to one dictionary, “prudential” (adjective) means:420

Of, involving, or characterized by prudence; exercising prudence, esp. in business affairs.

According to the same dictionary, “prudence” and “prudent” mean:
Prudence (noun): the quality of being prudent.
Prudent (adjective): characterized by or proceeding from care in following the most politic
and profitable course; having or showing sound judgment in practical affairs; circumspect,sensible.

418

Ortino, Federico. 2006. Treaty Interpretation and the WTO Appellate Body Report in US – Gambling:
A Critique. Journal of International Economic Law 9(1), p. 145.
419
This section draws from Vu Nhu Thang (2007a), pp. 88-123.
420
The Shorter Oxford English Dictionary, Fifth Edition, 2002.

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In another dictionary, the word “prudential” denotes something that “of the nature ofprudence”, “characterized by careful deliberation”.421 The dictionary meaning of “prudential”
suggests that a degree of “care” must be an inherent characteristic in pursuing business affairs
in a profitable way. Specifically, a measure that is sought to be justified under the prudential
exception must involve prudence, which is characterized by a degree of care.
The dictionary definition of the word “reasons” that appears to be relevant in thecontext of Annex paragraph 2(a), reads as follow:
A cause of a fact, situation, event, or thing, esp. one adduced as an explanation; cause,422
ground.

Accordingly, “prudential reasons” would mean a degree of care must be paid to certain
situations or facts in conducting business operations. The dictionary definitions, nevertheless,do not resolve two interpretative issues. Firstly, this dictionary definition does not indicate towhich activities or business operations must take care in order to be considered “prudential
reasons”. The range of activities may include from only one type of business activity, such as
investment or financial accounting, to the whole range of business activities, including
marketing, acquisition of goods and services, undertaken by insurance service suppliers inpursuing profits. Secondly, this dictionary definition of “prudential” does not indicate from
whose perspective the “prudential reasons” must be judged. Regulators and supervisors may
have a view about the “prudential reasons” that differs from insurance service suppliers or the
public.
Nevertheless, the term “prudential reasons” can not be read in isolation. Reading in
conjunction with the words that follow this term, Annex paragraph 2(a) provides further
clarification with an illustrative list of “prudential reasons”, namely “the protection of
investors, depositors, policy holders or persons to whom a fiduciary duty is owed by afinancial service supplier” and “to ensure the integrity and stability of the financial system”.
The first part of this illustrative list stated in the Annex is to encompass four categories of
persons to be protected by domestic regulation, namely (i) investors, (ii) depositors, (iii)
policyholders, and (iv) persons to whom a fiduciary duty is owed by a financial service
supplier. As described in Chapter One, section 2.3, financial services addressed by the Annex
cover insurance and insurance-related services, and banking and securities services. Therefore,
this prudential exception deals not only with the insurance sector, but also the banking andsecurities sector. It is arguable that investors are protected by securities regulations anddepositors by banking regulations, while policyholders are protected by insurance regulations.
Moreover, Chapter One, section 1.2 also noted that the rationale for insurance regulations is
consumer protection. In other words, as far as the insurance sector is concerned, the firstexample of the “prudential reasons” means that measures justifiable under the prudential
exception must be designed to protect policyholders.
With regard to the scope of “person to whom a fiduciary duty is owed” by aninsurance service suppliers, according to a dictionary, the word “fiduciary” (adj.) denotes“holding something in trust, acting as trustee”. 423 This dictionary meaning indicates that
insurers, in acting as trustee, are required to take care of money or property given to them by

421
422
423

The Compact Oxford English Dictionary, Second Edition, reprinted 1994.
The Shorter Oxford English Dictionary, Fifth Edition, 2002.
Id.

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other persons, such as consumers, beneficiaries, shareholders. 424 In other words, the term
“fiduciary” would identify the particular business operations important in assessing the“prudential reasons”, i.e., those operations where insurers must take care in managing liability
and capital as well as assets in order to fulfill their obligations towards relevant persons.
Accordingly, those business operations would indicate the financial situation of insurers.
The second part of the illustrative list on “prudential reasons” provided by the Annex
is meant “to ensure the stability and integrity of the financial system”. Those words suggest a
broader consideration for the whole system, rather than the protection of individual persons in
the financial market. In abstract, this “prudential reason” addresses an unchanged andundivided condition in the financial system. The financial system would enjoy a broad
meaning to cover not only insurance market, but also banking and securities market.
Based on the dictionary definitions and taking into account the clarification added by
the drafters of GATS, the ordinary meaning of the term “prudential reasons” probably refers
to financial situations of insurance service suppliers, to which a degree of care must be
extended so that suppliers are able to fulfill their obligations towards policyholders and otherrelevant persons, as well as protecting the stability and integrity of the financial market.
(ii) Ordinary meaning “in the context” and “in the light of the object and purpose of thetreaty”
The ordinary meaning of the word “prudential reasons” must be further explored in thelight of its context as well as object and purpose of the Annex. As described in Chapter One,section 2.2, the negotiating history showed that the inclusion of the Annex into themultilateral framework of GATS reflected the needs of WTO Members in pursuing domestic
policies in this sector while implementing obligations under GATS. In the financial sector,
there is a need to introduce certain sustainable regulatory measures to protect the financial
market and assure the success of its liberalization under GATS framework.425 Consequently,
WTO Members have the right to pursue prudential reasons in regulating the financial services
sector. This result reflected the deep concerns of Members to include the financial services
sector into the multilateral framework, whereby liberalization must aim at the stability of thefinancial system, and the prudential exception should be properly designed to empower
regulatory authorities to protect depositors and the general public.426
424
The New Palgrave Dictionary of Economics and the Law, edited by Peter Newman, Macmillan
Reference Limited, London/New York, 1998, pp 127-132, describes “fiduciary duties” as follow:
fiduciary duties. Fiduciary duties fall into two broad categories: duty of loyalty and duty of care…
The ultimate effect of the law is to provide entrustors with incentives to enter into fiduciary
relationships, by reducing entrustors’ risks and costs of preventing abuse of entrusted power, andensuring quality of fiduciary services… The duty [of loyalty] requires fiduciaries to be honest:
refrain from converting entrusted power to unauthorized uses. [Meanwhile], the duty of carerequires fiduciaries to perform their services with care and skill that can be reasonably expected ofthem in the particular situation…
425
Bagheri, Mahmood and Chizu Nakajama. 2002. Optimal Level of Financial Regulation under the
GATS: A Regulatory Competition and Cooperation Framework for Capital Adequacy and Disclosure ofInformation. Journal of International Economic Law 5(2), p. 517.
426
Statement of the Indonesian delegation, Note on the Meeting of 13-15 September 1990, Working Groupon Financial Services Including Insurance, GATT Doc. No. MTN.GNS/FIN/3, 16 October 1990, para. 6. See
also the argument of Canada, Note on the Meeting of 11-13 June 1990, Working Group on Financial Services


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NATIONAL TREATMENT PRINCIPLE IN GATS:
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Moreover, this provision affords WTO Members certain autonomy to regulate thefinancial services sector.427 It is said that the inclusion of financial services in the frameworkof GATS would be deniable if there was no specific exception for prudential regulation andsupervision.428 While the incorporation of financial services in the multilateral framework is
considered as a major step, the prudential exception is to make this step more feasible andacceptable to domestic regulators.429 Leroux has pointed out that the need for this prudential
exception is based on the justification that trade liberalization in this financial sector would be
unacceptable to any country if it were restrained from adopting and maintaining laws andregulations to protect investors and depositors in its territory. 430 Therefore, while GATS
provides a framework for liberalization of financial services, the object and purpose of theAnnex is to ensure that such liberalization does not adversely affect the interests of domestic
consumers, as well as the security and integrity of the financial system.
Accordingly, “the context” and “the light of object and purpose” of the treaty haveclarified another interpretative issue, that the term “prudential reasons” must be observed andassessed from the point of view of consumers of financial services. A degree of care must be
paid to financial situations concerning management of insurance service suppliers’ liability
and capital, as well as assets during their business operations, to assure that consumers offinancial services are properly protected, and consequently that the integrity and stability of
the whole financial system is maintained.
(iii) Conclusion under Vienna Convention Article 31
The ordinary meaning of “prudential reasons” as it appears in the context and in thelight of object and purpose of the Annex would suggest a certain degree of care must be given
to the financial situations of insurance service suppliers in supplying insurance services withregard to consumer protection and the integrity of the financial system.
(iv) Supplementary means of interpretation
There are at least six sources instructive to interpretation of the term “prudential
reasons”. These sources - the preparatory note, note 1998 by the WTO Secretariat, Trade
Policy Review, scheduling practices of WTO Members, the work of specialized internationalorganizations, and scholarly works - are examined below.
(1) Preparatory note

Including Insurance, GATT Doc. No. MTN.GNS/FIN/1, 5 July 1990, para. 79; and Malaysian delegation on
behalf of the SEACEN, Note on the Meeting of 13-15 September 1990, Working Group on Financial Services
Including Insurance, GATT Doc. No. MTN.GNS/FIN/3, 16 October 1990, para. 4.
427
Jarreau (1999), p. 67.
428
Key, Sydney J. 1999. Trade Liberalization and Prudential Regulation: The International Framework for
Financial Services. International Affairs (Royal Institute of International Affairs 1944-) 75(1), p. 67.
429
Id. p. 73.
430
Leroux (2002), p. 430.

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During the Uruguay Round, the Secretariat prepared several notes as backgroundinformation for contracting parties to GATT negotiating the applicability of the generalframework to different service sectors, including the financial services and insurance services
sector. One concern here is the extent to which notes of the GATT Secretariat are relevant tointerpreting the term “prudential reasons”. In US – Gambling, the Panel found that the
Explanatory Note prepared by the Secretariat for Scheduling of Initial Commitments in Tradein Services constituted a context [of the Members’ specific commitments] within the meaningof Article 31 of the Vienna Convention because this note (i) related to GATS, (ii) formed anagreement among all parties, and (iii) was in connection with the conclusion of GATS.431
However, the Appellate Body held that the Panel erred in categorizing this note as“context” for interpretation, and reasoned that although the note was widely used and relied
upon by Members, it was not obligatory.432 Accordingly, notes of the GATT Secretariat are
observed as “supplementary means of interpretation”.433 In the words of Waincymer, although
the notes have no directly legal effect, they are highly influential in determining what WTO
Members perceived to be the true nature of existing rules.434
In the insurance sector, a note was prepared by the Secretariat to provide information
for negotiators’ discussions on the implications and applicability of concepts, principles andrules of the multilateral framework in the insurance sector. 435 Concerning motivations forgovernment regulations in the sector, this note described that, with a view to protection of
consumers, licenses generally were granted only to insurers who complied with financial
requirements intended to ensure their solvency on both pre and post licensing processes.436
The rationale was to provide insurance companies with sufficient guarantee of their solvency
and business integrity. This implies that the underlying concerns in the insurance sector are
the financial viability of insurers, who supply insurance services to consumers. In addition to
the solvency of insurers, regulations may also address other aspects, such as suitability ofowners and managers, reinsurance arrangements, permitted investments, marketing practices,and the terms of insurance contracts.437 This preparatory work for conclusion of the treaty
would suggest that prudential measures, which are designed to protect consumers, address
financial requirements on sound operations of insurers.
In addition to notes of the Secretariat, the negotiating history on the Annexdemonstrates that there seems to be a consensus among negotiators on the necessity ofprudential measures, which allow government certain flexibility in protecting consumers aswell as the safety and soundness of the financial market.438 Moreover, in the words of the EC
delegation, “any agreement on services would need to respect national laws with respect to431

Panel Report, US – Gambling, paras. 6.77-82.
Appellate Body Report, US – Gambling, para. 204.
433
Id. para. 196.
434
Waincymer (2002), p. 381.
435
Note by the Secretariat. “Trade in Financial Services”. GATT Doc. No. MTN.GNS/W/68, 4 September
1989, para. 55.
436
Id. (Emphasis added)
437
Id.
438
See Note on the Meeting of 11-13 June 1990, Working Group on Financial Services Including
Insurance, GATT Doc. No. MTN.GNS/FIN/1, 5 July 1990, paras. 86-95. See also Note on the Meeting of 18-22
September 1989, the Group of Negotiations on Services, GATT Doc. No. MTN.GNS/25, 23 October 1989, paras.
95-98.
432


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financial services that aimed to ensure the solvency and integrity of the financial system andinstitutions”.439
Accordingly, the preparatory note has clarified that a degree of care must be paid tothe financial situation of service suppliers, and this financial situation is the solvency of
insurers. The solvency of insurers would ultimately ensure the solvency of the whole financial
system, and consequently its integrity and stability. In other words, the term “prudential
reasons” would indicate careful judgment on the solvency of insurers with regard to certain
types of persons and the integrity of the financial system.
(2) Note 1998 by the WTO Secretariat
A substantive discussion on prudential measures was engaged in a Note of the WTO
Secretariat in 1998 with the view of facilitating further understanding among the WTO
Members (hereinafter Note 1998). 440 Note 1998 was delivered after the conclusion of the
Uruguay Round as well as the achievement of an agreement on liberalizing financial services
in 1997.441
However, pursuant to Article IX:2 of the WTO Agreement, only the Ministerial
Conference and the General Council have the exclusive authority to adopt interpretation of the
WTO Agreement. 442 In addition, the Appellate Body in US – Gambling held that two
requirements must be satisfied in order for “subsequent practice” under the meaning of Article
31(3) of the Vienna Convention to be established, namely common and consistent acts or
pronouncements, and an implied agreement on the interpretation resulted from those acts andpronouncements.443 Note 1998 also expressly states that “it is intended to provide backgroundinformation for sectoral [financial services] discussion”.444 Accordingly, Note 1998 could not
be considered “subsequent practice” under the meaning of Article 31 (3) of the Vienna
Convention.
With regard to the meaning of the term “prudential reasons”, unfortunately, Note 1998
focused most attention to the area of banking services, rather than financial services in general
or insurance services in particular.445 Although Note 1998 deals only with banking services
439

Note on the Meeting of 11-13 June 1990, Working Group on Financial Services Including Insurance,
GATT Doc. No. MTN.GNS/FIN/1, 5 July 1990, para. 82 (Emphasis added). See also Mexican delegation:“supervisors had to ensure the solvency and security of the financial system, and the safety of the depositors”,
Note on the Meeting of 10-25 July 1991, Group of Negotiations on Services, GATT Doc. No. MTN.GNS/44, 8
August 1991, para. 21.
440
WTO Secretariat. Background Note on Financial Services, Council for Trade in Services, WTO Doc.
No. S/C/W/72, 2 December 1998, para. 1.
441
The agreement on liberalizing financial services, which was achieved by the end of 1997, shall be
discussed in details in Chapter Four.
442
WTO Agreement, Art. IX:2.
443
Appellate Body Report, US – Gambling, para. 192.
444
WTO Secretariat. Background Note on Financial Services, Council for Trade in Services, WTO Doc.
No. S/C/W/72, 2 December 1998, para. 1.
445
See UNCTAD Secretariat. 2005. Note on Trade and Development Aspects of Insurance Services andRegulatory Frameworks. New York and Geneva: UN, (Document No. UNCTAD/DITC/TNCD/2005/17), pp. 1516 and 19-20.
In contrast to the Note of the WTO Secretariat, a Note by the UNCTAD Secretariat provides an intensive
analysis on the term “prudential reasons”. According to the Note of the UNCTAD Secretariat, prudential
regulations are defined as “measures the compliance of which allows an insurer to continue its operation within agiven market”, which deal with a broad scope of operations of insurer, including consumer protection and

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and does not constitute a “subsequent practice”, several aspects might be useful in examining
the term “prudential reasons”, and thus be relevant for interpretation of this term in insurance
services.
The scope of prudential measures in the banking sector may consist of capital
adequacy ratios, limits on risk concentration and risk management system requirements,
liquidity requirement, prohibitions on insider trading and transactions giving rise to conflictsof interest, rules on the classification of and provisioning for non-performing assets, as well astransparency and disclosure requirements.446 In contrast, non-prudential regulatory measures
may include lending requirements to certain sectors or geographic regions, restrictions on
interest rates or fees and commissions, and requirements to provide certain services.447 The
Secretariat also admitted that there may be different views as to whether certain measures canbe considered prudential, and the line between prudential and non-prudential regulations isblurred.448 Note 1998, therefore, could suggest that prudential measures directly relate to thefinancial soundness of financial service suppliers.
(3) Trade Policy Review
Some examples of WTO Members who have relied on “prudential reasons” in order toexplain their application of regulation of insurance services include Indonesia, Thailand,
China, and Japan. The Trade Policy Review – Indonesia reported that all insurance companies
must be licensed and satisfy certain prudential requirements, such as minimum capitallevels. 449 Moreover, the Indonesian government also improved prudential supervision,
including new regulations requiring insurers to phase in solvency requirements.450 According
to Trade Policy Review – Thailand, the government of Thailand underscores that, in order tofacilitate insurance business operations in Thailand, the government streamlined the licensing

establishment of reasonable solvency standards. The objective of prudential regulation is to ensure the security
and solvency of the market and protect policy holders even if insurers fail. The note also provides a list ofprudential regulations, including adequate entry requirements, capital adequacy and solvency margin; a system
of monitoring operations; technical provisions; and regulations on investments of insurance companies. However,in the context of GATS prudential exception, the Note of UNCTAD Secretariat also recognizes the need forfurther clarification on what exactly the “measures for prudential reasons” are, and the exact nature of measuresthat are provided in the exemplary list of prudential reasons under paragraph 2 of the Annex.
446
WTO Secretariat. Background Note on Financial Services, Council for Trade in Services, WTO Doc.
No. S/C/W/72, 2 December 1998, para. 35.
447
Id, para. 37.
448
Id, footnote 44 reads as follows:
Traditional line-of-business restrictions, such as the segregation of banking, securities andinsurance businesses such as those existing in the US and Japan, have prudential objectives, butthey can be perceived as having non-prudential elements from the point of view of European
countries with a tradition of universal banking. Another example may be portfolio allocation rules
for investments of financial institutions, where a shift appears to be occurring towards the adoptionof prudent-person rules providing flexibility in investment decisions instead of numericalrestrictions traditionally adopted in many European countries. This does not necessarily mean,
however, that the traditional rules are trade restrictions limiting market access or national treatment.
449
WTO. Trade Policy Review – Indonesia, Report by the Secretariat, WT/TPR/S/117, 28 May 2003, para.
82, p. 91.
450
Id. (Emphasis added)

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regime, and reviewed prudential measures, including, security deposit, capital fund, solvency
margin.451
In case of China, the requirements for obtaining a license by foreign insurancecompanies include, inter alia, no less than US$ five billion gross assets at the end of the year
prior to application, adequate solvency by the standards established in the home country, andother prudential conditions such as corporate governance and a good risk management
system.452 Trade Policy Review – Japan specifically noted that prudential requirements underJapan Insurance Business Law include capital requirements and portfolio restrictions.453
Those examples would suggest that the term “prudential” denotes a range of financial
issues aiming at conditions of the solvency applicable to insurers for their business operations
in a given market.
(4) Scheduling practices of WTO Members
Although it is not required that measures falling within the scope of the prudential
exception be inscribed in WTO Members’ schedules of specific commitments,454 the EC andKorea have mentioned the term “prudential” in their schedules.
As noted by the Panel in US – Gambling, other Members’ schedules represent the“context” for the interpretation of the US schedule under Article 31(2) of the Vienna
Convention because all Members’ schedules are an integral part of GATS under Article
XX:3. 455 Moreover, in EC – Customs Classification of Certain Computer Equipment, theAppellate Body reasoned that even though commitments are undertaken by a Member in its
schedule, they constitute a common agreement among all Members.456
However, the Panel in US – Gambling has set out a criterion for relying on a practiceof other Members as a context for interpretation is that such practice must be coherent andconsistent, and consequently, “few examples do not evidence any such practice by
Members”.457 Accordingly, the scheduling practices of two WTO Members referring to theterm “prudential” do not qualify as a “context” for interpretation of the term “prudential
reasons” in GATS. Examples of these commitments, nevertheless, would be instructive ininterpreting the term “prudential reasons”.
In their revised schedule of specific commitments in financial services, the EC noted
that, in case of insurance services, branches of a non-EC financial institution may be required
to meet certain specific prudential requirements, such as specific guarantee and deposit

451

WTO. Trade Policy Review – Thailand, Report by the Government, WT/TPR/G/123, 15 October 2003,
para. 79, p. 16. (Emphasis added)
452
WTO Trade Policy Review – China, Report by the Secretariat, WT/TPR/S/161, 28 February 2006, para.
190, p. 202.
453
WTO. Trade Policy Review – Japan, Report by the Secretariat, WT/TPR/S/32, 5 January 1998, para.
131, p. 137.
454
Scheduling of Initial Commitments in Trade in Services, Explanatory Note, MTN.GNS/W/164, 3
September 1993, para. 13.
455
Panel Report, US – Gambling, para. 6.97.
456
Appellate Body Report, European Communities – Customs Classification of Certain Computer
Equipment, WT/DS62/AB/R, WT/DS67/AB/R, WT/DS68/AB/R, adopted 22 June 1998, para. 109.
457
Panel Report, US – Gambling, para. 6.98.

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requirements, a separate capitalization, technical reserves and other solvency requirements.458
In addition to the EC, another WTO Member who refers to the term “prudential” in its
schedule is Korea. In its financial services sector-horizontal commitments, Korea understands
that prudential measures include the minimum capital requirement or minimum operating
funds requirement. 459 Thus, these examples support the claim that prudential requirements
address the solvency situation of insurance service suppliers.
(5) Possibility of reference to the work of specialized international organizations
In several cases, panels and the Appellate Body have examined meanings of the terms
by referring to the work of international organizations specializing in the matter of dispute. In
Dominican Republic – Cigarettes, the Panel requested information from the International
Monetary Fund on exchange control and found that the foreign exchange fee measure appliedby the Dominican Republic does not constitute an “exchange restriction” under the meaningof GATT Article XV:9(a).460 In another case, EC – Poultry, the Appellate Body found themeaning of the term “c.i.f. import price” in customary usage in international trade under
Article 5.1(b) of the Agreement on Agriculture by reference to Incoterms 1990 of theInternational Chamber of Commerce.461
In case of services, panels for disputes regarding sectoral matters shall have thenecessary expertise relevant to the specific services sectors in disputes. 462 Particularly, infinancial services, including insurance services, according to Zdouc, the word “specific” inparagraph 4 of the Annex would mean that panelists should have appropriate expertise in
prudential and other financial matters when a financial service is involved in a dispute.463 In
other words, this paragraph suggests that prudential issues must be interpreted in light of thespecific financial service under dispute. To be more specific, if it is an insurance service, it
must be interpreted in the light of the insurance sector, not banking sector, and as understoodby an expert of the insurance services under dispute. This obligation expressly indicates that it
was a strong intent of negotiators when liberalizing financial services including insurance
services in the multilateral framework, that the interpretation of the term “prudential reasons”
should be referred to the work of insurance experts. As mentioned earlier in section 1.3 of thischapter, at the international level, insurance standards are developed by the IAIS. Therefore, it
is submitted that information from the IAIS should be taken into consideration in the panel
procedure on insurance matters, and this might make panel reports more predictable andlegitimate.
The reference to the work of the IAIS to clarify the meaning of the term “prudential
reasons” could also be supported by the heading of Annex paragraph 2(a), which indicates“domestic regulation”. A broader scope of domestic regulation is governed by Article VI,
which provides that consideration shall be paid to international standards of relevant458

EC – Schedule of Specific Commitments, GATS/SC/31/Suppl.4/Rev.1, 18 November 1999, footnote 1,

p. 2.
459

Republic of Korea – Revised Schedule of Specific Commitments in Financial Services,
GATS/SC/48/Suppl.3/Rev.1, 18 November 1999, p. 2.
460
Panel Report, Dominican Republic – Cigarettes, paras. 7.142-145.
461
Appellate Body Report, EC – Poultry, para. 146.
462
Decision on Certain Dispute Settlement Procedures for the General Agreement on Trade in Services,
para. 4.
463
Zdouc, Werner. 1999. WTO Dispute Settlement Practice Relating to the GATS. Journal ofInternational Economic Law 2(2), p. 311.

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international organizations.464 Moreover, the WTO Agreement calls for making appropriatearrangements for consultation and cooperation with other organizations concerned withmatters related to those of the WTO,465 it is submitted that the works of the IAIS relating toprudential issues should be integrated into this consultation and cooperation.466 The WTO
Agreement also calls for cooperation between the WTO and the World Bank and International
Monetary Fund.467 For their part, the World Bank and International Monetary Fund clearly
list standards, codes, and principles useful for both organizations in conducting operational
works and producing reports on the observation of those standards and codes, including
insurance supervisory principles developed by the IAIS.468
Accordingly, the work of the IAIS, as described earlier, has confirmed the meaning of
the term “prudential reasons” as financial situations of insurers in order to ensure theirsolvency. In a nutshell, prudential concerns address three financial aspects, namely liabilities,
assets and investment activities of insurers. The solvency of insurers, consequently, would
ensure the integrity of the insurance market.
(6) Scholarly works
Other possible sources for clarifying this term might be scholarly works. Waincymer
pointed out that, compared to GATT 1947, there is a greater degree of reference to scholarly
writings in WTO panel reports, although the degree is still limited.469 As described in section
1.2 of this chapter, literature review shows that prudential concerns in the insurance sector
refer to the state of solvency of insurers. The rationale for those concerns is consumer
protection.
In sum, it is unclear to what extent and how these six sources are treated as
supplementary means of interpretation under Article 32 of the Vienna Convention.
Nevertheless, they may be influential in clarifying the term “prudential reasons”, andconsequently, they could make reasoning of panels and the Appellate Body more legitimate.
These instructive sources have clarified that the term “prudential reasons” would indicate a
careful judgment on the solvency of insurance service suppliers. This solvency would
ultimately ensure the integrity and stability of the whole financial system, and consequently
consumer protection.
(v) Is a narrower or broader interpretation of the term “prudential reasons” acceptable?
464

GATS, Art. VI:5 (b).
WTO Agreement, Art. V.
466
The works of the IAIS relating to prudential issues have been proposed as information sharing
mechanism for on-going discussion and consultation in order to provide clearer understanding on the term“prudential reasons” among WTO Members. The Committee on Trade in Financial Services has agreed to carryout informal future discussions, but not the official proceedings of the Committee, with three international
standards-setting organizations, including the IAIS. Actually, a seminar was held in October 2001 to inform
Members about activities conducted by those three organizations.
See Committee on Trade in Financial Services, Report to the Council for Trade in Services, WTO Doc. No.
S/FIN/6, 3 October 2001, para. 4; see also Committee on Trade in Financial Services, Report of the Meeting
held on 19 September 2005, WTO Doc. No. S/FIN/M/50, 23 September 2005, para. 70.
467
WTO Agreement, Art. III:5.
468
See www.imf.org/external/standards/scnew.htm – Last visited 22 May 2006.
469
Waincymer (2002), p. 384.
465


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The challenge of interpreting the term “prudential reasons” is that it must be broad
enough for prudential objectives, but not too broad to undermine the purpose of GATS.470
Specifically, in the words of Panourgias, if the term is broadly interpreted “to include any
measure with a prudential function, this could cancel most of the trade commitments”.471 As
pointed out earlier, the meaning of this term, based on WTO jurisprudence of treaty
interpretation, would center on solvency requirements with regard to insurers, which address
three aspects, namely liabilities, assets, and investment of insurance companies. This
interpretation could ensure a balance between liberalization and the right of WTO Members toregulate their insurance sectors for prudential reasons, and be consistent with the light of theobject and purpose of GATS.
In dispute settlement, however, panels and the Appellate Body may adopt broader or
narrower meanings of the term “prudential reasons”. The meaning could be broadly adopted
to cover not only solvency requirements but also, among other things, the right of WTO
Members to control rate regulations. For example, government could set up a minimum rate
and premiums applied to each category of insurance services, based on the assumption thatpremium regulations could also reduce insolvency risk of the insurer, and then protect
policyholders. In other words, government would control and monitor the prices that
insurance companies charge for assuming risks covered under an insurance policy.
In response to this broader interpretation of the term “prudential reasons”, in acompetitive insurance market, insurance companies, based on their assessment of risks
assumed, should determine rates and premiums.472 Government interference into this pricing
consideration would harm some policyholders due to high premiums charged on low risks. On
the other hand, some other consumers would benefit from low premiums on their high risks.
Accordingly, it is submitted that these regulations would not relate to consumer protection.
Moreover, these regulations would also distort a competitive financial system, rather
than ensure its stability. This broader interpretation would suggest a protection of the financial
industry. If “all” measures in the insurance sector were deemed prudential, the term“prudential reasons” would become abusive. Broader interpretation of the term “prudential
reasons” would undermine commitments of WTO Members, and then would reduce thepredictability of the multilateral trading system. Thus, it would impair the balance between
liberalization under the multilateral trading system and the right of WTO Members to pursue
prudential purpose; disrupting this balance probably contradicts the intent of GATS
negotiators.
In an opposite scenario, a narrower meaning of the term could be adopted in disputesettlement to exclude, for example, investment regulations. It would be arguable that aprohibition on insurers investing abroad is a trade restrictive measure rather than a prudential
regulation.473 However, the main purpose of an investment program is to ensure security of
470

UNCTAD Secretariat (2005), p. 20.
Panourgias (2006), p. 79.
472
Outreville (1998), pp. 147-151; Harrington (1991), p. 251.
473
See Committee on Trade in Financial Services, Report of the Meeting held on 23 November 2004,
WTO Doc. No. S/FIN/M/47, 26 November 2004, para. 60.
For example, under Article 6 of China’s Provisional Measures on the Administration of the Oversea
Utilization of Insurance Foreign Exchange Funds, China Insurance Regulatory Commission provides a thresholdof Yuan 5 billion for insurance companies to be able to invest oversea. According to the representative of China,
this requirement is based on prudential consideration (9 August 2004) (China).
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capital. 474 Too risky assets would cause financial losses to insurers, and then make them
unable to pay claims and benefits to policyholders. Consequently, the fiduciary duty of theinsurance company with regard to policyholders would not be fulfilled. The inability of theinsurer to pay claims and benefits to policyholders could also lead to instability of theinsurance market, and then financial system. Furthermore, too narrow interpretation of theterm would reduce the flexibility of WTO Members, and impinge on the right of government
to take prudential measures.
Examination of the term “prudential reasons” would be incomplete without somethoughts being given to the context of development of current negotiations. As commented by
Leroux, the concept of prudential reasons is not “frozen”, but rather it may evolve partly
based on practice of WTO Members as well as international standards. 475 The balance
between rights and obligations of WTO Members in engaging into trade in services in general
has been asserted in the Ministerial Declaration of the Doha Round:
We reaffirm the right of Members under the GATS to regulate, and to introduce new476
regulations on, the supply of services.

Since then, a series of intensive discussions were centered on the relation between the
Annex and international standards on financial services in general and insurance services inparticular. While recognizing the importance of liberalization of financial services, including
insurance services under GATS, WTO Members continue to underline their ability to takemeasures for prudential reasons as provided in the Annex, and this balance should bemaintained.477
Therefore, either broader or narrower interpretation of the term “prudential reasons”
would lead to an imbalance between two objectives, liberalization of insurance services underthe multilateral trading system, on the one hand, and the right of WTO Members to pursue
prudential measures in this sector, on the other hand.
(vi) Overall conclusion on the meaning of the term “prudential reasons”
In the context of the Annex, the term “prudential reasons” would refer to the financial
situation of insurance service suppliers to preserve their solvency. In turn, this solvency
would ensure the interests of policyholders and other relevant persons, and also contribute to
the stability and integrity of the whole financial system. Accordingly, a measure justified
under prudential reasons must show a degree of care for the solvency on the part of insurance
service suppliers in particular, as well as the solvency of the financial system in general.

474

Outreville (1998), pp. 247-248.
Leroux (2002), p. 430. See also US – Shrimp, paras. 129-130, whereby Appellate Body reasoned thatthe term “exhaustible natural resources” must be read in the light of “contemporary concerns of the community
nations” and not “static” but “by definition, evolutionary”.
476
Ministerial Declaration, Doha 9-14 November 2001, WTO Doc. No. WT/MIN(01)/DEC/1, 20
November 2001, para. 7.
477
Communication from Canada, WTO Doc. No. S/CSS/W/50, 14 March 2001, para. 5; Communicationfrom Switzerland, WTO Doc. No. S/CSS/W/71, 4 May 2001, para. 18; statement of Japan in Committee on
Trade in Financial Services, Report of the Meeting held on 23 March 2004, WTO Doc. No. S/FIN/M/44, 21
April 2004, para. 49.
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3.2 Identifying the connection between the prudential reasons and measures: “for”
When the scope of “prudential reasons” is defined and a measure found discriminatory
under GATS Article XVII falls within this scope, the second layer for interpretation of theprudential exception is whether a measure is taken “for” those prudential reasons. This layer
shall determine the relationship between the general structure and design of the measure inquestion, and government policy that it purports to serve, namely the prudential reasons.
(i) Is the “necessity” test appropriate?
One interpretation proposed by Mattoo is that measures which are not moreburdensome than necessary to ensure the solvency and the healthy operations of financial
institutions shall be qualified for prudential reasons. 478 In other words, measures are
permissible only if they are “necessary” to achieve prudential objectives. 479 Indeed, theproposal of Mattoo originates from GATS Article VI:4, which is partly read as follows:
With a view to ensuring that measures relating to qualification requirements and procedures,
technical standards and licensing requirements do not constitute unnecessary barriers to trade
in services… Such disciplines shall aim to ensure that such requirements are, inter alia:…
(b) not more burden some than necessary to ensure the quality of the service;…

GATS Article VI:4 is a call for removal of certain trade restrictive measures overlicensing, technical standards and qualifications adopted by WTO Members. Specifically, inthe field of accounting services, Members are required to “ensure that such measures are notmore trade-restrictive than necessary to fulfill a legitimate objective.”480 Mattoo’s suggestion,
therefore, seems to contain a necessity test in the form of an obligation. In contrast, as
discussed earlier, Annex paragraph 2(a) is an exception, not a positive rule establishingobligation.
Chapter Two, section 5.2 has described the requirement of the necessity test, in theform of exception, which is developed by GATT/WTO jurisprudence. 481 In a nutshell, a

478

Mattoo (1999), p. 7.
See Mattoo, Aaditya. 2000. Financial Services and the WTO: Liberalization Commitments of theDeveloping and Transitional Economies. The World Economy 23(3), p. 254.
However, in a following article, Mattoo (2000) seems to withdraw his proposal when specifying that “Thislanguage [of paragraph 2(a)] differs from … that in Article XIV dealing with General Exceptions in that is does
not require that the measures be necessary to achieve the stated objectives.” (Original emphasis)480
Council for Trade in Services, “Disciplines on Domestic Regulation in the Accountancy Sector”, WTO
Doc. No. S/L/64, 17 December 1998, para. 2.
481
See Neumann, Jan and Elisabeth Turk. 2003. Necessity Revisited: Proportionality in World Trade
Organization Law After Korea-Beef, EC-Asbestos and EC-Sardines. Journal of World Trade 37(1), pp. 203-204
and 210-213. See also Desmedt, Axel. 2001. Proportionality in WTO Law. Journal of International Economic
Law 4(3), pp. 463-470.
The necessity test under WTO jurisprudence is different to the proportionality test, for example, of theEuropean Court of Justice. The proportionality test consists of three elements: (i) the measure must be effective
or capable to foster the realization of the policy objectives; (ii) there is no other alternative measure available
that would reach the legitimate objective just as effectively, but in a less trade-restrictive way; and (iii) whether
the restriction on trade is out of proportion to the benefit arising from the protection of the legitimate value,
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discriminatory measure is found “necessary” under the context of GATT Article XX andGATS Article XIV only if there were no alternative measures consistent or less inconsistent
with GATT and GATS, which a WTO Member could reasonably be expected to employ topursue its national policy objectives. This requires considering whether any less trade
restrictive measure could fulfill the same policy goals.
In response to Mattoo’s proposal of equating the word “for” with the necessity test,
according to other scholars, prudential measures must be subject to a different test because allmeasures, not only those deemed necessary, would be permitted.482 This would imply that any
measure that pursues prudential reasons, regardless of necessity, is justifiable in the context of
the Annex. In addition, the proposal on the necessity test to interpret the prudential exception
seems not to be supported in negotiating history. During the negotiations of Annex paragraph2(a), several negotiators employed the word “necessary” when discussing the prudential
requirements in the field of financial services.483 However, as the word “necessary” did notappear in the final text of paragraph 2(a), it probably suggests that negotiators did not intend anecessity test to be within the context of prudential exception.
(ii) An alternative interpretation by reference to “relating to”
The dictionary definition of the word “for”, in accordance with the general approach
to interpretation of exceptions, denotes a range of degree of “purpose”, “result”, or“destination”. 484 This definition of the word “for” implies the existence of a connection
between the measure at issue and prudential reasons. The context where this word appears in
Annex paragraph 2(a) shows that the word “for” should be read in conjunction with“prudential reasons”. According to the same dictionary, the word “for” is defined as follows:which the measure aims to pursue. However, the proportionality test has not yet been recognized under WTO
jurisprudence.
482
Key (2005), p. 965; Dobson and Jacquet (1998), pp. 76-77
483
For example, Canada and the United States.
See Note on the Meeting of 11-13 June 1990, Working Group on Financial Services Including Insurance,
GATT Doc. No. MTN.GNS/FIN/1, 5 July 1990, para. 86. See also Note on the Meeting of 18-22 September
1989, GATT Doc. No. MTN.GNS/25, 23 October 1989, para. 241; Note on the Meeting of 10-25 July 1991,
Group of Negotiations on Services, GATT Doc. No. MTN.GNS/44, 8 August 1991, para. 20.
The term “prudential” at first was used in the context of the National Treatment principle, whereby the US
proposed that:
Whenever market access has been achieved by as service provider of another Party with respect toprovision of a service, each Party shall accord national treatment to that service provider withrespect to provision of that service.
[However,] the treatment of a Party accords to service providers of another Party may different
from the treatment the Party accords its own persons provided that:- the difference in treatment is no greater than that necessary for prudential, fiduciary, or healthand safety reasons; and- such different treatment is equivalent in effect to the treatment accorded by the Party to its own
persons in like circumstances. (Emphasis added)
See Note by the Secretariat, Material to be Considered with a View to Fulfilling the Mandate Given to the
GNS in paragraph 11 of the Montreal Declaration (MTN.TNC/11), GATT Doc. No. MTN.GNS/W/90, 18
December 1989, pp. 11-15.
484
The Shorter Oxford English Dictionary, Fifth Edition, 2002.

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Following a verb, adjective, or noun of quality denoting suitability, appropriateness,
appointment, purpose, or design; following a noun or as a predicate indicating the possession
485
of such a quality.

This definition suggests that there must be a degree of causal connection between the means
and the ends, or a measure in question must be designed to pursue the policy purpose that themeasure serves. It means that the measure is intended for or aimed at prudential reasons.
Specifically, the inconsistent measure in question must result from the pursuit of prudential
reasons in the insurance sector, and for their part, prudential concerns ultimately require theexistence of such a measure. Moreover, this causal connection must show a degree ofsuitability or appropriateness between the measure and policy objectives. In other words, thedegree of causal connection between the inconsistent measure at issue and prudential reasonsmust be direct and substantial. Accordingly, the dictionary meaning of the term “for”
indicates that while all measures may be aimed at prudential reasons, only measures that aresuitable and appropriate are qualified.
The word “for” must also be interpreted in its “context and object and purpose of thetreaty” pursuant to Article 31(1) of the Vienna Convention. As noted earlier, the object andpurpose of the Annex is to guarantee liberalization in financial services without prejudice toconsumer protection and the integrity of financial markets. Furthermore, the preamble of
GATS stipulates the right of Members to regulate and introduce new regulations for the
supply of services to pursue their legitimate policy objectives. The exercise of the right tointroduce prudential regulations by WTO Members, nevertheless, must not damage the object
and purpose of the multilateral trading system. While an expansive reading of the words "forprudential reasons" may seriously undermine other obligations, including the national
treatment principle, a too narrow interpretation may diminish the right of WTO Members toregulate their financial markets in general and the insurance sector in particular. Accordingly,
the context and purpose of the treaty is meant to ensure that obligations under GATS do notjeopardize WTO Members’ rights to design measures intended for prudential purposes.
Nicolaidis and Trachtman, as noted earlier, have proposed an interpretation analogous
to GATT Article XX(g), whereby in order for a measure to be considered as a prudential
exception, it would need to be “primarily aimed at” prudential regulation. 486 In WTO
jurisprudence, a discriminatory measure is proved as “relating to” only when it must be“primarily aimed at” the conservation of an exhaustible natural resource.487 To be qualified
for the “primarily aimed at” test, there must be a “substantial” or “close and real” connection
between measures at dispute and the prudential reasons, and this connection is revealed byexamining the general structure and design of the measures, as well as their legislative policy
objectives. 488 The proposal of Nicolaidis and Trachtman is consistent with the ordinary
meaning of the word “for” in its “context and purpose of the treaty” as described above.
Measures which are justifiable by Annex paragraph 2(a), therefore, must be “primarily aimedat” prudential reasons.
3.3 Applying the anti-avoidance provision
485
486
487

Id.
Nicolaidis and Trachtman (2000), pp. 255-256.
Appellate Body Report, US – Gasoline, pp. 17-18; Appellate Body Report, US – Shrimp, paras. 137-

141.
488

Appellate Body Report, US – Gasoline, p. 18; Appellate Body Report, US – Shrimp, para. 141.

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When a measure is found to be “primarily aimed at” the solvency of insurance service
suppliers and the financial system, a third layer must be examined. This third layer
investigates whether the application of that measure satisfies requirements under the second
sentence of paragraph 2(a) of the Annex.
The dictionary meaning of the word “avoid” (verb) is “to keep (away) from, refrain
from, or escape”.489 The word “use” is defined as “make use (a thing), esp. for a particular end
or purpose”, and the word “means in pl. (usu. treated as single)” denotes “an instrument,
agency, method, or course of actions, by which some object is or may be attained, or someresult is or may be brought about”.490 In conjunction, these dictionary meanings suggest an
intent of WTO Members to escape their obligations and commitments while applying
prudential measures. This definition would indicate that the prudential exception must not beapplied in a way to restrict trade in insurance services under the multilateral framework. In
other words, there is no protectionist intent in the application of measures designed for
prudential reasons. While WTO Members have the right to regulate and introduce new
regulations in the insurance sector, they must not escape their obligations and commitments
under GATS. More specifically, the core requirement of the anti-avoidance provision as
stated in the second sentence of paragraph 2(a) of the Annex is to prevent regulatory abuse by
WTO Members in exercise of the prudential measures. This interpretation is supported by thenegotiating history, whereby negotiators have been expressly concerned about the possibilityof abusing the prudential exception.491
On the other hand, as described earlier, the interpretation of the chapeau of GATT
Article XX and GATS Article XIV has been developed by panels and the Appellate Body.
According to the Appellate Body, the ultimate object and purpose of the chapeau of GATT
Article XX is to prevent “abuse or illegitimate use of the exceptions”.492 The Appellate Body
in US – Shrimp noted that an abusive exercise by a Member of its own treaty right will giverise to both a breach of the treaty rights of the other Members and a violation of the treaty
obligation of that Member. 493 In case of services, WTO jurisprudence in interpretation of
GATT Article XX has been incorporated into interpretation of the chapeau of GATS Article
XIV due to the textual similarities between GATT Article XX and GATS Article XIV.494 It
means that the chapeau aims to ensure that the exceptions of GATS Article XIV are notabused, and the manner that measure in question is applied could be identified by threestandards, namely arbitrary discrimination, unjustifiable discrimination and disguised
restriction on trade.

489

The Shorter Oxford English Dictionary, Fifth Edition, 2002.
Id.
491
See Note on the Meeting of 17-27 September 1991, Group of Negotiations on Services, GATT Doc. No.
MTN.GNS/45, 18 October 1991, para. 14 (for Malaysian delegation and SEACEN). See also Note on the
Meeting of 11-13 June 1990, Working Group on Financial Services Including Insurance, GATT Doc. No.
MTN.GNS/FIN/1, 5 July 1990, paras. 79 and 88 (for Canada and South Africa, respectively); Note on the
Meeting of 13-15 September 1990, Working Group on Financial Services Including Insurance, GATT Doc. No.
MTN.GNS/FIN/3, 16 October 1990, para. 12.
492
Appellate Body Report, US – Shrimp, para. 116; and Appellate Body Report, US – Gasoline, pp. 20 and
23.
493
Appellate Body Report, US – Shrimp, para. 158.
494
Panel Report, US – Gambling, paras. 6.571 and 6.581.
490


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Nevertheless, in the words of the Panel in US – Gambling, there is an overlapping area
between "arbitrary or unjustifiable discrimination" and "disguised restriction on trade"because disguised restrictions may cover disguised discrimination and other restrictions whichconstitute arbitrary or unjustifiable discrimination in international trade. 495 With regard to
disguised restrictions, the Panel in EC – Asbestos noted that this term indicates an intention toconceal the pursuit of trade-restrictive objectives.496
Because of a similarity between the purpose of the anti-avoidance in Annex paragraph2(a) and that of the chapeau of GATS Article XIV, there is a possibility that case law on theanti-avoidance provision in Annex paragraph 2(a) would rely on WTO jurisprudence
developed by case law on the chapeau of GATS Article XIV in order to appraise the intent of
avoiding obligations and commitments under the prudential exception.497 In addition, during
the negotiations of GATS, several delegations suggested a phrase analogous to the chapeau of
GATT Article XX to prevent the abuse of prudential exception, whereby a Member must beable to regulate any necessary prudential measure so long as those prudential measures were“not arbitrary, unjustifiable, or discriminatory”.498 Therefore, it is arguable that in order for ameasure pursuing prudential reasons to satisfy the anti-avoidance provision, the application ofthat measure must not constitute a disguised restriction. In other words, the protectionist
intent of a WTO Member could be found by examining whether or not the application ofprudential measures constitutes a disguised restriction on trade in insurance services, and thenqualifies for the prudential exception.
Under WTO jurisprudence, different indicators have been developed to examine
disguised restrictions on trade, including “foreseen burden as a result of”,499 and “the rigidity
and inflexibility”, 500 “the consistency”, 501 of application of the measure. Moreover, theinterpretation of the chapeau of GATT Article XX by the Appellate Body in both US –Gasoline and US – Shrimp indicates that the necessity criterion could be another indicator for
examining the application of measures at dispute.502 It means that the application of these495

Id. para. 6.580. The same reasoning is found in Appellate Body Report, US – Gasoline, p. 23 that“disguised restriction… may properly be read as embracing restrictions amounting to arbitrary or unjustifiable
discrimination in international trade taken under the guise of a measure formally within the terms of an exception
listed in Article XX.”
496
Panel Report, EC – Asbestos, para. 8.236.
497
Leroux (2002), p. 431, proposed that the comments of the Appellate Body in US – Shrimp on thechapeau of GATT Article XX could be instructive to this anti-avoidance in prudential exception.
498
For example the US and Canada.
See Note on the Meeting of 10-25 July 1991, Group of Negotiations on Services, GATT Doc. No.
MTN.GNS/44, 8 August 1991, para. 20. See also Note on the Meeting of 18-22 September 1989, Group of
Negotiations on Services, GATT Doc. No. MTN.GNS/25, 23 October 1989, para. 241.
499
Appellate Body Report, US – Gasoline, p. 27.
500
A criterion for determining the unjustifiable and arbitrary character of discrimination is the rigidity andinflexibility of application of the measure, i.e. Sec. 609, which led to the legal effect that the United States
authority granted or refused other Members the right to export shrimp to the United States.
See Appellate Body Report, US – Shrimp, paras. 163-164 and 177. See also Appellate Body Report, US –Shrimp: Recourse to Article 21.5 of the DSU by Malaysia, para. 144.
501
In considering whether the United States discriminatory measures qualify for three standards of thechapeau, the Panel concluded that the application of the measures in dispute on prohibiting the remote supply ofgambling and betting services, is not in a consistent manner between those supplied domestically and those thatare supplied from other Members through cross-border transactions, and the Appellate Body upheld thisconsistency assessment.
See Panel Report, US – Gambling, para. 6.607; and Appellate Body Report, US – Gambling, para. 351.
502
Neumann and Turk (2003), pp. 228-230.

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prudential measures should not be more trade-restrictive than necessary to pursue prudential
reasons.503
Another context of Annex paragraph 2(a) guaranteeing this anti-avoidance provision isfound in Article VI:1 because the title of both Annex paragraph 2(a) and Article VI is“Domestic Regulation”. Measures of general application affecting trade in services must be“administered in a reasonable, objective, and impartial manner”. 504 This broad scope ofmeasures also covers prudential measures affecting trade in insurance services. It is arguablethat the application of measures for prudential reasons must not be contrary to the spirit andthe letter of fundamental requirements under Article VI. 505 In other words, although
prudential measures may not constitute a disguised restriction on trade in insurance services,
those measures and the use of those measures must also satisfy the requirements of GATS
Article VI:1. Moreover, it may be useful to recall the object and purpose of GATS requiringtransparency under the multilateral system on trade in services, which would be guaranteed by
an appropriate exercise of the right under the prudential exception. The requirement oftransparency would be guaranteed by an appropriate exercise of the right of WTO Members
under the prudential exception. 506 Accordingly, it is submitted that those requirements oftransparency, reasonableness, objectiveness and impartial manner would constitute one of thecriteria for determining the “avoiding” character for application of inconsistent measures.
3.4 Burden of proof
As observed by Pauwelyn, GATT/WTO practice has established the rule that the party
which invokes an exception or defense must prove it.507 The Appellate Body in US – Shirts
and Blouses specified that “the burden of proof rests upon the party, whether complaining or
defending, who asserts the affirmative of a particular claim or defense.”508 The Appellate
Body also stated that:
We acknowledge that several … panels have required such proof of a party invoking a defense,such as those found in Article XX …, to a claim of violation of a GATT obligation… Article
XX … [is] limited exceptions from obligations under certain other provision of the GATT1994, not positive rules establishing obligations in themselves. They are in nature of503
This necessity criterion is different to the necessity test, which examines the connection between
measures at issue and policy objectives as provided under GATT Article XX and GATS Article XIV. On the one
hand, policy objectives of measures are examined in the first and second layers, i.e. whether such measures arenecessary to pursue specific policy goals. On the other hand, as the anti-avoidance provision puts an obligation
on WTO Members to not abuse such prudential rights, the necessity criterion in the third layer examines thedegree and scope of the application of such measures.
504
GATS, Art. VI:1.
505
In the context of GATT Article XX, the Appellate Body in US – Shrimp, para. 183, held that GATT
Article X:3 [Publication and Administration of Trade Regulations] establishes certain minimum standards fortransparency and procedural fairness in the administration of trade regulations.
506
During negotiations on applying the national treatment principle to the financial services sector and theprudential exceptions, for example, the delegation from Mexico noted that the national treatment should allow
for prudential regulations, and for their part, those prudential regulations must be applied in a transparent manner.
See Note on the Meeting of 11-13 June 1990, Working Group on Financial Services Including Insurance,
GATT Doc. No. MTN.GNS/FIN/1, 5 July 1990, para. 54.
507
Pauwelyn (1998), pp. 238-42.
508
Appellate Body Report, US – Shirts and Blouses, p. 14.


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affirmative defenses. It is only reasonable that the burden of establishing such a defense should509
rest on the party asserting it.

This means that a party who relies on exceptions to justify its WTO-inconsistent measures
must provide evidence of justification. More specifically, the Panel in US – Gasoline asserted
that the US, which invoked GATT Article XX(b), as justification must prove three issues.510
First, the inconsistent measure falls under an exceptional heading. Second, there exists a
connection between legitimate policy objectives and the inconsistent measure. Third, themeasure is in compliance with the three standards of the chapeau.
For trade in services, this approach was confirmed by the Appellate Body in US –Gambling when it found that the Panel was correct in assuming the “burden of constructing
the defense under GATS Article XIV(a) for the US” because they sought to justify theirmeasures based on general exceptions.511
Accordingly, by relying on the prudential exception to justify measures applied in theinsurance services sector found to be inconsistent with other GATS provisions, a WTO
Member that invokes prudential justification must provide evidence that: (i) its inconsistentmeasures fall within the scope of “prudential reasons”, (ii) such inconsistent measures mustbe “primarily aimed at” prudential reasons, and (iii) the application of inconsistent measures
must not constitute disguised restrictions on trade in insurance services.
4. Reframing the two-stage approach: A balance between conditions of competition in
Article XVII and prudential reasons in the Annex on Financial Services
As discussed in Chapter Two, section 5.3, the two-stage approach is proposed for theinterpretation of Article XVII in order to determine, firstly whether a measure accords lessfavourable treatment to foreign services and service suppliers than the domestic likecounterparts, and secondly whether that less favourable treatment, if found, could be justified
under Article XIV. The second stage constitutes a countermeasure against the uncertainty ininterpretation of the national treatment principle by balancing legitimate national policy
objectives with allegedly protective measures against foreign services and service suppliers.
In the insurance sector, when a measure is found discriminatory against foreign
services and service suppliers in the context of Article XVII by an objective assessment,
WTO Members would be safe to provoke the prudential exception to justify thediscrimination. As an exception under GATS, which maintains a flexibility for governments
to purpose legitimate policy objectives in liberalization of the financial system, prudential
reasons provided under Annex paragraph 2(a) represent the second stage in the two-stage
approach towards interpretation of the national treatment principle in the insurance sector.
The two-stage approach towards interpretation of the national treatment principle as it applies
to the insurance sector, therefore, may be summarized by the analytical framework in Figure 5.
This approach consists of four elements for analysis:(1) Confirming a measure in question falling within the scope of Article XVII(Box 1);
509
510
511

Id. pp. 15-16. (Footnotes omitted)
Panel Report, US – Gasoline, para. 6.20
Appellate Body Report, US – Gambling, para. 289.

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NATIONAL TREATMENT PRINCIPLE IN GATS:
A Study of Vietnam’s Insurance Services Market(2) Confirming the likeness between foreign and domestic insurance services andservice suppliers (Box 2);(3) Ascertaining that the discriminatory measure accords to foreign insurance
services and service suppliers irrespective of regulatory aims (Box 3); and(4) Ascertaining that the discriminatory measure aims to pursue prudential reasonsin a non-protectionist manner under Annex paragraph 2(a) (Box 4.1).

Figure 5: Analytical framework for interpretation of the national treatment principle in
the insurance services sector: Two-stage approach
In sur an c e s e r vi c e s an d s up p l i e r s fr o m
c o unt r y A ; and d o m e s t i c i ns ur anc es e r vi c e s and s up p l i e r s o f c o unt r y B(1) M e as ur e s
affecting supply of
insurance services(3) N o l e s s favo ur abl e t r e at me nt
垸 Different or Identical treatment
垸 Modifying conditions of competition

Like

Unlike(2) Like ne s s of ins urance s e rvice s
垸 Competitive relationship(products’ end-uses, consumers’
taste and habits)
垸 Insurance services
classification
垸 Insurance service suppliers(physical characteristics,
process of supplying services,market place)垸 Modes of supply

Less favourable treatment(4) Jus t i fi c at i o n
un d e r A r t .X IV
垸 Exceptional headings
垸 Chapeau

No lessfavourable
treatment(4.1) A n ne x o n
F i nanc i al Se r vi c e s
垸 For prudential reasons垸 Not avoiding

Legitimate
policy goals
and Not abuse㪧 rudential
reasons and
Not avoiding

C o nc l us i o n: N o v iola tion

Illegitimate policy
goals or Abuse

Non-prudential
reasons or Avoiding

C on clu sion : V iola tion

Fundamentally, the two-stage approach towards interpretation of the national
treatment principle applied to the insurance sector is to determine whether the trade restrictive
measure in question is acceptable based on balancing prudential concerns with trade
restrictions on conditions of competition. Accordingly, when a measure is founddiscriminatory against foreign insurance services and service suppliers compared to domestic“like” counterparts in the context of Article XVII, by an objective assessment, it would (i) not
constitute a violation of Article XVII if it falls within the scope of “prudential reasons” andqualifies the anti-avoidance provision; or (ii) constitute a violation of Article XVII if thatmeasure does not fall within the scope of “prudential reasons” or the application of that

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measure is proved to constitute a disguised restriction on trade in insurance services. In otherwords, while the first stage is aimed at revealing any discrimination, which is neutral toregulatory aims, among like insurance services and service suppliers, the second stage will
distinguish the legitimate discrimination in pursuing prudential reasons. This means that a
Member does not violate its obligation under the national treatment principle as it committedwith regard to insurance services as far as its measure does not constitute discrimination withprotectionist aims in the context of prudential exception.

Figure 6: Effective scope of the national treatment principle
in the insurance services sector(C)
GeneralExceptions(b2)(B) Market Access(c1)(b1) (b4) (c2)
(b3)

(d)

(A)
National
Treatment(a)Prudential
Exception(D)

Figure 6 illustrates the effective scope of application of the national treatment
principle in the insurance sector after employing the two-stage approach for interpretation. As
described in Chapter Two, in relation with Article XVI on Market Access, the scope of thenational treatment principle has been equal to the area of [(A) – (b)], where (b) =  (b1), (b2),(b3), (b4). Moreover, by justifying discriminatory measures under the general exceptions, theeffective scope of this principle is narrowed down to the area of [(A) – (b) – (c)], where (c) = (c1), (c2). The area governed by the prudential exception is named (D), which deals withnot only the national treatment and market access obligations, but also other GATS articles.
As far as Article XVII is concerned, the area [(d) + (c2)] indicates those measures, which
violate Article XVII but are justifiable by the prudential exception.
There would be an overlapping scope between the prudential exception and general
exceptions under GATS Article XIV. Certain measures could be found to fall exclusively
within the scope of general exceptions, such as those measures necessary to protect public
morals under Article XIV(a) or collection of direct taxes under Article XIV(d). Certain othermeasures could be found to fall exclusively within the scope of the prudential exception, suchas regulations on technical provisions or investment rules as stipulated in insurance laws.
However, a third category of measures could be found to fall within the scope of both GATS


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NATIONAL TREATMENT PRINCIPLE IN GATS:
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Article XIV and the prudential exception. For example, some measures that fall within thescope of the prudential exception may also fall within the scope of a general exception for
adoption and enforcement of measures “necessary to secure compliance with laws andregulations”.512 Specifically, those measures are designed to deal with “the effects of a default
on services contracts” under GATS Article XIV(c)(i), or governmental measures on capitalrequirement of financial service supplier to enforce compliance with banking laws. Thisoverlapping scope is illustrated by area [(b4) + (c2)]. It means that if a measure is found toaccord less favourable treatment to foreign insurance services and service suppliers compared
to domestic like counterparts under the meaning of GATS Article XVII in the first stage, a
WTO Member may justify that measure by relying on Article XIV and/or the prudential
exception in the second stage.
Therefore, in the insurance services sector, by employing the prudential exception as
the second stage in examining whether a measure violates Article XVII, the effective scope ofthe national treatment principle is equal to the area of [(A) – (b) – (c) – (d)]. In other words,
the prudential exception would probably re-determine the exact scope of application of thenational treatment principle (the area (a)). By defining the scope of the national treatment
principle, Members would be more willing to inscribe their specific commitments for further
liberalization in insurance services.
5. Concluding remarks
The application of GATS national treatment principle to trade in insurance services
would clearly define the proper space for WTO Members to pursue prudential regulations inthis sector by examining the prudential exception based on three interpretative layers. WTO
Members are entitled to introduce measures which are primarily aimed at the solvency of
insurance service suppliers with a view to consumer protection as well as the stability andintegrity of the financial system as a whole. However, in cases where these measures areinconsistent with the national treatment principle, WTO Members would be protected only if
the application of these measures does not constitute disguised restrictions on trade ininsurance services. Hence, the balance between trade and financial stability would be
respected.
The interpretation of the prudential exception in insurance services might have auseful application in other financial services, such as the banking and securities services, tojustify violations of GATS obligations and commitments, including the national treatment
principle.

512
Key (2005), p. 965.
According to the Panel in US – Gambling, para. 6.538, in order for a measure to secure compliance under
GATS Article XIV (c), two requirements must be satisfied: (i) a measure must “enforce” the relevant laws andregulations, and (ii) that measure enforces “obligations” stipulated in those laws and regulations rather thanmerely ensure achieving their objectives.


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CHAPTER FOUR
Post-Uruguay Round Negotiations on Insurance Services and National
Treatment Commitments in Schedules of Selected Countries

As noted in Chapter One, the agreement on liberalization of the financial services
sector, including insurance services, was achieved by the end of 1997, rather than at the timeof conclusion of the Uruguay Round. This chapter provides a brief history of post-Uruguay
round negotiation on this sector. The main part of this chapter reviews the specificcommitments on insurance services with regard to the national treatment principle by theselected countries, namely the EC, US, Japan and China, in order to reexamine theinterpretation of the national treatment principle in Chapter Two. The reasons for thisselection are twofold. One is that the EC, EU, and Japan are the most developed insurance
markets in the world. The other is that these countries have been involved both during andafter the Uruguay Round negotiations on financial services, including insurance services. The
case of China is included in order to examine subsequent practices of a newly acceded WTO
Member after the conclusion of the financial service agreement in 1997.
In addition, an example of China’s measure on the minimum capital requirement ofbranches of foreign non-life insurance companies shall be analyzed and tested through theapplication of the two-stage approach, framed in Chapter Three, towards interpretation of thenational treatment principle in the insurance sector.
1. Post-Uruguay Round negotiations on insurance services: A brief history
1.1 The Second Protocol
Although in the Uruguay Round, by 15 April 1994, eighty countries (counting twelve
EC member states individually) had made commitments on financial services,513 there was noagreement among WTO Members on the liberalization of this service sector. As noted in
Chapter One, section 2.2, the main reason was the dissatisfaction of developed countries,
mainly the US, with the results achieved in financial services during the Uruguay Round, in
exchange for extension of the MFN treatment. This was called the “free-riders” issue, where,
from the US’s point of view, other WTO Members, who undertook weak or no commitments
on opening their financial services sector, would enjoy the US market-opening commitments

513

Own calculation based on all commitments submitted by 15 April 1994. Two countries, which accededto the WTO after 1995, namely Benin (22 February 1996) and Grenada (22 February 1996) are included in thiscalculation because they also submitted schedules of commitments by 15 April 1994.
Dobson and Jacquet (1998), p. 81, point out that there were seventy-six countries. In contrast, another figure
shows that eighty-two countries made initial commitments on financial services at the end of the Uruguay Roundin 1993. See Sapir, Andre. 1999. The General Agreement on Trade in Services: From 1994 to the Year 2000,
Journal of World Trade 33(1), p. 59; and Das, Dilip K. 1998. Trade in Financial Services and the Role of the
GATS: Against the Backdrop of the Asian Financial Crisis. Journal of World Trade 32(6), p. 81.

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under the MFN treatment. 514 In the words of Dobson and Jacquet, one deadlock of thefinancial services negotiations was the unwillingness of many developing countries, and even
Japan, to undertake “substantial and binding” commitments to liberalize their financial
services sectors.515
Therefore, the Second Annex on Financial Services was incorporated into GATS inorder to allow WTO Members a period of six months after the date of entry into force of the
WTO Agreement, to review their commitments on financial services without offering
compensation. 516 This Second Annex was made in contrary to GATS Article XXI on
Modification of Schedules, which obliges a Member, while modifying or withdrawing any
commitment in its Schedule, to provide compensatory adjustments. 517 It means that for
financial services, WTO Members continued to carry out negotiations until the end of June
1995, and consequently, this deadline was extended to 28 July 1995.518
Before this deadline, the US announced that commitments on liberalization offinancial services of some WTO Members, especially from emerging countries, were still
unsatisfactory, and therefore, the US committed to bind only for existing operations of foreign
financial companies.519 In contrast, forty-three countries (counting fifteen EC member states
separately) revised their commitments on financial services by the deadline of 28 July
1995.520 Accordingly, in order to lock what was achieved in 1995, those improvements onfinancial services commitments were annexed to the Second Protocol to GATS, which enteredinto force on 1 September 1996 and lasted until 1 November 1997.521
As a result of the Second Protocol and new accessions to the WTO during 1995-1997,
the total number of WTO Members who undertook commitments in financial services, had
increased to ninety-six, in comparison with eighty countries at the end of the Uruguay
Round.522
1.2 The Fifth Protocol

514

Jarreau (1999), p. 27.
Dobson and Jacquet (1998), p. 81.
516
GATS, Second Annex on Financial Services, para 2.
517
GATS, Art. XXI.
518
Dobson and Jacquet (1998), p. 81.
519
Key (2005), p. 960.
520
WTO. Financial Services Negotiations: The results of the financial services negotiations under the
General Agreement on Trade in Services (GATS).
Available at http://192.91.247.23/english/tratop_e/serv_e/finance_e/finance_fiback_e.htm – Last visited 22
May 2006.
521
See Second Protocol to the General Agreement on Trade in Services, 24 July 1995, WTO Doc. No.
S/L/11; and Ministerial Decision on Adopting the Second Protocol, 24 July 1995, WTO Doc. No. S/L/13.
522
Four WTO Members made commitments after the conclusion of the Uruguay Round: Kuwait (strictly
speaking, Kuwait submitted its commitments on financial services for the first time in the Second Protocol, 28
July 1995), Lesotho (30 August 1995), Sierra Leone (30 August 1995, and Slovenia (30 August 1995). Twelve
entrants to the WTO during 1996-1997 have included the financial services in their schedules of specificcommitments: Angola (1 December 1996), Bulgaria (1 December 1996), Ecuador (21 January 1996), Gambia(23 October 1996), Haiti (30 January 1996), Mongolia (29 January 1997), Panama (6 September 1997), Papua
New Guinea (9 June 1996), Qatar (13 January 1996), St. Kitts and Nevis (21 February 1996), Solomon Island(26 July 1996), and United Arab Emirates (10 April 1996).
515


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The Second Decision on Financial Services adopted by the Council for Trade inServices on 21 July 1995 urged WTO Members to continue to modify or withdraw all or partof the specific commitments on financial services inscribed in their schedules by the end of
1997. 523 However, until the end of 1996, the Ministerial meeting at Singapore agreed toresume negotiations in the financial services sector from April 1997 in order to “significantly
improve market access commitments with a broader level of participation.” 524 Specificcommitments on financial services sectors of seventy countries (counting fifteen EC member
states separately) were submitted by 12 December 1997 and annexed to the Fifth Protocol to
GATS.525 The result of the Fifth Protocol has brought the total number of WTO Members
who have specific commitments in financial services to 102 of the 132 WTO Members,526
including five countries making commitments in financial services for the first time.527
According to Das, the most significant result of the Fifth Protocol is to make thosecommitments binding, whereby WTO Members agree to liberalize their financial services
under the multilateral rules and disciplines.528 In general, Dobson and Jacquet observed thatthe agreement on financial services guarantees a liberalization of insurance services better
than the banking sector due to demands of insurance companies from developed countries aswell as less developed insurance markets in developing countries.529
Fifty-two among seventy countries have opened market access through Mode 3 withrespect to all four types of insurance services as provided in the Annex. 530 Among them,
forty-five countries allow foreign insurers to establish wholly owned insurance subsidiaries orbranches; seven countries allow only wholly owned insurance subsidiaries (Brazil, Chile,
Indonesia, Jamaica, Nicaragua, South Africa, and Venezuela); and nine countries permit
majority control of insurance subsidiaries (Egypt, Ghana, Kenya, Pakistan, the Philippines,
Romania, Singapore, Slovenia, and Thailand). 531 With respect to Mode 1, twenty-sevencountries undertook commitments on cross-border supply of marine, aviation and transport
insurance, and thirty-five countries allow cross-border transactions on reinsurance andbrokerage services. 532 By the deadline of 29 January 1999, fifty-three WTO Members

523

Second Decision on Financial Services, 24 July 1995, WTO Doc. No. S/L/9.
Singapore Ministerial Declaration adopted on 13 December 1996, WTO Doc. No. WT/MIN(96)/DEC,
18 December 1996, para. 17.
525
WTO News, 1997, Press releases, Press/86, 15 December 1997.
Available at www.wto.org/english/news_e/pres97_e/pr86_e.htm – Last visited 22 May 2006.
526
This number goes up to 122 countries among 151 Members by 2007 because nineteen countries
acceded to the WTO after the Fifth Protocol: Albania (8 September 2000), Armenia (5 February 2003),
Cambodia (13 October 2004), China (11 December 2001), Croatia (30 November 2000), Estonia (13 November1999), Former Yugoslav Republic of Macedonia (4 April 2003), Georgia (14 June 2000), Jordan (11 April 2000),
Kyrgyz (20 December 1998), Latvia (10 February 1999), Lithuania (31 May 2001), Moldova (26 July 2001),
Nepal (23 April 2004), Oman (9 November 2000), Saudi Arabia (11 December 2005), Chinese Taipei (1 January2002); Tonga (27 July 2007); Vietnam (17 January 2007); and one WTO Member – Cote d’Ivoire – submitted its
commitments in financial services in 18 November 1999.
527
The five countries are: Bolivia, Costa Rica, Mauritius, Senegal, and Sri Lanka.
528
Das (1998), p. 82.
529
Dobson and Jacquet (1998), p. 90.
530
Press Release, Office of the US Trade Representative, WTO Financial Services Negotiations, 13
December 1997. In Kennedy, Kevin C. 2003. A WTO Agreement on Investment: A Solution in Search of a
Problem? University of Pennsylvania Journal of International Economic Law 24, p. 121.
531
Id.
532
Id.
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A Study of Vietnam’s Insurance Services Market(counting fifteen EC member states separately) accepted the Fifth Protocol, which enteredinto force on 1 March 1999.533
The reach of the agreement on financial services in December 1997 reflects a shift in
attitude among developed and developing countries.534 There was a significant change in theattitude of the US towards the offers of other WTO Members; although some offers remained“defective” or “inadequate” (in cases of Thailand and Malaysia), those offers should be“harvested” though a permanent agreement.535 According to Key, another factor which would
affect this attitude was the concessions by both Japan and Malaysia. While Japan accepted toextend the liberalizing measures agreed with the US to the multilateral framework, theMalaysian negotiators increased the ceiling limitations on foreign ownership in domestic
insurers from 49 to 51 percent.536 Moreover, the cooperative role between the US and EU has
led to a situation where liberalization in the financial services sector was not a “transatlantic
issue”, and this joint effort in the negotiations would encourage other Members to adopt a
cooperative attitude in liberalizing their financial services sectors.537
From the point of view of developing countries, the agreement on financial services isa response to pressure from the Asian crisis, information technology evolvement andincreasing capital mobility.538 The severity of the Asian financial crisis and “dramatic reversal
in market sentiment towards Asia” forced governments to restore confidence from both
domestic and foreign investors, and it was perceived that commitments under the multilateralframework could contribute to this attempt.539 Specifically, in the words of Key, the Asianfinancial crisis put greater pressure on all WTO Members to finalize an “acceptable
compromise” on liberalization of the financial services sector.540
2. Re-examining the scope of the national treatment principle
2.1 Scheduling methodology
Liberalization on trade in services is based on negotiations of specific commitments
aimed at reducing or eliminating restrictions as well as securing overall balance of rights andobligations.541 There are two ways of recording commitments: (i) horizontal commitments
533
See Fifth Protocol to the General Agreement on Trade in Services, 3 December 1997, WTO Doc. No.
S/L/45; and Decision on Acceptance of the Fifth Protocol to the General Agreement on Trade in Services,adopted by the Council for Trade in Services, WTO Doc. No. S/L/68, 15 February 1999. See also
Communication from Members which have accepted the Fifth Protocol to the General Agreement on Trade inServices, WTO Doc. No. S/L/67, 15 February 1999.
By February 2006, sixty-seven members (counting fifteen EC member states separately) have accepted theFifth Protocol. Three remaining countries, which have not yet ratified the Fifth Protocol, are Brazil, Jamaica, and
the Philippines. See Committee on Trade in Financial Services, Report of the Meeting held on 7 February 2006,
WTO Doc. No. S/FIN/M/51, 24 February 2006, para. 3.
534
Das (1998), pp. 81-82.
535
Dobson and Jacquet (1998), p. 84.
536
Key (2005), pp. 961-62.
537
Dobson and Jacquet (1998), p. 84.
538
Id. pp. 93-95.
539
Id. p. 85.
540
Key (2005), p. 961.
541
GATS, Art. XIX:1.


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that are applicable to trade in services in a number of sectors or sub-sectors, and (ii) sectorspecific commitments, which govern the liberalization of sectors or sub-sectors concerned.542
Members may select sectors or sub-sectors and modes of supply to be liberalized under themultilateral framework as well as inscribe any restrictions on market access and national
treatment in their schedules.543
With regard to any sector or sub-sector and mode of supply, there are four levels ofcommitments.544 First, no limitation or full commitment (None) refers to situations where a
WTO Member accepts the full obligation with regard to market access and/or national
treatment.
Second, no commitment (Unbound) is applicable when a Member is not obliged toundertake market access and/or national treatment obligations. In this case, Member is not
required to refrain from introducing any restrictive measures, which is inconsistent with themarket access or national treatment obligation.
Third, “Commitment with limitations” is applicable to a situation where Members
reserve some measures inconsistent with obligations on market access and/or national
treatment.
Last, there are some cases where a specific mode of supply may be not technicallyfeasible, Members may make no commitments due to lack of technical feasibility (Unbound*).
2.2 Remarks about commitments on national treatment
The US made commitments on liberalization of insurance services with regard to
direct insurance, both life and non-life, reinsurance and retrocession services, services
auxiliary to insurance, including brokerage, agency, consultancy, actuarial, risk assessment,
and claim settlement services.545 Similarly, China undertook liberalization of its insurance
services sector when it acceded to the WTO on 11 December 2001, namely life, health andpension/annuity insurance; non-life insurance; and services auxiliary to insurance.546 Both EC
and Japan, however, simply inscribe the heading of “insurance and insurance-related services”
in their schedules of specific commitments.547
Table 2 summarizes specific commitments of the selected countries on national
treatment by sub-sectors and modes of supply. The sub-sectors of insurance and insurancerelated services are consistent with insurance service classification as provided by the Annex.
As noted earlier, there are four levels for WTO Members to inscribe their commitments in themarket access and national treatment columns. However, the fourth level of commitments
542
Scheduling of Initial Commitments in Trade in Services, Explanatory Note 1, MTN.GNS/W/164, 3
September 1993, paras. 20-21.
543
See GATS, Art. XVIII.
Moreover, commitments, which may affect trade in services and not be subject to scheduling under either
Article XVI or XVII, shall be inscribed in a column named “Additional Commitments”.
544
Scheduling of Initial Commitments in Trade in Services, Explanatory Note 1, MTN.GNS/W/164, 3
September 1993, paras. 24-28.
545
US – Schedule of Specific Commitments, GATS/SC/90/Suppl.3, 26 February 1998, pp. 2-9.
546
China – Schedule of Specific Commitments, GATS/SC/135, 14 February 2002, p. 28.
547
EC – Schedule of Specific Commitments, GATS/SC/31/Suppl.4/Rev.1, 18 November 1999, p. 3; Japan– Schedule of Specific Commitments, GATS/SC/46/Suppl.3, 26 February 1998, p. 2.


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NATIONAL TREATMENT PRINCIPLE IN GATS:
A Study of Vietnam’s Insurance Services Market(Unbound*) may be considered as a special case of “Unbound”.548 In addition, no schedulerefers to the fourth level of commitments. Accordingly, each mode of supply consists of threelevels of commitments, namely “None”, “Unbound”, and “Commitment with limitations”.549
Table 2: Commitments on National Treatment: By sub-sectors and modes of supply
Modesof
supply

Mode
1
Mode
2
Mode
3
Mode
4
Total
entriesLevel ofCommitments

Direct Insurance(A) Life(B) Non-life

Reinsurance/
Retrocession

Insurance
Intermediation

Services
auxiliary to
insurance

Total
entries

11
0
9

None
Unbound2 (J, C)

2 (J, C)

2 (J, C)

2 (J, C)

3 (J, US, C)

Commitment
with limitations

2 (EC, US)

2 (EC, US)

2 (EC, US)

2 (EC, US)

1 (EC)

None
Unbound

3 (J, US, C)

3 (J, US, C)

3 (J, US, C)

3 (J, US, C)

3 (J, US, C)

Commitment
with limitations

1 (EC)

1 (EC)

1 (EC)

1 (EC)

1 (EC)

None
Unbound2 (US, C)

2 (US, C)

2 (US, C)

1 (C)

2 (US, C)

Commitment
with limitations

2 (EC, J)

2 (EC, J)

2 (EC, J)

3 (EC, J, US)

2 (EC, J)

90111 (US)
3 (EC, J, C)

1 (US)
3 (EC, J, C)

1 (US)
3 (EC, J, C)

1 (US)
3 (EC, J, C)

1 (US)
3 (EC, J, C)

0
5
15

7
1
8

7
1
8

7
1
8

6
1
9

8
1
7

None
UnboundCommitment
with limitations

None
UnboundCommitment
with limitations

15
0
5

Notes: EC = European Communities; J = Japan; US = United States; C = China.
Source: EC – Schedule of Specific Commitments, GATS/SC/31/Suppl.4 dated 18 November 1999, pp. 3-9; Japan– Schedule of Specific Commitments, GATS/SC/46/Suppl.3 dated 28 February 1998, pp. 2-4; US – Schedule ofSpecific Commitments, GATS/SC/90 Suppl.3 dated 28 February 1998, pp. 2-14; China – Schedule of SpecificCommitments, GATS/SC/135 dated 14 February 2002, pp. 28.

There are several observations noteworthy from the current commitments on national
treatment by the selected countries.
First, commitment entries are different between Mode 1 and Mode 2, where the former
is likely less liberal than the latter. The number of full commitments in Mode 2 is higher thanthat of Mode 1.550 This may imply that Member governments may be more concerned with
548
Scheduling of Initial Commitments in Trade in Services, Explanatory Note 1, MTN.GNS/W/164, 3
September 1993, para. 28.
Where the mode of supply thought to be inapplicable is in fact applicable, or become so in the future, theentry of “Unbound*” means “Unbound”.
549
See Scheduling of Initial Commitments in Trade in Services, Explanatory Note 1, MTN.GNS/W/164, 3
September 1993, para. 26.
Entry “Unbound except for” is counted as “Commitment with limitations”.
550
See Committee on Trade in Financial Services. “Technical Issues Concerning Financial Services
Schedules”, WTO Doc. No. S/FIN/W/9, 29 July 1996, paras. 10-11.
However, the difference between Modes 1 and 2 seems to be less significant in case of financial services ingeneral and insurance services in particular. For example, in case of property insurance, a consumer of a


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Mode 1 where consumers still locate within their own territories, while undertaking more
liberal commitments in Mode 2. Another concern might be outward capital movement fromthe domestic market.
Second, in contrast to the other three modes of supply, the level of commitments inMode 4 is substantially constrained in “Commitment with limitations”, which usually appear
in horizontal commitments rather than sector-specific commitments. The selected countries
made a higher level of full commitments in Modes 1, 2 and 3 than that of Mode 4. In otherwords, the national treatment obligation would enjoy broader scope in the other three modesof supply.
Third, in Mode 4, the national treatment principle is extended only to certain
categories of natural persons, particularly intra-corporate transferees, i.e. managers,
executives and specialists, by the selected Members. This may suggest that Member
governments prefer highly skilled personnel, who may transfer know-how, techniques andskill to local residents, and Mode 4 is considered as a supportive instrument to facilitate trade
in insurance services through Mode 3.551 Another implication might be to protect the domestic
labour market, whereby job creation may result from promotion of commercial presence of
foreign insurers, on the one hand, and prohibition of ordinary and less skilled foreigners, on
the other hand.
Fourth, the schedules of specific commitments show that restrictive measuresinscribed in the national treatment column by the selected countries cover, inter alia, tax
measures and residency requirement.552
Last, as far as insurance and insurance-related services are concerned, a higher level ofcommitments were made in more international insurance services, such as reinsurance andretrocession, large commercial risks in non-life insurance, marine, aviation and transportation
services, and insurance-related services, which may require professional skills. This may
imply that the governments would be more willing to liberalize those services under Modes 1

Member purchases insurance policy from an insurer of another Member for his or her property in the latter
Member. This transaction might be regarded as the consumption abroad under Mode 2 because his or her insured
property is abroad, and the property insurance service is “delivered” outside the territory of the consumer inconnection with the location of the property. On the other hand, the same transaction might be considered as
cross-border supply of the property insurance service because the premiums are paid by the consumer in his or
her home country, and the indemnity, if the risk occurs, shall be paid to the consumer in the home country.
Accordingly, the service is “delivered” within the territory of the consumer under Mode 1.
551
See OECD Working Party of the Trade Committee. 2003. Managing Request-Offer Negotiations under
the GATS: the Case of Insurance Services. Paris: OECD (TD/TC/WP(2003)17), p. 9.
Although in insurance services sector, Mode 4 might be less significant than that in other services sectors,
such as professional services, this mode may facilitate auxiliary services to insurance.
552
See US – Schedule of Specific Commitments. GATS Doc. No. GATS/SC/90 Suppl.3, 28 February 1998,
pp. 2-14; see also EU – Schedule of Specific Commitments. GATS Doc. No. GATS/SC/31/Suppl.4, 18
November 1999, pp. 3-9.
For example, under Mode 1, one per cent federal excise tax on all life insurance premiums covering US
risks that are paid to companies not incorporated under US law in case of life insurance, and four per cent federal
excise tax is imposed on all non-life insurance premiums covering US risks that are paid to companies notincorporated under US law. When more than 50 per cent of the value of a maritime vessel whose hull was built
under federally guaranteed mortgage funds is insured by a non-US insurer, the insured must demonstrate that therisk was substantially first offered in the US market.
In case of the EU, concerning non-life insurance agency services under Mode 3, agent shall have his placeof residence in Finland.

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NATIONAL TREATMENT PRINCIPLE IN GATS:
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and 2. It would also indicate that these different insurance services sub-sectors are treateddifferently by the selected WTO Members.
2.3 Scope of the national treatment principle under the Understanding on Commitments in
Financial Services
An alternative approach to undertaking the national treatment principle applicable tofinancial services in general and insurance services in particular is provided in the
Understanding on Commitments in Financial Services (hereinafter the Understanding), which
is a part of the Final Act of the Uruguay Round. 553 The intention of introducing theUnderstanding as an alternative approach is to provide a “formula that would facilitate
undertaking commitments” in liberalization of financial services. 554 According to Jarreau(1999), the aim of this Understanding is to further clarify the national treatment principle in
the field of financial services, which would improve predictability in trade in financial
services.555
However, the main legal issue is to what extent the Understanding binds WTO
Members for scheduling their commitments with respect to the national treatment principle infinancial services in general and insurance services in particular. There is no provision thatrefers to the Understanding in either the framework of GATS or the Annex. Meanwhile, as
described by Waincymer, the term “understanding” would suggest “something more” toclarify the ordinary meaning of the terms.556 While in a strict legal sense, “understanding” has
no validity, in a practical sense, if it is clearly acknowledged, the “understanding” is likely tohave the legal effect of expressed rules.557
In the context of GATS, it is arguable that the process of “acknowledgment” is thepractice of WTO Members to undertake specific commitments. Schedules of specificcommitments, which apply to those service sectors and sub-sectors listed in a Member’sschedule, constitute an integral part of GATS under Article XX:3. 558 Accordingly, it issubmitted that although the Understanding is an alternative approach to Part III of GATS, andspecifically the national treatment principle, it only binds Members who adhere to theUnderstanding in the event that they inscribe those obligations into their schedules ofcommitments with respect to the national treatment principle.559
553

The Final Act Embodying the Results of the Uruguay Round of Multilateral Trade Negotiations,
Marrakesh, 15 April 1994.
554
Committee on Trade in Financial Services, Report of the Meeting held on 26 February 2003, WTO Doc.
No. S/FIN/M/39, 7 April 2003, para. 25.
555
Jarreau (1999), pp. 39-40.
556
Waincymer (2002), p. 380.
557
Id.
558
GATS, Art. XX:3.
559
There are thirty-one Members (counting EC member states separately) expressly accepts theUnderstanding in scheduling their commitments in financial services: Australia (GATS/SC/6/Suppl.4 dated 26
February 1998), Bulgaria (GATS/SC/122/Suppl.2 dated 26 February 1998), Canada (GATS/SC/16/Suppl.4 dated
26 February 1998), Czech Republic (GATS/SC/26/Suppl.3 dated 26 February 1998), European Communities(15 Members) (GATS/SC/31/Suppl.4/Rev.1 dated 18 November 1999), Hungary (GATS/SC/40/Suppl.3 dated
26 February 1998), Iceland (GATS/SC/41/Suppl.2 dated 26 February 1998), Japan (GATS/SC/46/Suppl.3 dated
26 February 1998), Liechtenstein (GATS/SC/83-A dated 15 April 1994), New Zealand (GATS/SC/62/Suppl.2
dated 26 February 1998), Nigeria (GATS/SC/65/Suppl.1 dated 26 February 1998), Norway

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Since the US, EU and Japan expressly adopted the alternative approach in schedulingtheir commitments on financial services, including insurance services, 560 several important
aspects of the Understanding could clarify the scope of the national treatment principle.
Concerning insurance and insurance-related services supplied through Mode 1, certain
insurance services in transportation, and reinsurance and retrocession services, as well asother services auxiliary to insurance are permitted to be supplied through cross-bordertransactions in accordance with the national treatment principle.561 While according market
access for those services under Mode 1, WTO Members are required to concurrently render
the standard of “no less favourable” treatment. This would indicate that the national treatment
principle shall be accorded to those foreign services upon their entry into the domestic market
of a WTO Member.
With regard to established commercial presence of foreign service suppliers, firstly,
the rights to establish and expand business activities, including acquisition of existing
domestic companies, of foreign financial service suppliers are categorized under the headingof Market Access, rather than National Treatment.562 This suggests that the right to establish acommercial presence falls into Article XVI on Market Access.
Second, the Understanding specifies obligation of each Member in granting tofinancial service suppliers of other Members established in its territory, under terms andconditions of the national treatment principle, access to payment and clearing systems
operated by public entities and official funding and refinancing facilities available in thenormal course of business.563 The word “established” apparently indicates that the national
treatment principle is applicable to those foreign service suppliers who have entered thedomestic market of another Member.
Third, a WTO Member must ensure the national treatment principle be extended tofinancial service suppliers of other Members when “privileges or advantages” are granted todomestic service suppliers or the supply of services is conditional upon membership,participation, or access to any entity in that Member. 564 This obligation, nevertheless, isapplicable to foreign service suppliers who are resident in that WTO Member.565 Although
there is no definition of the term “resident” in either GATS or the Understanding,566 it isarguable that this treatment is only applicable to commercial presence of foreign insurers in
supplying insurance services under Mode 3 to a WTO Member’s domestic market. In other(GATS/SC/66/Suppl.4 dated 26 February 1998), Slovak Republic (GATS/SC/77/Suppl.3 dated 26 February1998), Sri Lanka (for banking and other financial services excluding insurance, GATS/SC/79/Suppl.2 dated 26
February 1998), Switzerland (GATS/SC/83/Suppl.4 dated 26 February 1998), Turkey (GATS/SC/88/Suppl.3
dated 26 February 1998), United States of America (GATS/SC/90/Suppl.3 dated 26 February 1998).
560
US – Schedule of Specific Commitments, GATS/SC/90/Suppl.3, 26 February 1998, p. 2; EC –Schedule of Specific Commitments, GATS/SC/31/Suppl.4/Rev.1, 18 November 1999, p. 2; Japan – Schedule ofSpecific Commitments, GATS/SC/46/Suppl.3, 26 February 1998, p. 2.
561
The Understanding, para. B.3.
562
Id. para. B.5.
563
Id. para C.1.
564
Id. para. C.2.
565
Id. para. C.2. See also Leroux (2002), p. 440.
566
Id. para. D.1 defines “non-resident” as follows:
A non-resident supplier of financial services is a financial service supplier of a Member which
supplies a financial service into the territory of another Member from an establishment located in
the territory of another Member, regardless of whether such a financial service supplier has or has
not a commercial presence in the territory of the Member in which the financial service is supplied.

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NATIONAL TREATMENT PRINCIPLE IN GATS:
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words, a Member who agrees on this Understanding, shall accord the national treatment
principle to those foreign financial service suppliers who have established commercial
presence in its territory.
In summary, obligations in the Understanding will bind WTO Members as far as theyschedule their specific commitments based on this alternative approach. This approachindicates that the scope of the national treatment principle could not broadly cover preestablishment measures, which fall under the scope of the market access obligation.
2.4 Scope of the national treatment principle in the schedules
As discussed in section 4.1 of Chapter Two, the scope of the national treatment
principle seems to be unclear when GATS Article XVI on Market Access is taken into
account. The interpretation of the legal text of the national treatment principle implies ahierarchical relationship between Articles XVI and XVII. Specifically, the scope of thenational treatment principle addresses all discriminatory measures, which do not fall within
the ambit of Article XVI on Market Access.
Under their schedules of specific commitments, the selected WTO Members inscribe
commitments on liberalization in insurance services in market access and national treatment
columns. Therefore, in order to further clarify the scope of the national treatment principle asundertaken by the selected countries in their schedules of specific commitments, Table 3
represents the combinations of different levels of commitments inscribed in market access andnational treatment columns. Accordingly, nine scenarios must be examined.
Table 3: Analytical scenarios on the scope of the national treatment principle

None
MarketAccessColumnUnboundCommitment
with limitations

None
(1)
Hierarchy(2)
Hierarchy(3)
Hierarchy

National Treatment Column
UnboundCommitment with limitations(4)(7)
No evidence but hierarchy
No evidence but hierarchy(5)(8)
No obligation
No evidence but hierarchy(6)(9)
Hierarchy
Hierarchy(i) Scenario (1)In scenario (1), the entry “None” is inscribed in both market access and national
treatment columns. 567 In other words, the full national treatment and full market accessobligations are applied. As noted earlier, this scenario, nevertheless, has been dealt with by567
See US – Schedule of Specific Commitments. GATS Doc. No. GATS/SC/90 Suppl.3, 28 February 1998,
pp. 2 and 11-14.
For example, with regard to supplying direct insurance services and services auxiliary to insurance,
including insurance intermediation, the US inscribed “None” in both market access and national treatment
columns under Mode 2.


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Chapter Two, section 4.1, whereby the legal text would support a hierarchical relationshipbetween Articles XVI and XVII.
(ii) Scenarios (2) and (4)As far as scenario (2) is concerned, China inscribed “None” in the national treatment
column and “Unbound” in the market access column with respect to supplying insurance
brokerage services through Mode 2. 568 A legal point here is how entries “None” and“Unbound” are interpreted in case of those discriminatory measures falling within theoverlapping area between Article XVI and XVII?
One interpretative option is that “None” prevails over “Unbound”.569 Consequently, a
WTO Member must refrain not only from applying any measure that is inconsistent with thenational treatment obligation, but also from introducing any discriminatory measure that falls
within the scope of the market access obligation. In other words, while a Member is entitled
to introduce only quantitative restrictions under Article XVI, that Member must ensure thatthose restrictions do not discriminate between domestic and foreign services and service
suppliers. This interpretation, however, probably limit the scope of Article XVI because only
non-discriminatory restrictions are allowed. 570 When a WTO Member inscribes a fullcommitment on the national treatment principle in a specific mode of supply, “no lessfavourable” treatment will be entirely bound for that mode. 571 This would mean that the
inscription of “None” require Members to observe only the national treatment obligation, but
not the obligations in Article XVI.
Moreover, as far as scenario (4) is taken into account,572 i.e. the entry of “Unbound”
inscribed in the national treatment column and “None” in the market access column, because
the inscription of “None” in market access prevails over “Unbound” in national treatment, a
WTO Member is required to remove all discriminatory measures that fall into Article XVI aswell as Article XVII. This interpretation probably contradicts the intent of that WTO Member
when inscribing “Unbound” in the national treatment column.
Another interpretation is that “Unbound” overrides “None”. This reading may besupported by the progressive approach to service liberalization under GATS, whereby anegative listing would commence with “Unbound” and WTO Members liberalize their service
568

China – Schedule of Specific Commitments. WTO Doc. No. GATS/SC/135, 14 February 2002, p. 28.
For example, the proposal of Switzerland.
See Council for Trade in Services, Report of the Meeting held on 14 May 2003, WTO Doc. S/C/M/66, 18
June 2003, paras. 26 and 29.
570
For example, the argument of Hong Kong, China.
See Committee on Specific Commitments, Report of the Meeting held on 29 September 2003, WTO Doc.
S/CSC/M/30, 1 December 2003, para. 42.
571
See Guidelines for the Scheduling of Specific Commitments under the General Agreement on Trade inServices (GATS), adopted by the Council for Trade in Services on 23 March 2001, WTO Doc. No. S/L/92, 28
March 2001, para. 43.
If a member make a commitment under Art. XVI in a sector where commercial presence is limited topartnership, an entry “None” in the national treatment would refer to the whole mode of supply, and not only topartnership.
572
See Bolivia – Schedule of Specific Commitments, GATS/SC/12/Suppl.2, 26 February 1998, p. 3.
Although this reverse scenario did not appear in the schedules of specific commitments of the selected
countries, it exists in the schedule of, for example, Bolivia, where entries “None” and “Unbound” are inscribedin market access and national treatment column, respectively, under Mode 3 in supply of insuranceintermediation.
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NATIONAL TREATMENT PRINCIPLE IN GATS:
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markets by undertaking “None”.573 Under scenario (2), “Unbound” in market access could
cover not only non-discriminatory measures, but also all discriminatory measures, which fall
into Articles XVI and XVII. In other words, a WTO Member would be entitled to introduce
discriminatory measures under the national treatment column. This situation is clearly
contrary to the expectation of other WTO Members when that Member inscribes “None” inthe national treatment column in its schedule.
Additionally, in scenario (4), while a Member could not introduce any nondiscriminatory measures which fall into Article XVI, it could take any discriminatory measure
in both Articles XVI and XVII. This situation, nevertheless, facilitates WTO Members to
introduce discriminatory measures, which absolutely is not the intention of the drafters of
GATS. In US – Gambling case, the Panel interpreted the inscription “None” in the market
access column as “a full market access” commitment, whereby a Member is obliged to refrainfrom maintaining any of the six limitations and measures listed in Article XVI:2.574
Because neither interpretation proves to be persuasive, it is submitted that the entry of“None” would mean no limitation in the inscribed column, i.e. market access or national
treatment only, and the entry of “Unbound” would mean no commitment in the inscribedcolumn, i.e. market access or national treatment only. “Unbound” in the market accesscolumn deals with all discriminatory and non-discriminatory measures which fall within thescope of Article XVI only, while inscribing “None” in the national treatment column, WTO
Members are only required to guarantee the no less favourable treatment when adopting thosemeasures that fall exclusively into Article XVII. 575 Therefore, while China is required toaccord to foreign insurance brokerage services supplied through Mode 2 treatment no lessfavourable than that of domestic “like” services under the meaning of Article XVII, China has
the right to introduce other discriminatory measures, which fall within the scope of Article
XVI:2, against foreign insurance brokerage services.
In the reverse scenario, “None” in the market access column addresses all six
limitations and measures stipulated in Article XVI, and by inscribing “Unbound” in thenational treatment column WTO Members are entitled to introduce all discriminatory
measures that fall exclusively under Article XVII. This would mean that Members are notrequired to guarantee national treatment even when foreign services and service suppliers areallowed to enter a domestic insurance market.
Accordingly, the interpretation of scenarios (2) and (4) would indicate that theoverlapping area between the national treatment and market access obligations shall begoverned by commitments inscribed in the market access column.
573
For example, the arguments of Philippines and Brazil.
See Council for Trade in Services, Report of the Meeting held on 14 May 2003, WTO Doc. S/C/M/66, 18
June 2003, paras. 35-36; the Meeting held on 28 February 2003, WTO Doc. S/C/M/65, 21 March 2003, para. 21.
574
Panel Report, US – Gambling, para. 6.279.
575
See Mattoo (1997), p. 118.
According to Mattoo (1997), this interpretation is supported by Art. XX:2, whereby all measures, which areinconsistent with only Art. XVI as well as both Articles XVI and XVII, are governed by the entry “Unbound” inthe market access column, and consequently, Art. XVII addresses those discriminatory measures not falling in
the domain of Art. XVI. However, in response to his proposal, it is useful to revisit Art. XX:2. The wording ofArt. XX:2 specifically refers that measures inconsistent with both Articles XVI and XVII “shall be inscribed” inthe market access column. It would mean that Art. XX:2 does address the relationship between entries “None”
nor “Unbound”, but only situation where Members intend to inscribe any restrictions on market access and/or
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CENTER FOR ASIAN LEGAL EXCHANGE, NAGOYA UNIVERSITY CALE BOOKS 3(iii) Scenarios (3) and (7)Under scenario (3), while the US schedules no limitation on the national treatment
column with regard to both life and non-life insurance services supplied through Mode 3,
branches of foreign insurers are not permitted to supply surety bond for US federal
government contracts under market access commitments.576
If “None” overrides “Commitment with limitations”, the scope of the national
treatment obligation would cover all discriminatory measures, and it would limit the scope ofthe market access obligation to only non-discriminatory measures. Accordingly, alldiscriminatory measures, which fall within Article XVI, would be eliminated. The US,
therefore, was required to allow branches of foreign insurance service suppliers to supply
surety bonds for US federal government contracts. This interpretation obviously contradicts
the US intention when inscribing a limitation on the market access column.
The same conclusion is also found in scenario (7) where the scope of the market
access obligation would cover all discriminatory and non-discriminatory measures.577 WTO
Members, therefore, had refrained from applying any discriminatory measure under themeaning of either Article XVI or XVII. This interpretation would render useless limitation
intended by WTO Members when inscribing in the national treatment column.
In the opposite case, if “Commitment with limitations” overrides “None”, in scenario(3), WTO Members could impose restrictions not only on market access but also on national
treatment. It would mean that the US could apply discriminatory measures against branches offoreign insurance companies under the meaning of Article XVII. This interpretation
apparently narrows down the scope of the national treatment obligation committed by the US
to “Commitment with limitations” or even “Unbound”, and consequently contradicts theinscription of “None” by the US in its schedule.
As far as scenario (7) is concerned, WTO Members would extend their limitations as
inscribed in the national treatment column to prohibit market access. This interpretation
would be contrary to the intent of WTO Members when inscribing “None” in the market
access column. In addition, as noted earlier, the Panel in US – Gambling concluded that
“None” in the market access column means “a full market access” commitment.
Accordingly, it is submitted that the entry of “None” would mean no limitation in theinscribed column, i.e. market access or national treatment only, and the entry of“Commitment with limitations” would permit WTO Members to reserve their rights toimpose several restrictions as inscribed in the corresponding column, i.e. market access or
national treatment only. The examination of commitments on scenarios (3) and (7) would
indicate that the overlapping area between the national treatment and market accessobligations is governed by commitments inscribed in the market access column.

576

US – Schedule of Specific Commitments, GATS/SC/90 Suppl.3, 28 February 1998, p. 3.
See Thailand – Schedule of Specific Commitments, GATS/SC/85/Suppl.3, 26 February 1998, p. 2.
Although scenario (7) did not appear in the schedules of specific commitments of the selected countries, itexists in, for example, Thai schedule of specific commitments. While there is no limitations under market accesscolumn on supplying life insurance services through Mode 2, premiums on life insurance services supplied byforeign insurers under Mode 2 are not tax deductible similarly to that accords to holders of policies issued by
local life insurers.
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NATIONAL TREATMENT PRINCIPLE IN GATS:
A Study of Vietnam’s Insurance Services Market(iv) Scenario (5)There is no evidence on this scenario in schedules of specific commitments of theselected countries. However, as the entry of “Unbound” is inscribed in both the market accessand national treatment columns, there is no obligation on market access or national treatment.
The problem of overlapping area, therefore, does not occur in this scenario.
(v) Scenarios (6) and (8)Under scenario (6), while inscribing no commitments in the national treatment column
with regard to insurance and insurance related services supplied through Mode 4 (Unbound),the US extends market access on temporary entry and stay of certain categories of natural
persons.578 If “Unbound” prevails over “Commitment with limitations”, the US would only beallowed to apply market access restrictions on a non-discriminatory basis.
In contrast, if “Commitment with limitations” overrides “Unbound”, as far as scenario(8) is concerned, 579 WTO Members would not be allowed to apply all discriminatory
measures except for those inscribed in the national treatment column. It would mean that any
discriminatory measures within the scope of Articles XVI and XVII must be eliminated. This
interpretation, therefore, would lead to a situation such that the entry “Unbound” in themarket access column is effective only for non-discriminatory measures, and consequently,
excludes discriminatory measures from the scope of Article XVI.
Accordingly, the entry “Unbound” means no commitments with regard to the column
concerned, i.e. either market access or national treatment. “Commitment with limitations” ineither market access or national treatment column shall cover measures which fall within thescope of Article XVI or XVII, respectively. Scenarios (6) and (8) would suggest the hierarchy
between the market access and the national treatment principle.
(vi) Scenario (9)With regard to both life and non-life insurance services, concurrently with imposing
restrictions on market access of government-owned or government-controlled insurancecompanies under Mode 1, the US also imposes excise tax on insurance premiums paid toforeign insurance companies under the national treatment principle. 580 Other examples ofscenario (9) are China and Japan, where both countries undertake no horizontal commitmentsin the supply of services under Mode 4 with regard to the national treatment obligation,581

578

US – Schedule of Specific Commitments, GATS/SC/90, 15 April 1994, p. 1.
See Israel – Schedule of Specific Commitments, GATS/SC/44/Suppl.2, 26 February 1998, p. 3.
An example of another WTO Member which undertakes “None” in the market access column and the entryof “Commitment with limitations” in the national treatment column is Israel with regard to consumption abroadof non-life insurance services. The limitation inscribed in the national treatment column is that compulsory car
insurance must be purchased in Israel from an insurance company established in Israel and licensed by the Israeli
commissioner of insurance.
580
US – Schedule of Specific Commitments, GATS/SC/90 Suppl.3, 28 February 1998, p. 2.
581
See Scheduling of Initial Commitments in Trade in Services, Explanatory Note 1, MTN.GNS/W/164, 3
September 1993, para. 26.
The entry of “Unbound except for…” belongs to the second level of commitment, i.e. “Commitment withlimitations”.
579


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except for measures affecting the “categories of natural persons referred to under market
access”.582
However, for scheduling purposes as provided in Article XX:2 of GATS, measuresinconsistent with both Article XVI and XVII shall be inscribed into the market accesscolumn.583 This would indicate that, in this scenario, commitments on market access shallapply to the overlapping area between the market access and national treatment obligations.
In summary, the above-analyzed scenarios on the scope of the national treatment
principle through the specific commitments by the selected countries demonstrate that Article
XVII applies to all discriminatory measures which do not fall under the realm of Article XVI
on Market Access.
3. Revisiting likeness3.1 Reconfirming uncertainty of service classification
As mentioned in Chapter Two, section 4.3, the services sectoral classification list wasdeveloped by the GATT Secretariat for the purpose of negotiations during the Uruguay Round.
This classification list covers twelve broad service sectors in the left column, which arecorresponding to the UN CPC in the right column. The relevant section of the WTO
Classification in the insurance sector is as follows584:
SECTORS AND SUB-SECTORSCORRESPONDING CPC

7.

FINANCIAL SERVICES

A.
a.
b.
c.
d.

All insurance and insurance-related services
Life, accident and health insurance services
Non-life insurance services
Reinsurance and retrocession
Services auxiliary to insurance (including
broking and agency services)

812**
8121
8129
81299*
8140

Note:
The (*) indicates that the service specified is a component of a more aggregated CPC item
specified elsewhere in this classification list.
**
The (**) indicates that the service specified constitutes only a part of the total range ofactivities covered by the CPC concordance.

*

UN CPC numbers 812 and 814, corresponding to sub-sector 7.A (All insurance andinsurance-related services) of the WTO Classification are broken down as follows585:

582
See China – Schedule of Specific Commitments, GATS/SC/135, 14 February 2002, p. 3; Japan –Schedule of Specific Commitments, GATS/SC/46, 15 April 1994, p. 1.
583
GATS, Art. XX:2.
584
GATT. Services Sectoral Classification List, GATT Doc. No. MTN.GNS/W/120, 10 July 1991.
585
See Provisional Central Product Classification of the United Nations (Provisional CPC), 1989.


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NATIONAL TREATMENT PRINCIPLE IN GATS:
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812

Insurance (including reinsurance) and pension fund services, except compulsory social
security services
8121
Life insurance and pension fund services
81211
Life insurance services
81212
Pension and annuity services
8129
Non life insurance services
81291
Accident and health insurance services
81292
Motor vehicle insurance services
81293
Marine, aviation and other transport insurance services
81294
Freight insurance services
81295
Fire and other property damage insurance services
81296
Pecuniary loss insurance services
81297
General liability insurance services
81299
Other insurance services n.e.c814

Services auxiliary to insurance and pension funding
8140
Services auxiliary to insurance and pension funding
81401
Insurance brokering and agency services
81402
Insurance and pension consultancy services
81403
Average and loss adjustment services
81404
Actuarial services
81405
Salvage administration services
81299
Other services auxiliary to insurance and pension funding

As noted by the WTO Secretariat, there are four main differences between the WTO
Classification and the UN CPC with regard to insurance and insurance-related services, 586
namely:(i) accident and health insurance are included in "life" insurance instead of "non life"
insurance as in the UN CPC;(ii) reinsurance and retrocession services, which are not in a specific category in the
UN CPC but included in “other insurance services”, are separated as a sub-sector of insurance
services in the WTO Classification;(iii) pension fund management services are separated from life insurance services tobe included in asset management services under “banking and other financial services” in the
WTO classification; and(iv) “insurance brokering and agency services” and other services auxiliary to
insurance are combined as a sub-sector in insurance service in the WTO Classification.
The definition of insurance services in the Annex also differs to that of the WTO
Classification. 587 In specific, the Annex distinguishes “insurance intermediation” from
Available at http://unstats.un.org/unsd/cr/registry/regcs.asp?Cl=9&Lg=1&Co=81 – Last visited 5 October
2007.
586
WTO Secretariat. Background Note on Financial Services, Council for Trade in Services, WTO Doc.
No. S/C/W/72, 2 December 1998, para. 9.
587
In addition to the WTO and CPC classifications, in the financial services sector, WTO Members may
also employ the Annex on Financial Services for scheduling. Paragraph 16 of the Scheduling of Initial
Commitments in Trade in Services, Explanatory Note 1, MTN.GNS/W/164, 3 September 1993, reads in part asfollows:… In general the classification of sectors and sub-sectors should be based on the Secretariat’s
revised Services Sectoral Classification List. Each sector contained in the Secretariat list is
identified by the corresponding Central Product Classification (CPC) number. Where it is

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CENTER FOR ASIAN LEGAL EXCHANGE, NAGOYA UNIVERSITY CALE BOOKS 3“insurance-related services” and explicitly specifies several services to include consultancy,
actuarial, risk assessment and claim settlement services. 588 In addition, life and non-life
insurance services are categorized under the same sub-sector of “Direct insurance”.
The schedules of specific commitments of the selected countries may demonstratethese differences among those services classification lists.
First, as Japan specifically refers to the Annex in its schedule, it may indicate thatJapan based its commitments on the Annex. Accordingly, it could be said that insuranceintermediation (brokerage and agency) and services auxiliary to insurance (consultancy,
actuarial, risk assessment and claim settlement services) are unlike because they are classified
under different sub-sectors in Japan’s Schedule of Specific Commitments. However, different
to Japan, the US is strictly consistent with the numbering of insurance sub-sectors, namely life,
non-life, reinsurance, and services auxiliary to insurance as provided in the WTO
Classification. As noted earlier, in the WTO classification insurance intermediation is
included into the sub-sector of “Services auxiliary to insurance”. Therefore, it might beargued that insurance intermediation (brokerage and agency) and services auxiliary to
insurance (consultancy, actuarial, risk assessment and claim settlement services) are alikebecause they are classified under the same sub-sector in the US’s Schedule of SpecificCommitments.
Second, the EC does not mention the relevant services classifications for theirundertaking commitments on insurance and insurance related services. The EC simply
inscribed sub-sector “A. Insurance and insurance-related services”. If the EC’s Schedule ofSpecific Commitments is interpreted based on the Annex, the likeness might be notestablished between insurance intermediation and services auxiliary to insurance. However, if
the EC follows the UN CPC, reinsurance services and non-life insurance services might bealike because they are classified under the same sub-sector of “Non-life insurance services”.
Third, China clearly inscribes health insurance services in the same category with life
insurance services, which are under sub-sector 7.A (a) of its schedule.589 In addition, China
follows the same order as provided in the WTO Classification. It may suggest that Chinabases its commitments on the WTO Classification. Accordingly, likeness could not beestablished among life, non-life, reinsurance, and services auxiliary to insurance because they
are classified under different sub-sectors in China’s Schedule of Specific Commitments.
However, the likeness might be found between insurance intermediation (brokerage andagency) and services auxiliary to insurance (consultancy, actuarial, risk assessment and claim
settlement services) because the WTO Classification expressly incorporates brokerage andagency services into the sub-sector of “Services auxiliary to insurance”.
In short, the examination reveals that the schedules of specific commitments have notbeen developed in a consistent and uniform manner. Some Members employed the Annex as abasis for scheduling, while others used the UN CPC or WTO Classification. Consequently,
this scheduling practice confirms that the scope of likeness in Article XVII is broad anduncertain if panels rely only on the criterion of service classification.
necessary to refine further a sectoral classification, this should be done on the basis of the CPC orother internationally recognized classification (e.g. Financial Services Annex)… (Footnote
omitted)588
WTO Secretariat. Background Note on Financial Services, Council for Trade in Services, WTO Doc.
No. S/C/W/72, 2 December 1998, para. 10.
589
China – Schedule of Specific Commitments, GATS/SC/135, 14 February 2002, p. 28.

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3.2 Likeness by reference to modes of supply and “like” service suppliers
As discussed in Chapter Two, section 4.3, the reference to modes of supply andlikeness of service suppliers for interpretation of the national treatment principle would
narrow down the scope of likeness as a whole. It is clearly significant for understanding thisprinciple in each specific case as Article XVII:1 depends on “any conditions andqualifications” set out in the inscribed sectors or sub-sectors in WTO Members’ schedules.
Table 2 reveals that no WTO Member undertakes the entry “None” in the national
treatment column across all four modes of supply with respect to any sub-sector of insurance
and insurance related services. It suggests that there are significant differences incommitments on national treatment among modes of supply. The US, while rendering fullcommitments on national treatment under Modes 2 and 3 in supplying direct insurance
services, does not extend this treatment to cross-border transactions. 590 Similarly, inreinsurance services and services auxiliary to insurance, the US inscribes “None” in Modes 2
and 3, but “Commitment with limitations” in Modes 1 and 4.
Even new entrant, China, also inscribes “None” on the national treatment column withregard to only cross-border supply and consumption abroad, and reserves several limitations
in Modes 3 and 4.591 In Japan’s Schedule of Specific Commitments, while undertaking fullcommitments on national treatment with regard to Modes 1 and 2, there are some limitations
on national treatment in supplying all insurance and insurance-related services through Modes
3 and 4.592
These practical evidences on scheduling commitments of the selected countries would
suggest clear intention of the WTO Members to treat insurance services differently under
different modes of supply with regard to the national treatment obligation. However, theschedules of specific commitments by the selected countries do not provide any relevant
evidence for examining likeness of service suppliers.593
590

US – Schedule of Specific Commitments, GATS/SC/90 Suppl.3, 28 February 1998, pp. 2-3.
China – Schedule of Specific Commitments, GATS/SC/135, 14 February 2002, pp. 28-32.
592
Japan – Schedule of Specific Commitments, GATS/SC/46/Suppl.3, 28 February 1998, pp. 2-4;
593
See Thailand – Schedule of Specific Commitments, GATS/SC/85/Suppl.3, 26 February 1998, pp. 3-4;
and Singapore – Schedule of Specific Commitments, GATS/SC/76/Suppl.3, 26 February 1998, pp. 3-4.
In schedules of specific commitments of other WTO Members, for example, Thailand has differentiated thelevel of foreign ownership in a commercial presence in order to extend the national treatment principle for“service auxiliary to insurance” supplied through Mode 3. Thailand undertook no commitments on the standardof “no less favourable” treatment with regard to commercial presence of foreign supplier, whose foreign equity
participation exceeds forty-nine percent, in supplying insurance consultancy and average and loss adjustment
services. This practice would indicate that while Thai companies and commercial presence of foreign companies
in Thailand to supply the same “service auxiliary to insurance” through Mode 3, those commercial presenceswith foreign equity participation exceeding forty-nine percent are not subject to the “no less favourable
treatment”.
Another example is that, in the horizontal commitments, Singapore provides that commercial presence of
foreign service suppliers must have a local manager and at least one director being locally resident. In addition,
all branches of foreign companies that are registered in Singapore must have at least two locally resident agents.
Although these two evidences, arguably relate to the physical characteristics of service suppliers in supplying
insurance services through Mode 3, they do not clearly indicate the comparison of likeness between domestic
and foreign insurers. Moreover, there is no evidence for comparing service suppliers in supplying insurance andinsurance-related services through other modes of supply in the scheduling practice among these WTO Members.
591


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4. Case study: China’s measure on non-life insurance services594
China’s Insurance Law was enacted in June 1995 and amended in October 2002.595
Under China’s Insurance Law, the requirement of having a minimum of Yuan 200 million(approximately US$ 24 million) in registered capital must be satisfied in order to set up an
insurance company. 596 This requirement is applicable to both domestic and joint-venture
insurance companies. However, in circumstances where foreign insurers wish to establish
wholly owned branches in China to conduct non-life insurance business, they must alsosatisfy the minimum registered capital of no less than Yuan 200 million.597
During the transitional review under Section 18 of the Protocol on the Accession of
the People’s Republic of China, 598 several WTO Members raised concerns on China’s
excessively high minimum capital requirements for financial services, including insurance
services.599
In response to those concerns, China based its arguments on three main reasons.
Firstly, the measure on minimum capital requirements does not fall within the scope of
Article XVII because it application is transparent and non-discriminatory.600 Secondly, such ameasure is in compliance with the prudential reasons, which are allowed by GATS.601 Thirdly,
the key element in assessing the prudential aspect of a measure is whether it is prudential to aparticular Member.602

594This section draws from Vu Nhu Thang (2007a), pp. 88-123.
WTO. Trade Policy Review – China, Report by the Secretariat, WT/TPR/S/161, 28 February 2006, p.
221, para. 185.
596
Id. p. 222, paras. 189-190. See also Art. 6.3 of Regulations on Administration of Insurance Companiesof the China Insurance Regulatory Commission, effective as of 15 June 2004.
Available at http://www.circ.gov.cn – Last visited 2 April 2006.
597
Id. p. 222, para. 190. See also Art. 7 of Regulations of the People's Republic of China on
Administration of Foreign-funded Insurance Companies (Adopted at the 49th Executive Meeting of the StateCouncil on December 5, 2001, promulgated by Decree No. 336 of the State Council of the People's Republic ofChina on December 12, 2001, and effective as of February 1, 2002).
Available at http://english.gov.cn/laws/2005-08/24/content_25818.htm – Last visited 2 April 2006.
598
See Accession of the People’s Republic of China, Decision of 10 November 2001, WTO Doc. No.
WT/L/432, 23 November 2001, p. 11.
Section 18 titled as “Transitional Review Mechanism” requires the subsidiary bodies of the WTO and theGeneral Council to conduct the review on the implementation by China of the WTO Agreement and of therelated provisions of the China’s Accession Protocol in every year after the accession and for the period of eight
years.
599
For example, Communication from Japan, WTO Doc. No. S/FIN/W/36, 28 October 2004;
Communication from the European Communities, WTO Doc. No. S/FIN/W/39, 8 November 2004;
Communication from the United States, WTO Doc. No. S/FIN/W/40, 8 November 2004; and Communicationfrom Chinese Taipei, WTO Doc. No. S/FIN/W/41, 15 November 2004.
600
Committee on Trade in Financial Services, Report of the Meeting held on 23 November 2004, WTO
Doc. No. S/FIN/M/47, 26 November 2004, paras. 54-55.
601
Committee on Trade in Financial Services, Report of the Meeting held on 19 September 2005, WTO
Doc. No. S/FIN/M/50, 23 September 2005, para. 17.
602
Committee on Trade in Financial Services, Report of the Meeting held on 23 November 2004, WTO
Doc. No. S/FIN/M/47, 26 November 2004, para. 75.
595


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NATIONAL TREATMENT PRINCIPLE IN GATS:
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The legal issue for this examination is whether the China’s measure on imposing theminimum capital requirement of Yuan 200 million on branch of foreign insurers violates
Article XVII, and if yes, whether it is justifiable by the prudential exception.
As far as this measure affecting trade in insurance services is found under the scope of
GATS Article XVII, the two-stage approach towards interpretation of the national treatment
principle in insurance services sector, which is framed in Chapter Three, shall be employed.
Figure 7 provides the analytical framework of the two-stage approach towards interpretationof Article XVII, which consists of four elements for examination.
Figure 7: Analytical framework of the two-stage approach towards interpretation of thenational treatment principle: Example of China’s non-life insurance services(1) M e asur e s
affecting supply of insurance
services: minimum capitalrequirement of Y 200 million

Insur anc e se r vi c e s and sup p l i e r s fr o m
c o unt r y A ; and d o me sti c i nsur anc e
se r v i c e s and sup p l i e r s o f C hi na

Like(2) Like ne s s of ins urance se rvice s
垸 Competitive relationship(products’ end-uses, consumers’
taste and habits)
垸 Insurance services
classification: non-life insurance
services (CPC 8129)
垸 Insurance service suppliers(physical characteristics,
process of supplying services,market place)垸 Modes of supply: Mode 3(3) No l e ss favo ur abl e tr e at me nt
垸 Formally identical treatment, but垸 Modifying conditions of competition
De facto
Le ss fav ourable tre atme nt(4.1) A nne x o n F i nanc i al Se r vi c e s
垸 Solvency requirment
垸 Primarily aimed at prudential reasons

A disguise d re striction on
trade in insurance se rv ice s

C on clu sion : V iola tion

(1) Whether a measure in question falls under the scope of Article XVII?
As described earlier, China has undertaken to allow foreign insurers to set up
commercial presence, including branches, joint ventures, and wholly owned subsidiaries, inChinese insurance market to supply non-life insurance services through Mode 3. In addition,
China inscribes no limitation on the national treatment principle with regard to non-life
insurance services supplied through Mode 3. Consequently, China is obliged to accord to nonlife insurance services and service suppliers of other WTO Members treatment no lessfavorable than that China accords to its own like non-life insurance services and service
suppliers under Article XVII.

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Article XVII encompasses a broad coverage of measures, which affect the supply ofservices. The measure at analysis requires branches of insurers from other WTO Members tohave capital of at least Yuan 200 million in order to supplying insurance services in China.
This measure apparently affects the supply of insurance services by the branches. Moreover,because Article XVI only deals with maximum limitations, this measure of minimum
requirement is excluded from the scope of the market access provision.603 Therefore, it issubmitted that this measure falls within the scope of Article XVII.
(2) Likeness under Article XVIIAssuming that the second element of this analytical framework is established, i.e.
China’s domestic companies and the branch of a foreign insurer from country A are supplying
alike non-life insurance services because of competitive relationship between foreign anddomestic insurance services, the same service classification entry, the same mode of supply(Mode 3), and the likeness among insurance service suppliers (the same market place, similar
process of supplying services).
(3) Does this measure modify conditions of competition against foreign insurance
services and service suppliers?
Because the minimum capital requirement of Yuan 200 million applies to both
China’s domestic insurers and branches of foreign insurers, it is submitted that this measure is
not de jure discrimination, and thus arguably accords formally identical treatment to services
and service suppliers regardless of their origin.
According to Article XVII, either formally identical or different treatment which
modifies conditions of competition in favour of domestic services or service suppliers, or at
the expense of foreign services or service suppliers, shall be prohibited. Therefore, in orderfor the measure to be qualified for this requirement of Article XVII, the application of theformally identical treatment must not modify conditions of competition for foreign insurance
services or service suppliers.
This measure, in fact, imposes an excessively high level of minimum capitalrequirements compared to other WTO Members. 604 Moreover, the introduction of thismeasure may disregard the legal fact that branches constitute an integral part of foreign
insurers, and they may be supported by their head offices in case of insolvency. In otherwords, branches operate on the ground of foreign insurers’ consolidated worldwide capital,605
and accordingly are not separately capitalized.

603

Scheduling of Initial Commitments in Trade in Services, Explanatory Note 1, MTN.GNS/W/164, 3
September 1993, para. 5. See also Guidelines for the Scheduling of Specific Commitments under the General
Agreement on Trade in Services (GATS), adopted by the Council for Trade in Services on 23 March 2001. WTO
Doc. No. S/L/92, 28 March 2001, para. 11.
604
Committee on Trade in Financial Services, Report of the Meeting held on 23 November 2004, WTO
Doc. No. S/FIN/M/47, 26 November 2004, paras. 70-72.
For example, Thailand and Turkey, impose the minimum capital requirements on branches of foreign
insurers of approximately US$ 1 million and 4.7 million, respectively, while the level of China equals to US$ 24
million.
605
See Key (2003), pp. 35-36.

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Another important aspect is that branches are subject to two supervisory systems, one
in China and the other one from the authority of foreign insurers. As noted by the IAIS, there
may be differences in the supervision of subsidiary and branch because branches are assessed
under provisions applied by both exporting and importing jurisdictions. 606 Arguably, thismeasure could result in higher operational costs for branches to supply non-life insurance
services, and then would constitute the legal effect of prohibiting substantial number offoreign insurers from supplying non-life insurance services in China through branches.
Consequently, although the measure of minimum capital requirement operates in a nondiscriminatory basis, in practice, it creates an adverse impact on conditions of competition for
insurance services and service suppliers from other WTO Members compared to China’s likecounterparts.
Thus, this measure could constitute de facto discrimination against foreign insurance
services and service suppliers, and thus violate GATS Article XVII on National Treatment.
(4) Justification under Annex paragraph 2(a)As China justifies its measure by relying on prudential reasons, the three-layer test as
analyzed in section 3 of Chapter Three shall be examined. Specifically, in order for the
Chinese measure on the minimum capital requirement of branches of foreign non-life
insurance companies, which has been found in violation of the national treatment obligation,
to be qualified for the prudential exception, (i) that measure must be concerned with“prudential reasons”, (ii) that measure must be taken “for” the prudential reasons, and (iii) theapplication of that measure is not used as a means of “avoiding” obligations and commitments
under GATS.
At the first layer, as discussed in section 3.1 of Chapter Three, the term “prudential
reasons” refers to the solvency of an insurance company. This solvency could ensure theinterests of policyholders and contribute to the stability as well as the integrity of the wholefinancial system.
As noted earlier, one argument from the Chinese government is that the minimum
capital requirement is in conformity with prudential reasons. Article 1 of Regulations of thePeople's Republic of China on Administration of Foreign-funded Insurance Companies
stipulates that the aim of those regulations is to “promote the healthy development of theinsurance industry”. 607 In addition, in the words of the IAIS, “in order to protect
policyholders from undue loss, it is necessary that a solvency regime establishes not only
minimum capital adequacy requirement, but also a solvency control level, or series of control
level…”608 Specifically, the IAIS also suggests that the regulatory framework must determinea threshold minimum capital requirement for insurance companies. 609 Therefore, it issubmitted that the measure of minimum capital requirement of insurance service suppliers isconcerned with solvency requirements, and falls under the scope of prudential reasons.

606

IAIS. Principles No. 2 on The Supervisions of International Insurers and Insurance Groups and Their
Cross-border Business Operations, December 1999, p. 5.
607
Art. 1 of Regulations of the People's Republic of China on Administration of Foreign-funded Insurance
Companies.
608
IAIS (2003), ICP 23 on Capital Adequacy and Solvency, p. 39.
609
IAIS. Principles No. 5 on Capital Adequacy and Solvency, January 2002, p. 8.

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The second layer under Annex paragraph 2(a) requires that a measure is taken “for”
prudential reasons. As described in section 3.2 of Chapter Three, the WTO-inconsistentmeasure must be “primarily aimed at” prudential reasons. The Chinese measure on minimum
capital requirement would allow a minimum guarantee on the financial health of insurance
suppliers, by providing a financial buffering to absorb risks during their operations.
Consequently, interests of policyholders are protected. In the words of the IAIS, “thisminimum level of capital is designed to provide a minimum assurance of the financial
capacity and soundness of the insurer.” 610 The measure of minimum capital requirement andthe legitimate policy objectives of prudential reasons are closely interrelated. This connection
is a direct and substantial one. Furthermore, other WTO Members, like Japan, the EC and US,
share a consensus that the measure on minimum capital requirement with respect to branchesof foreign insurers would fall within the scope of the prudential reasons.611 Therefore, it could
be concluded that the Chinese measure of minimum capital requirement is taken “for”
prudential reasons within the meaning of Annex paragraph 2(a).
The third layer needs to be evaluated before concluding that the measure is justifiable
under the prudential exception. Under this layer, the application of the minimum capitalrequirement must not constitute a disguised restriction on trade in insurance services. As
pointed out in section 3.3 of Chapter Three, different criteria might be applied under the antiavoidance provision, such as rigidity and inflexibility, and necessity.
According to the IAIS, as mentioned earlier, the supervision of branches differs to thatof subsidiaries. While subsidiaries are required to comply with the importing country’s rules
on capital adequacy and solvency, branch’s solvency may be assessed under both exportingand importing jurisdictions. By adopting the excessively high capital requirement on branchesof foreign non-life insurers, several special factors of branches are not taken into
consideration by China. This would constitute an inflexibility of application of the prudential
measure. The rigid application of the excessively high level of minimum capital would
indicate protectionist intent of China’s regulators and supervisors to limit foreign participationin the domestic insurance market, and consequently seeks to avoid its obligations andcommitments towards branches in the Chinese insurance market. While this measure has
guaranteed China’s right to regulate its insurance market, rigid and inflexible application ofthis measure could constitute a disguised restriction on trade in insurance services.
Moreover, several WTO Members, for example Korea, also apply different levels of
minimum capital requirement for branches of foreign insurers.612 Other WTO Members apply
minimum capital requirements equally between domestic insurers and branches of foreign

610

Id.
See Committee on Trade in Financial Services, Report of the Meeting held on 23 November 2004,
WTO Doc. No. S/FIN/M/47, 26 November 2004, paras. 70-72.
612
See Republic of Korea – Schedule of Specific Commitments, GATS/SC/48/Suppl.3/Rev.1, 18
November 1999, pp. 9-10; Trade Policy Review – Republic of Korea, Report by the Secretariat, WT/TPR/S/137,
18 August 2004, p. 102, para. 82; and OECD. 2002. Insurance Solvency Supervision – OECD Country Profiles.
Paris: OECD, pp. 160-161.
Although Korea undertakes that branches of foreign direct insurance (life and non-life) companies are
permitted, there is a difference in minimum capital requirement between domestic companies and branches offoreign insurers. Foreign branches must maintain funds of at least Won 3 billion (USD 3 million) if wanting to
do business with both Koreans and foreigners, or Won 100 million (USD 100,000) if only for foreigners.
Meanwhile, domestic insurance companies must have Won 30 billion in paid-in capital or foundation funds.
611


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insurers, but at a lower level than that of China.613 It could be argued that China may apply aless strict requirement on minimum capital without undermining the objectives ofpolicyholder protection and the stability of the whole financial system. Accordingly, theapplication of the Chinese WTO-inconsistent measure would also not satisfy the necessity
criterion under the anti-avoidance provision.
The measure of minimum capital requirement, therefore, would not be entitled tojustification under the prudential exception, and then constitute a violation of China’s
obligation under GATS Article XVII. The burden of proof lies with China for proving that theanti-avoidance provision is satisfied.
6. Concluding remarks
The examination of the schedules of specific commitments by the selected WTO
Members reconfirms that the scope of application of the national treatment principle is limited
to all discriminatory measures, which are excluded from the realm of GATS Article XVI on
Market Access. In addition, the determination of likeness in Article XVII would be uncertain
if only the criterion of services classification is taken into account. The practice of schedulingspecific commitments also reveals that WTO Members indicate different treatment indifferent modes of supply with regard to the national treatment principle.

613

See Thailand – Schedule of Specific Commitments, GATS/SC/85/Suppl.3, 26 February 1998, pp. 2-3;
Trade Policy Review – Thailand, Report by the Secretariat, WT/TPR/S/123, 15 October 2003, p. 82, para. 49;
and OECD. 2001. Insurance Regulation and Supervision in Asia and Latin America. Paris: OECD, Table 9, pp.
58-59.
For example, Thailand committed to allow foreign insurers to establish branches in their domestic insurance
market for supplying insurance and insurance-related services. The minimum capital requirements are set at Baht
50 million (USD 1.5 million) for life insurers and Baht 30 million (USD 900,000) for non-life insurers.
Moreover, in financial services commitments, Thailand allows foreign insurers to set up commercial presence inthe form of branches. And branches of foreign insurers have to fulfill the same minimum capital requirements as
domestic insurance companies.

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CONCLUDING OBSERVATIONS OF PART ONE

Part One undertakes a study of general aspects of the applicability of the national
treatment principle to trade in insurance services. Trade in insurance services under the GATS
system is governed by three levels, namely the framework agreement, the Annex on Financial
Services, and schedules of specific commitments by WTO Members. The first level is dealt
with in Chapter Two, the second level in Chapter Three, and the third level in Chapter Four.
Until the end of the Uruguay Round, trade in financial services in general and in insurance
services in particular was subject to agreement only on the first and second levels. Agreementon the third level, which was subject to two subsequent negotiations in 1995 and 1997, wasachieved by the end of 1997 and became effective from 1999. An additional level is theUnderstanding on Commitments in Financial Services, which affects trade in insurance
services of those WTO Members who employ it for undertaking specific commitments.
Five tentative concluding observations of Part One are as follows:Firstly, the national treatment principle in GATS is an object of both negotiations forliberalization and dispute settlement mechanism. WTO Members are obliged to respect thenational treatment obligation for sectors and/or sub-sectors as well as level of commitments
they inscribe in their schedules.
Secondly, there is a hierarchical relationship between Article XVI and XVII. Although
the text of Article XVII in the framework agreement seems to support a broad domain of thenational treatment principle to include pre and post entry stages of services and service
suppliers, on the one hand, and all quantitative and non-quantitative discriminatory measures,on the other hand, the practice of scheduling specific commitments has indicated that thescope of this principle covers all discriminatory measures, which do not fall within the ambitof Article XVI on Market Access. This interpretation is also confirmed by an alternative
approach of scheduling as provided in the Understanding on Commitments in Financial
Services.
Thirdly, the national treatment principle consists of three interpretative elements,
namely “measures” affecting trade in services, likeness, and the standard of “no lessfavourable” treatment. The first element covers all governmental measures, which directly or
indirectly affect trade in services. Uncertainty in criteria to compare foreign and domestic
services and service suppliers leads the second element to a broad coverage of likeness. The
examination of schedules of specific commitments by the selected countries also reveals alack of certainty with regard to the service classification criterion for comparing likeness.
As trade in services is defined through four modes of supply, it is submitted that thedetermination of likeness should also take into account modes of supply. Schedules of
specific commitments reveal a clear intention of the WTO Members to treat insurance
services and service suppliers differently under different modes of supply with regard to thenational treatment obligation. In addition, the scope of likeness would be narrowed down by
examining not only “like” services, but also “like” service suppliers. However, the schedulesof the selected WTO Members seem not to be clear on criteria for comparing “like” service
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The third element in the national treatment principle addresses a broad scope of
discrimination, both de jure and de facto. Accordingly, the uncertainty in interpretation of
likeness as well as the broad coverage of discrimination would lead to a high possibility ofviolation of the national treatment principle, which apparently discourages WTO Members
from undertaking commitments on national treatment for further liberalization of trade inservices.
Fourthly, an appropriate way, where legitimate national policy objectives are taken
into account, is needed for interpretation of the national treatment principle in order to balance
this broad obligation. General exceptions as provided in GATS Article XIV constitute thesecond stage in interpretation of the national treatment principle. By employing a two-stage
approach, even though in an objective assessment a measure is found discriminatory against
foreign services and service suppliers in the context of Article XVII, it may not constitute a
violation of the national treatment principle if the measure is a legitimate discrimination.
Lastly, as far as insurance services are concerned, the prudential exception under the
Annex is proposed to constitute a second stage in the two-stage approach towards
interpretation of the national treatment principle in the insurance sector in order tocounterbalance the broad coverage of both likeness and the standard of “no less favourable”
treatment under Article XVII. Through this approach, WTO Members would enjoy a proper
space for regulating their insurance markets in order to protect policyholders as well as thestability of the financial system.
The interpretation of the prudential exception consists of three layers, namely thescope of “prudential reasons”, the relationship between measures at issue and prudential
policy aims, and tests for the anti-avoidance provision. The meaning of the term “prudential
reasons” refers to preservation of financial conditions of insurers, through solvency
requirements, vis-à-vis policyholders and other relevant persons in the financial market, andthe stability of the financial system as a whole. A measure which is justified under theprudential exception must be primarily aimed at prudential reasons. In order to examine
whether WTO Members abuse their right to invoke the prudential exception, the applicationof such discriminatory measures must not constitute a disguised restriction on trade ininsurance services.


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PART TWOVIETNAM’S INSURANCE SERVICES MARKET


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CHAPTER FIVE
Development of Vietnam’s Insurance Services Market
This Chapter provides a general background on Vietnam’s economic developmentfrom the start of doi moi in 1986. The role of the insurance sector as well as its legal
framework is examined through three stages of development, namely pre-1993, 1994-2000,
and post-2001.
1. Economic development
1.1 Overview
After the reunification in 1975, the national five-year plan 1976-80 was adopted inorder to reconstruct the country from destruction and damage of the war, and to develop an
economic base. The overall objective of this plan was to strategically emphasize agriculturaldevelopment, which was considered a means of achieving national industrialization.614 The
state and collective sectors were perceived as the foundation of the economy, and heavily
subsidized by the state budget.615
However, this plan proved a failure due to the poor performance of the agricultural
sector as a result of forced collectivization undertaken in the Southern area, which
discouraged farmers from production as well as distorted prices on agricultural products thatwere mostly below market levels.616In addition, some poor choices in the industrialization
strategy, such as pursuing self-sufficiency in heavy industrial goods, strong market protection,and overvalued national currency, also limited this national plan’s success.617
A new economic plan was introduced in the Sixth Plenum of the Central Committee of
the Communist Party in 1979, which called for (i) developing production of domestic
consumption goods; (ii) promoting exportation as a strategic priority; (iii) encouraging
production by the non-state sector; and (iv) improving the distribution system of goods andproduction materials based on cohesion between production and market.618 Although these
economic policies brought about certain achievements in economic and social development,
the country suffered severe problems, including hyperinflation, which reached 774.7 percent
614
Beresford, Melanie. 1989. National Unification and Economic Development in Vietnam. Basingstoke:
Macmillan Press, p. 91.
615
Vu Tuan Anh. 1995. Economic Policy Reforms: An Introductory Overview. In Irene Norlund, Carolyn
L. Gates and Vu Cao Dam, eds., Vietnam in a Changing World. Richmond: Curzon Press, p. 19.
616
Nguyen Xuan Oanh. 1990. Vietnam: Recent Economic Developments and the World Economy. In Seiji
Naya and Akira Takayama, eds., Economic Development in East and Southeast Asia: Essays in Honor ofProfessor Shinichi Ichimura. Singapore: Institute of Southeast Asia Studies, p. 98.
617
Ebashi, Masahiko. 1997. The Economic Take-off. In James W. Morley and Masashi Nishihara, eds.,
Vietnam Joins the World. Armonk, N.Y.: M.E. Sharpe, p. 38.
618
The Resolution of the Sixth Plenum of the IV Central Committee of Vietnam Communist Party, No. 21NQ/TW, 20 September 1979, on Directions and Responsibilities for Development of Consumption Goods
Industry and Local Industries. In Van kien Dang Toan tap [Communist Party Documents]. 2005 (Volume 40),
Hanoi: Nha xuat ban Chinh tri Quoc gia, pp. 391-396.


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in 1986 as the consequence of extensive reform in “prices, wages, and currency” in late 1985,
and shortage of essential foods and products.619 State-owned enterprises (hereinafter SOE)
were unable to increase their efficiency.620
In terms of foreign trade and aids, Vietnam continued to rely heavily on trade with andassistance from the Council for Mutual Economic Assistance (hereinafter COMECON) for its
economic development, whereby centrally planning authorities intervened directly to control
all exports and imports with COMECON countries according to five-year plans and annual
protocols.621 However, due to difficulties experienced in those countries, financial assistanceto Vietnam gradually decreased and trade arrangements also witnessed great difficulties.622
Therefore, the economic development of Vietnam in the early 1980s was characterized
by the overwhelming position and low efficiency of the state sector, macro financial
difficulties, and over reliance on COMECON trading partners. The economic crisis in the mid
1980s was a desperate call for a comprehensive reform in Vietnam.623 At the same time, otherexternal factors, including the US embargo on trade and investment, the widening economic
and technical gap between Vietnam and regional countries, as well as the rapid progress ofChina’s economic reform and development, also contributed to the push for domestic
reform.624
Thus, in 1986, Vietnam launched a fundamental economic reform program, called doi
moi during its VI Congress of the Communist Party, which has been regarded as a turning
point marking the country’s transition from a centrally planned economy to a market-driven
economy with a socialist orientation.
The key elements of doi moi were: (i) decentralization of state economic management
and autonomy to SOEs in making decisions relating to production, distribution, and financing;(ii) replacement of administrative measures and controls by economic ones and in particular
the use of market-oriented monetary policies to control inflation; (iii) adoption of an outwardoriented policy in external economic relations, where important measures of this policy were
the introduction of real exchange rates and the liberal foreign investment law in 1988;625 (iv)adoption of agricultural policies which allowed for long term land use rights and greater
freedom in marketing products; and (v) reliance on or acceptance of the private sector as theengine of economic growth.626

619

See The Political Report at the VIII Congress of Vietnam’s Communist Party, 1996, Part One: The
country after a decade of reform, the preamble.
Available at http://www.cpv.org.vn/dcsvn/ – Last visited 5 October 2006.
620
Vu (1995), p. 21.
621
Than, Mya. 1993. Vietnam’s External Trade, 1975-91: A Survey in the Southeast Asian Context. In
Mya Than and Joseph L.H. Tan, eds., Vietnam’s Dilemmas and Options: The Challenge of Economic Transitionin the 1990s. Singapore: Institute of Southeast Asia Studies, p. 212.
622
Cai, Wenguo and Michael Hart. 1996. Vietnam’s Accession to the World Trade Organization. Journalof World Trade 30(6), p. 79.
623
Ebashi (1997), p. 39.
624
Id. p. 40.
625
Law on Foreign Direct Investment (Dec. 29, 1987), amended in 1990 and 1992. This Law was replacedby the Law on Foreign Direct Investment Law (Nov. 12, 1996), amended in 2000 (Vietnam).
626
Thant, Myo and Richard W.A. Vokes. 1993. Vietnam and ASEAN: Near-Term Prospects for Economic
Co-operation. In Mya Than and Joseph L.H. Tan, eds., Vietnam’s Dilemmas and Options: The Challenge of
Economic Transition in the 1990s. Singapore: Institute of Southeast Asia Studies, p. 240.

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The following shall review the development of three areas, namely SOE reform andprivate sector development, external trade and foreign investment, and liberalization of thefinancial market, which may affect development of the insurance sector.
1.2 State-owned enterprise reform and private sector development
Characteristics of the SOE reform program during doi moi included (i)commercialization of SOEs in order to place SOEs in a commercial position with increased
autonomy and financial responsibility; (ii) re-organization, re-structuring and liquidation; (iii)pilot divestiture program; (iv) developing a legal framework, including Law on SOEs (1995);
and (v) development of enterprise groupings (state corporations) in some key industrial
sectors, including natural resources, foods, airlines, post and telecommunication. 627 The
number of SOEs, thus, declined sharply from around 12,297 in 1987 to roughly 5,500 at theend of 1997.628 While its share in GDP dropped from 22.7 percent in 1995 to 17 percent in2005, the industrial output, at constant 1994 prices, of the SOE sector tripled in 2005 incomparison with that of 1995.629
However, problems persisted regarding the slow pace of SOE reform, especially in thefields of improving efficiency and accountability, and a lack of progress in the pilot
divestiture program.630 In more specific terms, only 40 percent of SOEs operated at a profit,
while 60 percent suffered losses or no profit by the early years of 2000s.631
Priorities for furthering SOE reform are, therefore, given to: (i) continuing to
restructure SOEs in order to delineate business operations and public utility purposes, as wellas to put SOEs on equal footing and legal environment with private sector enterprises,
including introduction of competition and bankruptcy laws; (ii) creating more autonomy for
SOE’s management in terms of investment decision making, labour and wages, and profit
distribution; (iii) promulgating regulations to deal with pricing management and supervisionof SOEs operating in monopoly sectors or industries; (iv) introducing regulations imposing
compulsory information disclosure and auditing of annual reports; (v) and accelerating thedivestiture program, as well as assignment, sale, lease and business contracts.632
The SOE reform has implications for private sector development in Vietnam. Because
the SOE’s share of employment fell from 9.3 percent of the total labour force in 1988 to 5.1
percent in 1995, the private sector was expected to absorb a great number of the redundant
workers from the SOE sector.633 In addition, legislation for private enterprise activities and
627
Arkadie, Brian Van and Raymond Mallon. 2003. Vietnam: A Transition Tiger? Canberra: Asia Pacific
Press, pp. 123-135.
628
Id. pp. 126-127.
629
Source: General Statistics Office, Vietnam.
Available at http://www.gso.gov.vn – Last visited 22 May 2007.
630
The Strategy for Socio-Economic Development by the year 2010, at the Ninth Congress of Vietnam’Communist Party, 2001, Part One: The country and international context, Sec. 1 (2).
Available at http://www.cpv.org.vn/dcsvn/ – Last visited 5 October 2006.
631
Arkadie and Mallon (2003), p. 142.
632
See the Resolution on State owned Enterprises of The Third Plenum of the IX Central Committee ofVietnam’s Communist Party, 2003, Part III: Main solutions.
Available at http://www.cpv.org.vn/dcsvn/ – Last visited 5 October 2006.
633
Arkadie and Mallon (2003), p. 154.


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entrance into those business areas of production and trade which used to be restricted orunder state monopoly further necessitated profound SOE reform.634
Another important reason for private sector promotion was to additionally satisfy thefinancial resources for economic development. The existence and development of the private
sector has been recognized and protected by laws.635 About 45,000 private sector enterprises
were registered during the 1990s, and nearly two million household business were establishedin urban areas, contributing to enhanced performance of the economy as well as considerably
improving the retail and service network.636
However, a need for further reduction of barriers to private sector development was
pushed by concerns about potential impacts of the Asian financial crisis and decline in foreign
investment during the late 1990s.637 A notable change was that, instead of application forlicenses, as provided in old legislations, domestic investors were only required to register
their business operations with relevant competent authorities under Law on Enterprises (1999).
Owing to this new registration procedure, about 56,000 new private sector enterprises wereregistered between January 2000 and December 2002 alone.638 In comparison with 1999, thetotal investment capital made by the private sector in 2006 went up by 4.2 times, and theoutput, at constant 1994 prices, increased by 4 times, accounting for 35 percent of GDP.639
Despite these improvements, a number of problematic issues persisted, constraining
the private sector from developing, including inconsistency in legal and regulatory system,
biases against the private sector, and increased compliance costs imposed on businesses as aresult of frequent changes in laws and regulations.640 Nevertheless, since 2006, the differencein legal framework between SOEs and private sector enterprises has been completely
abolished by the enactment of a new Law on Enterprises. This Law consolidates the Law on
SOEs (2003), Law on Enterprises (1999), and a part of Law on Foreign Direct Investment(1996) and amendment thereof (2000). As a result, establishment and operations ofenterprises, regardless of ownership, are categorized under limited liability, joint stock,partnership, and sole proprietorship.641
1.3 External trade and foreign investment

634

Leipziger, D. M. 1992. Awakening the Market – Vietnam’s Economic Transition. Washington, D.C.:
World Bank (Discussion Papers 157), p. 18.
635
Company Law (Dec. 21, 1990) (Vietnam); Law on Private Enterprise Law (Dec. 21, 1990) (Vietnam).
The translation of Private Enterprises Law may be the Sole Proprietorship Law as Article 2 stated that thisform of enterprise, as business entity, is owned by a sole person and liable for all business activities of theenterprise by his/her own assets.
636
Vo Tri Thanh and Pham Hoang Ha. 2004. Vietnam’s Recent Economic Reforms and Developments:
Achievements, Paradoxes, and Challenges.” In Philip Taylor, ed., Social Inequality in Vietnam and theChallenges to Reform. Singapore: Institute of Southeast Asia Studies, p. 66.
637
Arkadie and Mallon (2003), p. 161.
638
Tenev, Stoyan et al. 2003. Informality and the Playing Field in Vietnam’s Business Sector. Washington,
DC.: IFC, World Bank and MPDF, p. 2.
639
Source: General Statistics Office, Vietnam.
Available at http://www.gso.gov.vn – Last visited 22 May 2007.
640
Tenev et al. (2003), pp. 77-78.
641
Law on Enterprises (Nov. 29, 2005) (Vietnam), Art. 1.

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Another element in the economic reform was an increased integration into the world
economy, which has been reflected by the rapid development in external trade and foreign
direct investment.
Upon the commencement of doi moi, Vietnam’s trade regime was still subject to a
relatively comprehensive framework of regulations on trading rights and trade barriers,
including both tariff and non-tariff barriers, aimed at export promotion and protection ofimport substituting production.642 In addition, Vietnam lost its traditional trading partners dueto the fall of COMECON in the late 1980s.643 Accordingly, the important landmark was 1988
when major reforms in foreign trade policies were introduced, targeting the enhancement of
incentives and providing more autonomy for enterprises in conducting foreign tradetransactions.644
The structure of incentives that enabled Vietnam to trade at competitive world prices,consisted of: (i) a flexible exchange rate which maintained official price of the domestic
currency close to the market price; (ii) a substantial reduction in the average tariff rate
combined with some reduction in the range of tariff rates; (iii) a reduction in quantitative
restrictions on imports; and (iv) a reduction in export controls.645 As a result, foreign trade has
expanded with remarkable speed on account of new trading partners, primarily fromSoutheast and East Asia.646
Moreover, the gradual reduction of the monopoly position of SOEs in foreign trading
activities, and the abolishment of trade licenses in 1998 have resulted in an acceleration in thenumber of enterprises registered for trading activities from 2,400 in early 1998 to more than
16,000 in early 2002.647 All those measures increasingly contributed to a growth of the totalexport volume, which jumped from US$ 0.733 billion in 1988 to US$ 16.7 billion and 39.3
billion in 2002 and 2006, respectively.648
Promotion of foreign trade and investment is vital for Vietnam’s economic
development since both foreign trade and investment (i) are directly linked with the process of
economic growth and structural change; (ii) reflect Vietnam’s policy priority in opening the
economy and joining the world; and (iii) may be used to encourage an enabling environment
for furthering economic reform and development.649 Specifically, the significance of foreign
direct investment is not only in financing economic development and job creation, but also in
improving economic environment, corporate governance and technology transfer. This
includes new ideas, processes, management skills, know-how, as well as models for domestic
investors and facilitation of access to export markets.650 The total invested capital in foreign642

Vo and Pham (2004), p. 71.
Than (1993), p. 221.
644
Id. pp. 219-220.
645
Griffin, Keith. 1998. Restructuring and Economic Reforms. In Keith Griffin, ed., Economic Reform in
Vietnam. Basingstoke, Hampshire: Macmillan Press, p. 16.
646
Export market has increasingly expanded to the EU countries and the US since the late 1990s.
647
Vo and Pham (2004), p. 71.
648
Source: Ministry of Trade, and General Statistics Office, Vietnam.
Available at http://www.mot.gov.vn, and http://www.gso.gov.vn – Last visited 2 April 2007.
649
Gates, Carolyn L. and David H.D. Truong. 1995. “Development Strategy and Trade and Investment
Policies for Structural Change.” In Irene Norlund, Carolyn L. Gates and Vu Cao Dam, eds., Vietnam in a
Changing World. Richmond: Curzon Press, pp. 86-87.
650
Arkadie and Mallon (2003), pp. 210-213.
643


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direct investment has taken off from US$ 6.5 billion during 1991-1995 to US$ 12.3 billion in
1996-2000, and US$ 17.7 billion in 2001-2006.651
The difficult regional investment climate attributable to the Asian financial crisis has
required further improvement in Vietnamese investment conditions in order to compete
successfully for foreign investment resources.652 Amendments of the Law on Foreign Direct
Investment in 2000 have proved to be significant in attracting foreign inflows by streamlining
licensing and administration procedures, especially automatic registration for export-oriented
foreign invested enterprises,653 and leveling the playing field with domestic enterprises by
allowing them to buy foreign currencies from commercial banks in Vietnam to pay for theirimports.654
Endeavour towards a better investment environment in Vietnam was marked by the
promulgation of Investment Law since late 2005,655 whereby legal equity between domestic
and foreign investors was recognized in regard to the access to credit or other preferential
financings,656 public services;657 and the government’s maintenance of a single price systemwith respect to goods and services.658 In addition, the government pledged to refrain not only
from obliging investors to purchase domestic goods and services,659 but also from applying
geographical restrictions on supply of goods and services. 660 This would suggest a strong
commitment towards promotion of the private sector and encouragement of foreign
investment in Vietnam, which ultimately contribute to equal investment environment.
1.4 Financial market liberalization
Before 1990, Vietnam’s financial system was a mono-banking system, whereby themain function of the central bank was to receive funds from SOEs and then extend loans tothem through the state budget. 661 This system was largely responsible for SOEs’ heavy
dependence on the state budget, and blurring of monetary policy and commercial lending.662
An effort to reform the banking sector was introduced in 1990 by enactment of two banking
ordinances, where the mono-banking system was replaced by a two-tier system.663 The firsttier consists of four state-owned commercial banks, that exercise monetary transactions andprovide banking services, and the second tier is the State Bank of Vietnam as the central bank.
651

Source: Ministry of Planning and Investment, and General Statistics Office, Vietnam.
Available at http://www.mpi.gov.vn, and http://www.gso.gov.vn – Last visited 2 April 2007.
652
Arkadie and Mallon (2003), p. 213.
653
Decree 24/2000/ND-CP of the Government giving guidance on the implementation of the Law on
Foreign Direct Investment (1996) and Law on amendments (2000) (Jul. 31, 2000) (Vietnam), Art. 71.
654
Law on amendments of the Law on Foreign Direct Investment in Vietnam (Jun. 9, 2000) (Vietnam), Art.
1.6
655
Investment Law (Nov. 29, 2005) repeals Law on Foreign Direct Investment (1996) (Vietnam).
656
Id. Art. 14.1.
657
Id. Art. 19.2.
658
Id. Art. 10.
659
Id. Art. 8.2.a.
660
Id. Art. 8.2.b.
661
Ariff, Mohamed and Ahmed M. Khalid. 2000. Liberalization, Growth and the Asian Financial Crisis:
Lessons for Developing and Transitional Economies in Asia. UK: Edward Elgar, p. 269.
662
Id.
663
Ordinance on the State Bank (May 23, 1990) and Ordinance on Commercial Banks, Credit
Cooperatives and Financial Companies (May 23, 1990) (Vietnam).

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NATIONAL TREATMENT PRINCIPLE IN GATS:
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The central bank is in charge of both regulatory and supervisory functions over thebanking sector. The monetary policy has become a typical economic instrument of the central
bank with an overall objective of controlling inflation and promoting economic growth.
During the 1990s, tightened monetary policy, supplemented and harmonized with tax reforms,
ensured macroeconomic balance, especially by curbing the high inflation rate, and this, in turn,stabilized the exchange rate.664 The inflation rate decreased substantially to 67.4 percent in
1990, 12.7 percent in 1995, and to a single digit from 1996 until 2006.665 All of these were
important factors for accelerating foreign trade liberalization, and ensuring a stable
investment climate for business development.
In addition to monetary policy reform, the private sector and foreign investment werepermitted in the banking sector under the forms of joint stock bank, branch of foreign bank,and joint venture bank.666 While in 1991, there were only four state-owned commercial banks
and one joint venture bank, by the end of 2006, six state-owned commercial banks, five joint
venture banks, thirty-seven joint stock banks, and thirty-one branches of foreign banks were
established and operating in Vietnam.667 In 2003, capital mobilization through the banking
sector increased by 5 times in comparison with 1996, and the outstanding loans amounted to
VND 363,500 billion.668 Domestic capital mobilization and lending market of domestic banks
accounted for 90 percent while that of foreign banks was 10 percent during the period 20002004.669
Another encouraging development trend in the financial sector is the securities market.
The establishment of a securities market in Vietnam was gradual and pursued in prudent
steps. 670 Until 1998, most attempts of the government were to focus on formulating anecessary regulatory framework for securities and securities exchanges. Vietnam’s State
Securities Commission, which was established in late 1996, is empowered to grant securities
business licenses to joint stock companies or limited liability companies, which areestablished to conduct securities business.671 The first securities trading centre was set up in
Hochiminh City in 2000 and the second one in Hanoi in 2004. The total trading value of listed
664

Griffin (1998), p. 18.
Source: General Statistics Office, Vietnam. A
Available at http://www.gso.gov.vn – Last visited 22 May 2007.
666
Ordinance on Commercial Banks, Credit Cooperatives and Financial Companies, Art. 1 defined that“state owned commercial banks” were commercial banks established by 100 percent capital form the State
Budget; “joint stock commercial banks” were commercial banks established in the form of joint stock company,in which single organization or individual could not own shares exceeding the limitation set by the State Bank ofVietnam; “branches of foreign banks” were units of foreign banks in Vietnam which operated in conformity with
Vietnamese laws; “joint venture banks” were banks, established from joint capital between Vietnamese bank(s)and foreign bank(s), which had headquarter in Vietnam and operated in conformity with Vietnamese laws.
667
Source: State Bank of Vietnam.
Available at http://www.sbv.gov.vn – Last visited 22 May 2007.
668
Source: State Bank of Vietnam.
In Thai Ba Can and Tran Nguyen Nam. 2004. Phat trien Thi truong Dich vu Tai chinh Vietnam trong Boi
canh Hoi nhap [Developing Vietnam’s Financial Services Market in the Context of International Integration].
Hanoi: Institute of Financial Science, pp. 81-82.
669
Source: State Bank of Vietnam.
In Ministry of Planning and Investment and UNDP. 2006. Studies on the Competitiveness and Impact ofLiberalization in Financial Services: The Case of Banking Services. Hanoi: UNDP, Tables 3 and 4, pp. 14 and17, respectively.
670
Ariff and Khalid (2000), p. 275.
671
Decree 48/1998 of the Government on securities and securities exchange (Jul. 11, 1998 (Vietnam), Art.
29.
665


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bonds and shares increased from VND 8,226 billion in 2003672 to 26,600 billion in 2005.673
By the end of the first half of 2007, there are 106 listed joint-stock companies in bothsecurities trading centers in Hanoi and Hochiminh City.674
In summary, private sector and foreign participation are observed as fundamental
engines for Vietnam’s economic development. The financial sector has played a role instabilizing investment environment and constituted a key channel for capital mobilization.
Measures to create a level playing field for all enterprises, irrespective of ownership andorigin, have been introduced sequentially over a period of time. All these factors haveimportant implications for Vietnam’s insurance services market.
2. Vietnam’s insurance services market675
In the insurance sector, there are two important landmarks in the legal environment
after doi moi. First, the governmental decree on insurance was introduced in late 1993, andsecond, the first law on insurance business was passed in 2000. Therefore, the trend ofdevelopment of the insurance market in Vietnam can be divided into three stages: pre-1993,
1994-2000, and post-2001.
2.1 Before 1993
Three characteristics of Vietnam’s insurance sector before 1993 were (i) the statemonopoly in supplying insurance services, (ii) a modest role of the sector in the overall
economy, and (iii) no separate regulator and supervisor.
The state-owned insurance company, the Vietnam Insurance Corporation, wasestablished in the North under the Ministry of Finance (hereinafter MOF) in 1964 to provide
cargo insurance, marine hull insurance, and personal accident insurance. 676 In terms ofreinsurance activities, a part of insurance premiums was ceded to other insurance companies
in the former Soviet Union and China. 677 After the reunification, fifty-two insurance and672
Symposium on Finding Solutions for Further Development of Vietnam’s Securities Market. 2004.
Hanoi: The State Securities Commission (on file with the author).
673
Tran Dac Sinh. 2006. Thi truong chung khoan tap trung nam 2005 – Tao da tang truong cho cac nam
tiep theo [The Official Securities Market in 2005 – A Locomotive for Further Development]. Vietnam Securities
Review (1+2).
674
Source: State Securities Commission of Vietnam.
Available at http://www.ssc.gov.vn – Last visited 5 October 2007.
675
This section draws in part from Vu Nhu Thang. 2007b. Necessary reform of Insurance Business Law inVietnam after its Accession to the World Trade Organization: Prudential Regulatory Aspects. Fordham Journalof Corporate and Financial Law 12(6), pp. 977-1009.
676
Decision 179/CP of the Government Council on establishing Vietnam Insurance Corporation (Dec. 17,
1964) (Vietnam).
677
BaoViet Insurance Corporation. 2005. Bao Viet 40 nam xay dung va phat trien 15/01/1965 –15/01/2005 [BaoViet in Forty Years of Establishment and Development Jan 15, 1965 – Jan. 15, 2005]. Hanoi:
Nha xuat ban van hoa thong tin, p. 18.


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NATIONAL TREATMENT PRINCIPLE IN GATS:
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reinsurance companies operating in the South were merged with the Vietnam Insurance
Corporation during 1976-1977.678
During the early 1980s, along with the economic development, several new insurance
services were supplied, such as personal accident of passengers (1980), aviation insurance(1981), and agriculture insurance (1982).679 Due to the participation of foreign investors in
Vietnam, the Vietnam Insurance Corporation started to diversify insurance services to thoseforeign direct investment projects, including fire insurance (1989).680 Reinsurance activities
have been extended to Lloyd’s market since 1992. In terms of foreign participation in thedomestic insurance market, there was only one joint venture insurance brokerage company,
which was set up in 1993.681
However, insurance services were confined to twenty-two products in non-life
insurance.682 There were no life insurance services in this period. According to Seibel, thiswas due to the high inflation rate and the scarcity of long-term investment opportunities.683 In
1989, the total insurance premiums written achieved only 0.003 percent of GDP, with marine
hull and personal accident insurance accounting for 65 and 25 percent, respectively.684 The
total insurance premiums written climbed to 0.37 percent of GDP in 1993. 685 In turn,investment activities from the insurance sector into the economy were very limited, andamounted to 0.021 percent of GDP in 1993.686
Concerning the regulatory and supervisory body, the Vietnam Insurance Corporation
conducted both insurance business activities and state management function over the sector
until 1992. The Insurance Division under the MOF was established in 1992, separated fromthe Vietnam Insurance Corporation in order to conduct regulatory and supervisory activities
over the insurance market.
2.2 Period of 1994-2000
In parallel with the facilitation of foreign investment and promotion of the private
sector, the second period, from 1994 until 2000, experienced fundamental changes in thedomestic insurance market. Market players diversified significantly in this period. Vietnam
permitted three domestic joint stock insurance companies to be established and operated in
non-life insurance.

678
Truong Moc Lam. 2003. Nganh kinh doanh bao hiem o Vietnam – Mot chang duong. [Vietnam
Insurance Sector – A History]. Vietnam Insurance Review 2, p. 1.
679
BaoViet Insurance Corporation (2005), pp. 33-36.
680
Id. p. 42.
681
This joint venture was transformed to the wholly foreign owned insurance brokerage company in 2004.
682
Nguyen Trong Nghia. 2004. Thuc trang va Giai phap Hoan thien He thong Phap luat Phat trien Thi
truong Tai chinh va Dich vu Tai chinh [Current Situation and Solutions for Improving Legal System on theDevelopment of Financial Markets and Financial Services] (academic research paper, Ministry of Finance,
Vietnam) (on file with the Financial Scientific Institute), pp. 46-47.
683
Seibel, Hans Dieter. 1992. The Making of a Market Economy: Monetary Reform, Economic
Transformation and Rural Finance in Vietnam. Saarbrucken : Breitenbach, p. 67.
684
Source: BaoViet Insurance Corporation.
Available at http://www.baoviet.com.vn – Last visited 5 October 2006.
685
Ministry of Finance. 2005. Vietnam Insurance Market 2004. Hanoi: Nha xuat ban Tai chinh, p. 6.
686
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Foreign access to the domestic insurance market was allowed with four licenses in life
insurance and four licenses in non-life insurance.687 Among foreign counterparts, Japanese
insurers were main players in 1996-1997, while European and American insurers were
dominant in 1999-2000. In addition, two non-life insurers and one re-insurer with 100 percent
state ownership were also established during 1994-1995. Life insurance services have been
supplied since the mid point of this period by both domestic and foreign life insurers.
However, there is no domestic private-sector insurer in the life insurance market.688
The total insurance premiums written in 2000 were recorded at VND 3,000 billion, an
increase of seven times that of 1993; and of this figure, non-life insurance premiums havedoubled. 689 Property insurance services have been increased as a result of demand forindemnifying investment projects of both domestic and foreign investors. In 2000 alone, 74
percent of the total foreign investment capital and 6.63 percent of the total domestic
investment capital were insured, while these figures in 1995 were 0.77 and 0.81 percent,respectively.690 In addition, the value of export-import cargo insured by insurance companies
operating in Vietnam accounted for 17 percent of the total trade volume in 2000.691 During
the second period, in terms of the total premiums of both life and non-life insurance, themarket share of foreign insurers in the domestic insurance market sharply increased from 3
percent in 1999 to 16.4 percent in 2000.
In comparison with 1993, the total investment capital from the insurance sector into
the economy in 1999 increased by 58 times, 692 and achieved approximately VND 4,000
billion by the end of 2000.693 The insurance sector, therefore, has played a clearer and more
important role in economic growth.
Following the development of the domestic insurance market, the Association ofVietnamese Insurers started operations in May 2000 as a professional forum for: (i)contributing professional advices and opinions in policy-making process; (ii) propagating
policies and regulations on the insurance industry, and providing information and data basefor members; (iii) consulting members in insurance business development, and providing
training services; (iv) building up a self regulatory system with a view to create a levelplaying field in the insurance industry; and (v) reconciling members in dispute resolution.694
However, several limitations were found in this period of development, namely
newly-established insurance companies with limited range of insurance products, weakfinancial capacity and lack of management skills, and a simple set of investment portfolios.695

687

Id. p. 19.
Reasons might be that life insurance business would require long-term investment of capital, highly
professional skills that could not be satisfied by the private sector.
689
Strategy on Development of Vietnam Insurance Market 2003 – 2010 [hereinafter Insurance Strategy]
approved by Decision 175/2003/QD-TTg of the Prime Minister (Aug. 29, 2003) (Vietnam) [hereinafter Decision
175/2003/QD-TTg], Appendix 5. See also Ministry of Finance (2005), p. 6.
690
Decision 175/2003/QD-TTg, Appendix 5.
691
Insurance Strategy, Appendix 6.
692
Ministry of Finance (2005), p. 6.
693
Thai and Tran (2004), p. 86.
694
Decision 51/1999/QD-BTCCBCP of the Ministry of Personnel and Organization on establishment of
the Association of Vietnamese Insurers (Jul. 9, 1999) (Vietnam).
695
Governmental Submission Letter on the Insurance Business Bill, Doc. No. 486/CP-PC dated 18 May
2000 (Vietnam), pp. 3-4.
688


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NATIONAL TREATMENT PRINCIPLE IN GATS:
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2.3 After 2001
In the third period, from 2001 until now, Vietnam's insurance sector has recorded asignificant growth rate and expansion with the total insurance premiums written amounting tonearly 1.6 percent of GDP in 2006. 696 This includes premiums in life insurance services
equivalent to 0.9 percent of GDP, which helped increasing domestic savings, and channellingthem to investment.
As of the end of 2006, thirty-seven insurance companies participated in the domestic
insurance market, among them, twenty-one non-life insurers, seven life insurers, eight
insurance brokerage companies, and one re-insurer (see Chart 1). In terms of ownership, there
were thirteen companies with wholly foreign-owned capital, five joint venture companies,
sixteen domestically joint stock companies, and three state-owned insurers.697 The number offoreign owned insurers doubled in comparison with that of 2000. One of the main reasons is
the implementation of trade agreements between Vietnam with the US and EU.
Chart 1: Structure of Vietnam's insurance market players
㪋㪇
㪊㪌
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㪋

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㪋

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㪈㪐㪐㪊 㪈㪐㪐㪋 㪈㪐㪐㪌 㪈㪐㪐㪍 㪈㪐㪐㪎 㪈㪐㪐㪏 㪈㪐㪐㪐 㪉㪇㪇㪇 㪉㪇㪇㪈 㪉㪇㪇㪉 㪉㪇㪇㪊 㪉㪇㪇㪋 㪉㪇㪇㪌 㪉㪇㪇㪍㪪㫆㫌㫉㪺㪼㪑㩷㪤㫀㫅㫀㫊㫋㫉㫐㩷㫆㪽㩷㪝㫀㫅㪸㫅㪺㪼This period also marked an expansion of banks to the insurance sector by establishing
BIDV-QBE Insurance Company Limited, a joint-venture between Bank for Investment andDevelopment of Vietnam and Australian QBE Insurance Group in 1999, and Incombank-Asia
Insurance Company Limited, a joint-venture between Industrial and Commercial Bank ofVietnam and Asia Insurance Company in 2002 to conduct non-life insurance.
Charts 2 and 3 describe the trend in premiums written in non-life and life insurance,
respectively, during the period of 1994-2006.

696
697

Ministry of Finance. 2007. Vietnam Insurance Market 2006. Hanoi: Nha xuat ban Tai chinh, p. 6.
Id. p. 7.

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Chart 2: Growth of Vietnam's non-life insurance market(Gross premium income in VND billions)
㪎㪇㪇㪇
㪍㪇㪇㪇
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State-ow ned non-lif e insurers㪋㪇㪇㪇

Private sector non-lif e insurers㪊㪇㪇㪇

Foreign non-lif e insurers

㪉㪇㪇㪇

Total

㪈㪇㪇㪇

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㪈㪐
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㪐㪎

㪈㪐
㪐㪍

㪈㪐
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㪇

Source: Ministry of Finance

Chart 3: Growth of Vietnam's life insurance market(Gross premium income in VND billions)
㪐㪇㪇㪇
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State-ow ned lif e insurer㪌㪇㪇㪇Foreign lif e insurers

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Total

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㪇

㪪㫆㫌㫉㪺㪼㪑㩷㪤㫀㫅㫀㫊㫋㫉㫐㩷㫆㪽㩷㪝㫀㫅㪸㫅㪺㪼

Foreign owned insurers represent less than 10 percent of the non-life insurance market,
whereas their market share in the life insurance market accounts for approximately two
thirds.698 One reason might be that there is only one domestic life insurer who competes withthe other six giant foreign life insurers, both wholly foreign-owned and joint venture, in
supplying life insurance services. On the other hand, in the non-life insurance market,
domestic insurers are dominant in terms of the number of market players as well as broadcustomer network. Moreover, as commented by Kovsted et al., the life insurance market in
Vietnam enjoys more equal conditions of competition compared to the non-life insurance
market, and foreign life insurers are perceived as more reliable as well as competitive than698

Id. Table 2.

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NATIONAL TREATMENT PRINCIPLE IN GATS:
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domestic counterparts.699 However, a sharp decrease in the non-life premiums of the stateowned insurers in Chart 2 from 2004 to 2005 occurred due to the equitization of one stateowned insurer in 2004.
In terms of indemnification, the availability of insurance services as well as insurers in
the domestic market has enabled consumers to mitigate financial losses as a result of
occurrence of uncertain events. Insurance claims paid in 2006 reached VND 5,758 billions,six times the figure for 2000; of that, claims paid by foreign insurers accounted for around 15
percent. 700 Accordingly, insurance not only assures the financial stability of individuals,
families, and organizations, but also facilitates businesses by providing greater stability inbusiness transactions.
Chart 4: Investment sources by ownership(In VND billions)
18,000.00
16,000.00
14,000.00
12,000.00
10,000.00
8,000.00
6,000.00
4,000.00
2,000.00
0.00

Domestic Insurer
Foreign Insurers

2003

2004

2005

2006

Source: Ministry of FinanceConcerning capital investment in the economy, the amount increased by 11 times in2006 compared to 1999.701 This would likely be an important source for the securities market
as well as other investment projects. Foreign insurers climbed gradually from 35 percent of
the total capital investment from the insurance sector in 2003 to 40 percent and nearly 50
percent in 2004 and 2006, respectively (see Chart 4).
Chart 5 describes the structure of portfolios held by insurers. Looking at theinvestment portfolios of insurers as shown in Chart 5, it is observable that a large amount of
the total available investment capital of insurers is concentrated in government bonds anddeposits in credit institutions.702 One explanation is that there is a lack of detailed regulations
on investment, such as real estate and lending activities conducted by insurers, andconsequently insurers may be reluctant to grant loans because there is no available mechanism
for dealing with loss and risk management. 703 Another reason is due to a less-developed
securities market in Vietnam, especially the small number of listed companies.704
699
Kovsted, Jens; John Rand; and Finn Tarp. 2005. From Monobank to Commercial Banking – Financial
Sector Reforms in Vietnam. Singapore: NIAS Press, p. 40.
700
Ministry of Finance (2007), Annex 4.
701
Id. p. 6.
702
Id. Figure 11.
703
Phung Dac Loc. 2005. Dau tu an toan, sinh loi cao, dung phap luat dang la mong muon cua cac doanhnghiep bao hiem tai Viet Nam [Safe Investment and High Return in conformity with laws and regulations are adesire of Insurance Companies in Vietnam]; and Trinh Thanh Hoan. 2005. Can som ban hanh van ban huong dan
chi tiet cho hoat dong dau tu cho vay cua cac DNBH Vietnam [A necessity for detailed regulations on lending


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Chart 5: Investment portfolios(In percentage)
㪈㪇㪇㩼
㪏㪇㩼
㪍㪇㩼

㪣㫆㪸㫅㫊㩷㪸㫅㪻㩷㪩㪼㪸㫃㩷㪼㫊㫋㪸㫋㪼㫊㪚㫆㫉㫇㫆㫉㪸㫋㪼㩷㫊㪿㪸㫉㪼㫊㩷㪸㫅㪻㩷㪹㫆㫅㪻㫊㪋㪇㩼㪛㪼㫇㫆㫊㫀㫋㫊㩷㪸㫅㪻㩷㪞㫆㫍㪼㫉㫅㫄㪼㫅㫋㩷㪹㫆㫅㪻㫊

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㪪㫆㫌㫉㪺㪼㪑㩷㪤㫀㫅㫀㫊㫋㫉㫐㩷㫆㪽㩷㪝㫀㫅㪸㫅㪺㪼The reinsurance market also experienced sound development during this period. The
insurance premiums retained in the domestic reinsurance market increases from VND 8,980
billion in 2003 to VND 12,745 in 2006. 705 This trend would reflect the increasingly
capitalized situation of insurance companies as well as the improved risk management skills.
Seven out of the current eight insurance brokerage companies were established in thethird period. Of the eight insurance brokerage companies in existence at the end of 2006, there
are five domestically joint stock companies and three companies with wholly foreign-owned
capital. The amount of premiums was arranged through brokerage companies increasing from
5.14 percent in 2003 to 18 percent in 2006 of the total non-life insurance premiums. 706
Brokerage transactions concentrated in supplying property and casualty insurance services,
health insurance and personal accident insurance services, and vehicle owner’s liability.707
However, foreign brokerage companies dominated the insurance market with the income
exceeding 80 percent of the total brokerage fees in 2004-2005.708
With respect to the insurance supervisory authority, since 2003 the government has set
up a new Insurance Department under the MOF, mostly based on the previous Insurance
Division, to regulate the insurance market and promote its development. 709 Duties of the
Insurance Department include: to formulate and submit to the Finance Minister for approval
relevant regulations, strategies and market development plans, and to enforce those
activities of Vietnamese insurance companies]. In Symposium on Solutions for facilitating efficient investments
by insurers into the economy (on file with the Association of Vietnamese Insurers), pp. 11-13 and 35,
respectively.
704
Le Song Lai. 2005. Thuc trang va Giai phap nang cao hieu qua hoat dong dau tu cua cac doanh nghiep
tren thi truong bao hiem Viet Nam [Current situation and Solutions on improving investment efficiency bycompanies in Vietnam’s Insurance Market]. In Symposium on Solutions for facilitating efficient investments byinsurers into the economy (on file with the Association of Vietnamese Insurers), pp. 22-23.
705
Ministry of Finance (2007), Table 10.
706
Id. Chart 12.
707
Id. Chart 13.
708
Moi gioi bao hiem trong nuoc lep ve (Domestic brokerage companies insignificant), 20 February 2006.
Available at http://www.vneconomy.com.vn – Last visited 2 April 2007.
709
Decree 77/2003/ND-CP of the Government on functions, rights, responsibilities, and structure of the
Ministry of Finance (Jul. 1, 2003) (Vietnam).

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NATIONAL TREATMENT PRINCIPLE IN GATS:
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regulations; to carry out licensing function and oversee insurance business operations; toprotect the interests of policyholders; to promote the insurance market and maintain
development thereof; and to set up a risk management and advance warning system tominimize insurance risk.710
Some observations
The insurance market in Vietnam has evidenced a robust development from 1994
through the abolishment of the state monopoly, which has led to the diversification ofdomestic insurers as well as promotion of foreign direct investment in the insurance sector.
These statistical evidences show a strong link between the participation of foreign insurers
and the development of the life insurance market in Vietnam.
However, there remain limitations on the role of the insurance sector in economic
development, characterized by its small size and a limited variety of insurance products aswell as lower competitiveness of domestic insurers. As noted earlier, the total insurance
premiums in Vietnam accounted for less than two percent of GDP in 2006. In 2004,
premiums per GDP of the US were 9.44 percent, while the EU (15) and Japan were 8.64 and10.47 percent, respectively.711
Even though the number of insurance products has increased sharply to around sixhundred by the early years of this decade, there are still many areas which have not yet beenadequately covered, such as natural disasters, agriculture,712 credit insurance, and professional
liability insurance. 713 Investment portfolios of insurers were not diversified. Investment incorporate bonds and shares as well as loans and real estate accounted for around 20 per centof the total investment capital of insurers in Vietnam, compared to 80 percent in the EU.714
3. Legal framework715
3.1 Introduction of insurance regulations
As described earlier, before 1993, there was only one insurance company operating in
Vietnam. The supply of insurance services was governed by rules of the MOF, which was
designated exclusively to the Vietnam Insurance Corporation. Those rules included insurance

710

Decision 134/2003/QD-BTC of the Finance Minister on functions, rights, responsibilities, and structureof the Insurance Department (Aug. 20, 2003), Art. 2 (Vietnam).
711
SwissRe Sigma. World Insurance in 2004: Growing premiums and stronger balance sheets. Sigma No.
2/2005, November 2005.
Available at http://www.swissre.com/ – Last visited 5 October 2006.
712
Insurance services in agricultural production accounted for one percent of domestic animals and plants
in 2002. See Insurance Strategy, p. 12.
713
Nguyen Trong Nghia (2004), p. 46.
714
Le Song Lai (2005), pp. 22-23.
715
This section draws in part from Vu Nhu Thang (2007b), pp. 977-1009.

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products, insurance contracts, terms and conditions, premium rate, and dispute settlement.716
However, there was no regulation on new entrant and exit of insurers.
In addition to rules of the MOF, certain insurance services were regulated by different
laws, such as marine insurance contracts under Marine Code 1990 and civil liabilities ofcarriers under Law on Aviation 1992. The Marine Code consists of forty-one articles dealing
with formation, performance and transfer of marine insurance contracts, subrogation, andpayment of claims.717 With regard to air transport, carriers are legally required to purchaseinsurance policies for their civil liabilities on passengers’ body, health and injury.718
The government issued Decree 100/CP on December 18th, 1993 (hereinafter Decree
100/CP) on business insurance as the sole regulation guiding the industry. Decree 100/CP
represented a landmark for diversifying insurance services in Vietnam, including direct
insurance, both life and non-life;719 reinsurance; brokerage; and agency.720 Apart from those
insurance services, an insurance company was also permitted to conduct assessment,
inspection, calculation for loss distribution, and act as agent in assessment and settlement ofcompensation.721
In parallel with the policy on promotion of the private sector and encouragement offoreign direct investment in Vietnam, the monopoly in the insurance sector was replaced bydiversifying players. The forms of insurance companies included (1) state-owned companies,(2) joint stock companies, (3) mutual insurance companies, (4) joint venture companies, (5)branches of foreign insurance companies, and (6) wholly foreign-owned subsidiaries.722 The
MOF was the regulatory and supervisory body in charge of delivering “Certificate ofsatisfaction of qualifications and conditions required for conducting insurance business” fornew insurance companies in Vietnam. However, the opening of this sector was subject tovarious licensing criteria. These licensing requirements included: (1) clear objectives andareas of activity; (2) chartered capital not less than the legal capital; (3) fit and proper
managers; and (4) the necessity of insurance services supplied to the national economy.723
Although foreign participation in the insurance market was legally recognized, there
were several discriminatory measures against foreign insurance companies. First, foreign
owned insurance companies were subject to higher legal capital requirements than those for716

For example, Decision 254-TC/QD-BH of the Finance Minister permitting Vietnam Insurance
Corporation to supply marine insurance services (May 25, 1990) (Vietnam).
717
Marine Code (Jun. 30, 1990) was repealed by Marine Code (Jun. 14, 2005), Chapter XVI.
718
Law on Aviation (Dec. 26, 1991), Art. 72.
719
Decree 100/CP, Art. 7 defined the kinds of insurance which were permitted to be conducted: (1) life
insurance; (2) voluntary health insurance and personal accident insurance; (3) property insurance and loss
insurance; (4) cargo insurance covering land, marine, fluvial, railway, and air transportation; (5) hull insurance
and civil liability for ship owners; (6) co-insurance; (7) aviation insurance; (8) automobile insurance; (9) fire
insurance; (10) credit insurance and financial risk insurance; (11) business loss insurance; (12) agriculture
insurance; and (13) other insurance activities stipulated by the Ministry of Finance. Insurance services stipulatedin (2) to (13) were collectively referred to as non-life insurance.
720
Id. Art. 3.
721
Id. Art. 8.
722
Id. Art. 2 defined “Mutual insurance company” as a company conducting insurance business for its
members on the principles of mutual benefit and non profit, “insurance joint venture company” as a corporate
form of capital contributions made by a Vietnamese party and a foreign party, “branch of a foreign insuranceorganization” as an unit of a foreign insurance organization operating in Vietnam, and “foreign insurancecompany with one hundred (100) per cent foreign-owned capital” as an insurance company established in
Vietnam with one hundred (100) per cent capital owned by a foreign insurance company.
723
Id. Art. 17.

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NATIONAL TREATMENT PRINCIPLE IN GATS:
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domestic companies.724 Second, conditions on entrance into the market were vague and open
to administrative manipulation. It was hard for an insurance company as well as for the
regulators and supervisors to interpret the licensing requirement on whether insurance
services provided were “necessary for the national economy”. Third, compulsory cession of
20 percent of domestic insurance premiums to the Vietnam National Reinsurance Company
was applicable in case of ceding abroad.725 This requirement made conditions for insurers
abroad less favourable than insurers operating in Vietnam when supplying reinsurance
services.
Concerning solvency requirements, insurers were required to set up a compulsory
provision equivalent to 10 percent of the chartered capital.726 There was no article on theestablishment of technical provisions or requirements on the solvency margin to be held byinsurers, except for rules of the MOF.727 With regard to investment regime, insurers wereallowed to invest in government bonds, corporate securities, real estate, banking deposits,
lending activities, and contribution of capital to joint venture, in accordance with rules of the
MOF. 728 However, investment rules simply set up the ceiling of each asset category notexceeding 25 percent of the technical provisions.729 Moreover, there was no rule on financial
recovery plans in case of an insurance company facing financial difficulties.
3.2 Vietnam Insurance Law
The Vietnam Insurance Law, which became effective from 1 April 2001, was draftedfrom 1991, based on experiences of different countries, such as the EU, China, Malaysia andThailand.730 This Law was also drafted on the basis of the experimental period of introducing
Decree 100/CP. The Vietnam Insurance Law has expressed four fundamental objectives.731
First is to protect the legitimate rights and interests of the organizations and individuals
participating in insurance transactions. Second is to accelerate insurance business. Third is topromote and maintain a sustainable socio-economic development, and stabilize the people’s
living standards. The final objective is to strengthen the State’s effective administration of
insurance business. Accordingly, the Vietnam Insurance Law consists of nine chapters with
129 articles.
Chapter I, titled “General Provisions”, covering eleven articles, sets forth the scope of
application, and provides terms and definitions used throughout the Law. This chapter
continues to reaffirm diversified insurance services in Vietnam, including direct insurance,
both life and non-life;732 reinsurance; brokerage; and agency. Moreover, statutory insurance is724
Id. Art. 22 stated that legal capital requirement was VND 1.2 billion or US$ 2 million with respect toVietnamese insurance enterprises or joint venture companies; and US$ 5 million with respect to branches offoreign insurance companies or insurance companies with 100 per cent foreign owned capital.
725
Circular 78/1998/TT-BTC of the Ministry of Finance on reinsurance business (Jun. 9, 1998) (Vietnam).
726
Decree 100/CP, Art. 11.
727
Id. Art. 10.2.
728
Id. Art. 12.2.
729
Circular 45-TC/CDKT of the Ministry of Finance on Financial Regime of Insurance Companies (May30, 1994) (Vietnam), Sec. V.2.f.
730
Governmental Submission Letter on the Insurance Business Bill, Doc. No. 486/CP-PC dated 18 May
2000 (Vietnam), p. 1.
731
Vietnam Insurance Law, the preamble.
732
Id. Art. 7.


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also introduced in some economic activities to ensure the public interest and social security.733
The chapter also asserts that consumers may only purchase insurance services from insurers
who are authorized to operate in Vietnam.734 The principle of fair and lawful competition inproviding insurance services has been recognized, whereby four types of conduct areprohibited, namely false and inaccurate information disclosure, illegal expansion of customer
network, illegal sale promotion, and other illegal competitive activities.735
This chapter expresses the State’s intent to protect the interests of policyholders andother relevant persons as well as promote a sound development of the domestic insurance
market. However, there is a bias in favour of state-owned insurers, whereby the government isentitled to invest capital and other resources in order to secure the dominant role of thesecompanies in the market as provided in Article 4.2.736 This provision may discriminate not
only against foreign insurance services and insurers, but also against domestic non-stateowned insurers. In addition, in case of cession abroad, all insurance companies in Vietnam are
required to cede part of the direct risks insured to the Vietnam National Reinsurance
Company in conformity with governmental regulations.737 Again, this requirement constitutes
less favourable treatment for insurers abroad than insurers operating in Vietnam with regard
to supplying reinsurance services.
Chapter II covers forty-six articles governing insurance contracts, including categories
of insurance contracts, their contents, rights and obligations of insurers and insured.
Chapter III codifies the forms of insurance enterprises. There are five categories of
insurance companies, which are classified by ownership: (1) state-owned capital, (2) joint
stock, (3) mutual-aid, (4) joint venture, and (5) wholly foreign-owned capital.738 The MOF isthe single supervisory authority, in charge of licensing newcomers into the insurance
market.739 To gain entrance, licensing requirements include: (1) chartered capital not less thanthe legal capital as provided by the government; (2) application documents; (3) appropriate
corporate form; and (4) fit and proper managers.740
This chapter also provides some general principles for mutual insurance organizations,whereby members of such organizations must be both the owners and policyholders.741 The
chapter sets out conditions and procedures for transfer of insurance contracts in cases where
an insurer is in danger of insolvency, or merged, consolidated, divided, separated anddissolved.
Although the language of this chapter requires insurers to report to the supervisory
authority on their danger of insolvency, it fails to tell insurers what measures must be
733

Id. Art. 8.
Four statutory insurance services consist of civil liability of vehicle owners and air carriers; professional
liability in legal services; professional liability of insurance broking companies; and fire, explosion.
734
Id. Art. 6.
735
Id. Art. 10.
736
Id. Art. 4.2.
737
Id. Art. 9.
The compulsory reinsurance was set at 20 percent of the liability under Decree 42/2001/ND-CP of theGovernment providing guidance on the implementation of a number of articles of the Law on Insurance Business(Aug. 1, 2001) (Vietnam), Art. 22.1.
738
Id. Art. 59.
739
Id. Art. 62.1.
740
Id. Art. 63.
741
Id. Chapter III, Sec. 2.

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NATIONAL TREATMENT PRINCIPLE IN GATS:
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included in solvency recovery plans. Moreover, while the winding-up of insolvent insurers is
stipulated, there is no mechanism to ensure that the interests of policyholders shall beprotected and their claims shall be paid, either in full or partially.
Chapter IV, titled “Insurance Agents and Insurance Brokerage Enterprises”, identifies
the scope of operations, conditions for insurance agents and licensing requirements on
insurance brokerage enterprises, rights and obligations of insurance agents, insurers, andinsurance brokerage enterprises. An insurance agency may be conducted through either
corporate or individual agents, whereas an insurance broker must be established in corporate
form.
Chapter V lays down provisions with respect to finance, accounting and financial
statements. In order to ensure the solvency, insurers are required to keep a minimum legal
capital throughout their life, and to set out technical provisions and reserve funds. Insurers are
obliged to prepare financial statements, which are certified by an independent auditing firm,
and to make those financial statements public.
As financial institutions, insurance companies are legally entitled to use their idle
capital to purchase government bonds, corporate shares and bonds; to invest in otherenterprises, infrastructure and real estate; and to lend to other credit organizations.742 The
investment of insurance companies must ensure safety, efficiency and payment to parties tothe insurance contracts. 743 This chapter, however, does not properly regulate investment
activities, especially requirements on diversification and management of investment-relatedrisks. This is of importance to ensure the solvency of insurers, hence to protecting theinterests of policyholders.
Chapter VI designs a legal framework for foreign owned insurance and brokerage
enterprises. Almost all of the requirements on licensing conditions, application documents forlicenses, capital and reserve funds, and solvency regimes are analogous to Vietnam’s
domestic insurance and brokerage enterprises. 744 However, besides the Vietnam Insurance
Law, the scope of operation of foreign owned insurance and brokerage enterprises is also
subject to other relevant laws and governmental regulations.745 This provision may suggest apossible discrimination against foreign companies in the insurance sector.746
Chapter VII contains provisions on “State Administration of Insurance Business”.
According to this chapter, the MOF is empowered to exercise administration of insurance
business, including licensing, promulgation of regulations, supervisory duties, dealing withcomplaints and breaches of the Vietnam Insurance Law. In addition, other ministries and local
people’s committees are responsible for carrying out the state administration of the insurance

742

Id. Art. 98.2
Id. Art. 98.1
744
Id. Art. 109.
For example, to get a license of establishment and operation in Vietnam, apart from documents analogue toa Vietnamese insurance company, foreign insurance companies must submit their charter and operation license;
and audited balance sheets and annual financial statements.
745
Id. Art. 114 and 119.
746
Decree 42/2001/ND-CP of the Government providing guidance on the implementation of a number ofarticles of the Law on Insurance Business (Aug. 1, 2001) (Vietnam), Art. 39.1 provided that foreign insurancecompanies and insurance brokerage companies were not permitted to supply insurance services to SOEs or
certain compulsory insurance services.
743


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industry within their authorities.747 The chapter also sets out procedures for regular and ad
hoc inspection on the insurance business of insurers.
Chapter VIII establishes a legal basis for “Rewards and Sanctions for violations”. This
chapter specifies ten categories of prohibited activities which might constitute either
administrative violations or criminal offences, depending on the characteristics, seriousness,and consequences of those activities.748 However, details of administration sanctions for such
violations is governed by governmental regulations.
The final chapter, Chapter IX, gives implementation provisions. Such provisions allow
continuation of operation of insurers licensed before the effective date of the Vietnam
Insurance Law. In addition, this chapter also repeals all previously issued rules andregulations contrary to this Law.
4. Concluding remarks
The description of Vietnam’s economic development reveals that foreign participation
has made a contribution to the domestic economy. A clear tendency towards a level playing
field for all enterprises, irrespective of ownership and origin, has been introduced in asequence over a period of time, which has enabled the development of private sector andforeign direct investment, as well as external trade. This tendency also occurred in theinsurance sector, whereby the legal framework shows a consistent approach towards an open
insurance market with various players by gradually removing the state monopoly.
While foreign participation in the domestic insurance market has been allowed since
1994, there were a number of discriminatory measures against foreign insurance companies,
such as capital requirements and limitations on the scope of business activities. Several
discriminatory measures have been removed by the enactment of the Vietnam Insurance Law
in order to create a level playing field for both foreign and domestic companies, including nodifference in legal capital requirements for obtaining licenses, 749 and licensing fees. 750 In
addition to according equal treatment to foreign owned insurers in Vietnam, the solvency
regimes of insurers have been enhanced by more concrete provisions and regulations.
There are, however, several concerns over national treatment between domestic andforeign insurance companies as well as solvency regimes under the Vietnam Insurance Law,
which shall be analyzed and discussed in Chapter Six and Chapter Seven, respectively.
747

Vietnam Insurance Law, Art. 121.
Id. Art. 124 and 125.
The prohibited activities are: (1) Carrying out insurance business without a license, or in non-compliancewith the contents stipulated therein; (2) Violating provisions concerning the issue of license of establishment andoperation, inspection and supervision conducted by the competent State bodies; (3) Engaging in unfair
competition; (4) Compelling others to enter into insurance contracts; (5) Breaching regulations on compulsory
insurance; (6) Breaching the obligations of keeping confidential the information disclosed by customers in
relation to the insurance contract; (7) Providing false information, data and report; (8) Carrying out businessactivities in failure to met financial requirements in accordance with laws; breaching regulations on legal capital,
reserve funds, deposits, establishment, management and use of technical reserves; (9) Breaching regulations on
investment; and (10) Committing other breaches of laws on insurance business.
749
Decree 43/2001/ND-CP of the Government providing regulations on financial issues of insurance
enterprises and insurance brokerage enterprises (Aug. 1, 2001) (Vietnam), Art. 4.
750
Decree 42/2001/ND-CP, Art. 7.
748


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NATIONAL TREATMENT PRINCIPLE IN GATS:
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CHAPTER SIX
Vietnam’s Commitments on National Treatment andImplications for the Insurance Services Market
Along with the domestic economic reform, Vietnam has established and fosteredeconomic relationships with other countries at bilateral and regional levels with a view tofacilitating foreign trade relations and integration into the world economy. At the multilaterallevel, Vietnam became the 150th Member of the WTO on January 17, 2007.
The chapter starts with a brief description of Vietnam’s commitments on liberalizationof its insurance services. The main part of this chapter examines some implications for future
development of Vietnam’s insurance services market, and provides an overall assessment on
the implementation of commitments on the national treatment obligation.
1. Vietnam’s commitments in insurance services
At the bilateral level, the Bilateral Trade Agreement between the US and Vietnam(hereinafter US-VN BTA), which was concluded in 2001, has the most comprehensive
coverage, and is formatted to be consistent with the GATS schedule of specific commitments.
This is the first agreement to encompass trade in services, including insurance services, whichsignificantly influences the development of Vietnam’s insurance market. According to Kokko,
the US-VN BTA served as an important step towards a membership in the WTO as well as
continuance of the economic reform.751 In addition, a significant implication of the US-VN
BTA is that Vietnamese commitments have probably been regarded by other countries as
grounds for both bilateral and multilateral negotiations during the process of WTO accession.
On the other hand, at the multilateral level, because Vietnam received observation
status in GATT and the WTO in 1994, it did not participate in the negotiations forliberalization of insurance services during the Uruguay Round or during the Second and Fifth
Protocols on financial services, including insurance services, in 1995 and 1997, respectively.
As part of its accession negotiations, Vietnam submitted a schedule of specific commitments
for liberalization of domestic services, including insurance services. This schedule constitutes
an integral part of Vietnam’s accession agreement and legally binds Vietnam from 2007.
Accordingly, Table 4 summarizes the commitments in two schedules in insurance services,and shows the liberalization of Vietnam’s insurance market from 2001 to 2012, the date bywhich all commitments on opening insurance services must be fully implemented.
(i) Scope of business
Similar to the bilateral commitments, in the 2007 commitments, market access on the
cross-border supply of insurance services is applicable to four categories of insurance services,namely insurance services in international transportation; reinsurance services; insurance
brokerage and reinsurance brokerage services; and consultancy, claim settlement and risk
751

Kokko, Ari. 2004. “Growth and reform since the Eighth Party Congress”. In Duncan McCargo, ed.,Rethinking Vietnam. London and New York: Routledge Curzon, p. 77.

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assessment services.752 In addition, foreign insurers are permitted to engage in cross-bordertransactions with foreign owned companies or foreigners working in Vietnam.753 Vietnam has
agreed to ensure there are no limitations on market access with respect to consumption abroad(Mode 2) at both bilateral and multilateral levels.754
Statutory insurance services are permitted to be supplied by wholly foreign-owned
companies from 2008. 755 There was no bilateral commitment in the US-VN BTA on
supplying insurance agent services through Mode 3, whereas these services have been fully
liberalized at the multilateral level.756
With regard to reinsurance, Vietnam committed in the US-VN BTA that the rate of 20
percent liability to be ceded to Vietnam National Reinsurance Company would be abolishedfrom 2006. 757 However, under the multilateral commitments, the supply of reinsurance
services under Mode 3 has been subject to no restrictions on market access.
(ii) Investment
In terms of equity participation into a subsidiary in Vietnam, in the 2001 commitments,
US insurance companies are allowed to set up joint ventures with US equity participation ofless than 50 percent from 2004, and up to 100 percent by 2006.758 At the multilateral level,
foreign insurers are permitted to establish either joint-venture or companies with 100 percent
foreign invested capital from the date of accession, i.e., as of 2007.
As described in section 3.2 of Chapter Five, under the Vietnam Insurance Law,foreign insurers are not permitted to establish their branches in Vietnam to supply both lifeand non-life insurance services. Under the US-VN BTA, there was no commitment on market
access for branches of foreign insurers. However, at the multilateral level, branches of foreign
non-life insurers shall be allowed by 2012 in accordance with prudential regulations.759

752
753
754
755
756
757
758
759

Vietnam – Schedule of Specific Commitments, GATS /SC/142, 19 March 2007, p. 42.
Id.
Id. p. 43.
Id. p. 43.
Id. p. 43.
The US-VN BTA, Chapter III, Annex G – Vietnam, p. 13.
Id.
Vietnam – Schedule of Specific Commitments, GATS /SC/142, 19 March 2007, p. 43.

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Mode

A. Insurance andinsurance-related
services:a. Direct insurance(a) Life
insurance, excl.
healthinsuranceservices(b) Non life
insuranceservicesb. Re-insurance
and retrocessionc. Insuranceintermediation(such as brokerage
and agency)
d. Services
auxiliary to
insurance

MA

NT

Mode

4

NT

MA

Mode

3

NT

2


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Unbound, except as indicated in the horizontal commitments

Unbound, except as indicated in the horizontal commitments

None except for statutory insurance business

Abolishment of compulsory cession of 20 percent of the contracted
liabilities to the Reinsurance Corporation of Vietnam by 2006.

Statutory insurance business supplied by joint ventures with US
capital contributions by 2004; and by companies with 100 percent
US invested capital by 2006;*

Unbound for insurance agent services;

Joint ventures with US capital contributions less than 50 percent by
2004; and up to 100 percent by 2006;

None, except:
Branches depending upon the Insurance Business Law;

None

None

None

NT

MA

None for insurance services provided to foreign-invested
enterprises, foreigners working in Vietnam; reinsurance services;
insurance services in international transportation; insurance
broking and reinsurance broking services; advisory, claim
settlement and risk assessment services.

US-VN BTA 2001

MA

Mode

1

Mode
of
supplySub-sector

Unbound, except as indicated in horizontal commitments

Unbound, except as indicated in horizontal commitments.

None

Companies with 100 percent foreign invested capital not
being permitted to engage in statutory insurance business.*

None, except:

None

None

None

None for insurance services provided to foreign-invested
enterprises, foreigners working in Vietnam; reinsurance
services; insurance services in international transportation;
insurance broking and reinsurance broking services;advisory, claim settlement and risk assessment services

WTO commitments 2007

Table 4: Vietnam’s commitments in insurance services: past, present and future

NATIONAL TREATMENT PRINCIPLE IN GATS:
A Study of Vietnam’s Insurance Services Market

By 2008, companies
with 100 percent
foreign invested
capital engaging instatutory insurance
business.*

By 2012, branches of
non-life insurers
being permitted
subject to prudential
regulations.

Phased in 2012

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Note:
MA = Market Access; NT = National Treatment.
* Statutory insurance business includes civil liability of vehicle owners, insurance in construction and installation, insurance for oil and gas projects, and insurance for projects and constructionof high danger to public security and environment.

NATIONAL TREATMENT PRINCIPLE IN GATS:
A Study of Vietnam’s Insurance Services Market(iii) Movement of natural persons
The limitations on market access in supplying insurance services through the presenceof foreign natural persons in Vietnam are consistent with the horizontal commitments, which
apply to all service sectors and sub-sectors. In the US-VN BTA, the horizontal commitments
under Mode 4 extend to three categories of persons, namely intra-corporate transferees, othercorporate personnel, and service sale persons.760 At the multilateral level, Vietnam inscribes
no commitments on both market access and national treatment, except for measures relating
to entry and temporary stay of five categories of natural persons, namely intra-corporatetransferees, other personnel, service sales persons, persons responsible for setting up acommercial presence, and contractual service suppliers.761(iv) National treatment
Full national treatment is granted to Modes 1, 2 and 3 at the multilateral level. These
commitments are more liberal than those of the US-VN BTA, where the national treatment
obligation is not guaranteed for the provision of statutory insurance services under Mode 3.762
With respect to Mode 4, Vietnam undertakes multilateral commitments withlimitations, whereby only five categories of natural persons shall enjoy the full national
treatment when supplying insurance services in Vietnam.
In general, Vietnam’s commitments on liberalization of insurance services in 2007 are
more liberal than those commitments in 2001 under the US-VN BTA, and make Vietnam’s
insurance market more open to competition by foreign insurance services and service
suppliers under the WTO.
2. Implications for Vietnam’s insurance services market763
2.1 More efficiency and stability
Trade liberalization in insurance services under the WTO framework could make
Vietnam’s insurance services sector more efficient and stable through: (i) better
competitiveness, (ii) access to foreign markets, and (iii) positive spillover effect into thefinancial market.
First, competition fostered by existing as well as newly coming insurance service
providers could offer both incentive and pressure for domestic insurance companies to reduce
expenses and to increase corporate governance and management. According to a study
conducted by the Institute of Financial Science, liberalization of insurance services inVietnam has enabled domestic companies to gain experience and good practices in pricing
760

The US-VN BTA, Chapter III, Annex G – Vietnam, p. 3.
See Vietnam – Schedule of Specific Commitments, GATS /SC/142, 19 March 2007, pp. 4-9.
The entry of “contractual service suppliers” is allowed for computer and related services, and engineering
services.
762
The US-VN BTA, Chapter III, Annex G – Vietnam, p. 13.
763
This section is based on Vu Nhu Thang. 2006b. Taking out a Policy on the Nation’s Insurance Industry
in the Post-WTO Era. Vietnam Law and Legal Forum 13(148), pp. 12-16.
761


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and actuary techniques, insurance coverage design, customer network marketing, and risk
management skills. 764 This trend is expected to continue during the post-WTO accession
period. At the same time, domestic insurance companies may have an incentive to adopt
international standards and prudential practices so that they can adjust to competition, as wellas rationally expand operations by offering new financial services.
On the other hand, it has been argued that in order to continue and foster national
economic reforms, a new motive and external “push” is necessary.765 The WTO accession
will be expected to provide such a motive and external “push” to strengthen Vietnam’s
economic reforms in compliance with the WTO rules and commitments.766 This argument isalso apparently applicable to the insurance services sector, whereby commitments towards
more liberalization under the multilateral framework could push domestic insurers to improvetheir competitiveness.
Strengths of domestic insurers include broad customer networks and prestige insupplying insurance services in the domestic market.767 In addition, domestic insurers also
have competitive advantage in that they enjoy good understanding of customers’ habits andculture, and have wide networks of local branches. 768 Diversity of high-quality insurance
services supplied by foreign insurance companies operating in Vietnam will force domestic
insurance companies to improve their service quality in order to foster competitiveness, and to
avoid losing customer networks by raising financial strength and application of information
technology. According to the same study by the Institute of Financial Science, despite concern
about negative impacts on the domestic market, most existing insurance companies, including
foreign insurance companies in Vietnam, see a positive impact on enlargement of insurance
services as a result of foreign participation.769
By liberalization of the insurance sector, it is submitted that service quality and thevariety of services will probably be improved to meet different needs of customers, hence
ensure customers’ interests. As described in section 2.3 of Chapter Five, areas for widening
insurance products might include credit insurance for export and import activities, andliability insurance services, such as professional liability and general liability. It is observedthat domestic insurance companies have been increasingly capitalized to improve
competitiveness, and the total invested capital in 2004 grew by 16 times over that of 2000.770
As a result, consumers, both businesses and individuals, will enjoy benefits of a fully-fledged
domestic insurance market.
The second positive effect of the liberalization would be to help domestic insurancecompanies to extend their business to foreign markets. The WTO accession shall provide an
opportunity for Vietnam to gain greater access to foreign markets with larger export potentials.
764
Institute of Financial Science. 2004. Assessment on the impacts of opening market for Vietnam
insurance sector and some suggestions to develop insurance market in line with global integration process.
Hanoi: Ministry of Finance (Vietnam), p. 103.
765
Phan Thanh Pho. 2005. Vietnam Voi Tien Trinh Gia Nhap To Chuc Thuong Mai The Gioi [Vietnam’s
Accession to the World Trade Organization]. Hanoi: Nha xuat ban Chinh Tri Quoc Gia, pp. 14-15.
766
Phan (2005), pp. 14-15.
767
Ministry of Planning and Investment and UNDP (2006), pp. 48-49.
768
Id. pp. 49-50.
769
Institute of Financial Science (2004), pp. 140-141.
770
Interview with Mr. Trinh Quang Tuyen, Chairman of the Association of Vietnamese Insurers. In“Thuong mai va Hoi Nhap – Van o dang … tiem nang” (Trade and Integration – Still in the form of … potential),
Vietnam Investment Review, 18 June 2005.
Available at http://www.vir.com.vn – Last visited 5 October 2005.


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By enjoying the MFN treatment as well as commitments of other WTO Members, it appears
that insurance services exported from Vietnam shall be subject to less restrictive anddiscriminatory measures. Domestic insurance companies, after acquiring better
competitiveness, are expected to expand their markets of business activities to other countries,
and to cooperate with foreign insurance companies in order to establish subsidiaries to
conduct insurance business abroad.
However, domestic insurers have limited experience in providing insurance services
internationally, such as direct insurance services for certain oil projects invested abroad bydomestic oil companies, or reinsurance services and agency for loss adjustment.771 Moreover,even though there are reinsurance services supplied by local insurers to insurers abroad, thisactivity is very insignificant, accounting for less than US$ 10 million in 2006.772 As long as
most insurance companies focus on the domestic market, the expansion of their activities toother regional and international markets is very constrained. In addition, as mentioned earlier,
it may take time for domestic insurers to improve their competitiveness. Therefore, it isarguable that greater market access to foreign territory would be a long-term rather than shortor medium-term benefit.
Third, liberalization of insurance services may have a positive spillover effect on
securities market development through mobilization of capital for economic growth. Insurers
could play an important role in channeling savings to domestic investments as well as
enhancing the efficiency of financial systems by (i) reduction of transaction costs, (ii) increaseof liquidity, and (iii) facilitation of economies of scale in investment. Since the demand of
capital for development investment from the government and enterprises is increasing, thetotal value of the securities market is forecasted at around 10-15 percent of GDP by the year
2010.773
On the supply side, insurance premiums will be expected to grow at annual average of
24 percent, equivalent to 4.2 percent of GDP by 2010.774 Subsequently, by 2010 the total
technical provisions of insurance companies will have accumulated to 12 times over the 2002
level, which should help raising the total investment by the insurance sector injected into theeconomy. For that reason, available funds in the insurance sector would apparently be an
important source for securities market operations and development.
2.2 Facilitation of investment and external trade
As illustrated in section 1 of Chapter Five, the recent robust growth in the private
sector and the expansion of international trade represent a strong demand for qualified and771
Dinh Van Nha. 2002. Cac Giai phap Tong the Phat trien Thi truong Von va Thi truong Dich vu Tai
chinh o Vietnam [Comprehensive Solutions for Developing Capital Market and Financial Services Market in
Vietnam] (academic research paper, Ministry of Finance, Vietnam) (on file with the Financial Scientific
Institute), p. 63.
772
Ministry of Finance (2007), Table 10.
773
Decision 163/2003/QD-TTg of the Prime Minister on approving the Strategy on Development ofVietnam Securities Market by the year 2010 with the objectives of further promoting securities market in termsof scope and quality in order to become an efficient and effective channel of capital mobilization; ensuring orderand safety of the market as well as state regulation and supervision; and gradually improving competitivenessand active integration into international financial markets (Aug. 5, 2003) (Vietnam).
774
Decision 175/2003/QD-TTg, Art. 1.2.a.


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diversified insurance services. This demand has significantly intensified since entrepreneurs
are more willing to create and expand their business ventures if they can secure adequate
insurance protection. In addition, since the objective by the year 2010 is to better investment
climate for both domestic and foreign investors,775 more enterprises and business activities are
expected to develop. According to the study of the Institute of Financial Science, mostmanufacturing enterprises observe foreign participation in the domestic insurance market as apositive factor for enlarging their choice of insurance services.776 To some extent, insurance
contracts could be considered as a guarantee for the quality of exported products to othercountries.777 While the government targets an annual export growth rate equivalent to twotimes of the economic growth rate,778 the insurance premium written in export cargo wasequal to only 6.55 percent of the total export volume in 2002.779 This figure shows a potential
need for insurance services in this domain.
On the supply side, Thai and Tran observed that the increasing development of780
Vietnam’s insurance market has contributed to the expansion of foreign trade. As noted
earlier, further liberalization of trade in insurance services is expected to diversify insurance
services in Vietnam as well as improve service quality. Therefore, it can be argued that further
liberalization in the insurance sector under the WTO would be an appropriate response tosuch a desperate need in external trade.
With respect to foreign investment, increasing presence of foreign insurers in thedomestic market would reassure foreign investors about satisfying their needs for insurance
services, on the one hand, and make them more confident of Vietnam’s investment
environment, on the other hand. 781 Thai and Tran have also suggested that many foreign
investors, who conduct investment business in Vietnam, wish to be insured by foreign
insurers operating in Vietnam.782 Furthermore, with liberalization, the choice will be extended
to other foreign insurance services, including those supplied through Mode 1, which areprobably suitable to the needs of entrepreneurs and investors. Consequently, commitments on
foreign participation in Vietnam’s insurance market could contribute to further facilitation offoreign investment.
2.3 Fierce competition
As observed in section 1 of this chapter, Vietnam’s commitments in the WTO
accession make the domestic insurance market relatively liberal. Vietnam, nevertheless, may
impose several restrictions on market access with respect to unscheduled insurance service
775
The Strategy for Socio-Economic Development for the period of 2001-2010, at the Ninth Congress ofVietnam’s Communist Party, 2001, Part II.1.
776
Institute of Financial Science (2004), pp. 136-137.
777
Pham Trung Cang, Chairman of Board of Directors, Tan Dai Hung Plastic Company. In “Lam an lon
phai co bao hiem” [Big business deals need insurance]. Thoi bao kinh te Vietnam, 25 October 2006.
Available at http://www.vneconomy.com.vn – Last visited 22 May 2007.
778
The Strategy for Socio-Economic Development for the period of 2001-2010, at the Ninth Congress ofVietnam’s Communist Party, 2001, Part II.1.
779
Insurance Strategy, p. 12.
780
Thai and Tran (2004), p. 139.
781
Institute of Financial Science (2004), p. 104.
782
Thai and Tran (2004), p. 141.


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sub-sectors or uncommitted modes of supply. Possible restricted measures may include, forexample, cross-border supply of life and non-life insurance services supplied to Vietnamese
citizens and domestic companies under Mode 1, establishment of branches of foreign life
insurance companies under Mode 3, or movement of natural persons other than the fivecategories inscribed in the horizontal commitments under Mode 4.
Nevertheless, the implementation of commitments on liberalization requires Vietnam
to open its insurance services sector to foreign participation and competition, andconsequently domestic insurers might lose their markets. As noted by the government,
weaknesses of domestic insurers include: (i) limited financial capacity compared to foreigncompanies; (ii) weak technological infrastructure and management system; (iii) lack ofexpertise and training; and (iv) lack of customer services and weak focus on service quality.783
Other weaknesses affecting the development of domestic insurers could be a less-developed
securities market and inexperienced individual customers.784 As described in section 2.3 ofChapter Five, foreign insurers overwhelm the domestic life insurance market. As the majorityof the domestic non-life insurance market is still held by domestic insurers, domestic insurers’
share in Vietnam’s insurance market as a whole was stable at 60 percent during 2003-2006.785
This trend, however, may change in the future with increased foreign participation.
Another concern is that potentially fierce competition might cause failure of someinsurance companies, especially domestic ones, thus affecting the efficiency and stability of
the insurance sector.786 However, as mentioned earlier, more competition could be a “push”
for domestic insurers to improve their competitiveness. Competition also provides incentives
for insurers to consolidate their financial capacity and adopt good standards and practices inbusiness operations. Therefore, for the benefit of consumers and fair competition, any underperforming company should be closed. From the government standpoint, this competition
should be properly addressed through better prudential regulation and supervision in order toassure the financial health of all insurers and thus improve credibility of Vietnam’s insurance
market.
Besides fierce competition, market access could give rise to the problem of cherrypicking, whereby foreign insurers selectively service the market, and only set up and expand
their activities to profitable services and geographical areas.787 The response to this concern isthat those less profitable services, particularly those that were not profitable in the past,should not expect to gain from foreign participation in the domestic market. As pointed out by
Skipper, there is no perfect national insurance market in the world.788 Moreover, potential
cherry-picking by foreign insurers is not a persuasive argument against opening the insurance
sector because the government may follow a policy to promote insurance services on a nondiscriminatory basis.
2.4 Increasing regulatory transparency, equity and complexity

783

Insurance Strategy, Sec. A.II.3.
Ministry of Planning and Investment and UNDP (2006), p. 54.
785
Ministry of Finance (2005), Table 2, p. 7; Ministry of Finance (2006), Table 2; and Ministry of Finance(2007), Table 2.
786
Institute of Financial Science (2004), pp. 104-105.
787
Id. pp. 105-106.
788
Skipper (1997), p. 29.
784


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As described in section 2.3 of Chapter One, one fundamental obligation under GATS
is regulatory transparency. Transparency in policy-making procedures and application of laws
are a pre-requisite condition for Vietnam to comply with the WTO agreements. In theinsurance sector, for example, licenses for establishment and operation of insurancecompanies must be granted in conformity with master plan, roadmap, and orientation on
development of Vietnam’s insurance market as well as financial market.789 This requirement
apparently raises some concerns among investors in regard to how transparent and predictable
the master plan and roadmap are in practice. Although the government has issued the Strategy
on Development of Insurance Market, the full text of this strategy has not been published in
the Official Gazette and is not accessible to both existing and potential investors.790 Thus, tomeet its transparency obligation, Vietnam is required to make public all laws, regulations andjudgments relating to trade issues. In the long-term, regulatory transparency should result in abetter investment environment by eliminating trade distortions, which are caused by
ambiguity and information asymmetry, and therefore enable Vietnam to advance its economic
development.791
In addition to regulatory transparency, GATS Article XVII on National Treatment
indicates the assurance of equal treatment among enterprises, regardless of origin. Thisobligation may put domestic firms under pressure to restructure and innovate corporate
governance to enhance their efficiency. It has been observed that an attempt towards a levelplaying field for all market players has proved to be a good condition for the promotion of
trade in insurance services. 792 On the other hand, regulatory equity puts restraint on
distortionary intervention by the government in the domestic insurance sector, as well as
highlights incentives to eliminate discriminatory regulations. In other words, it would
guarantee the removal of regulatory discretion and arbitrariness. Arguably, this endeavour
would enhance the government’s reputation in the eyes of both the international community
and investors.
The national treatment obligation, however, probably makes it difficult for regulators
to protect domestic insurance companies. As discussed in section 1.2 of Chapter One, themain rationale for insurance regulation is to address consumer protection. Liberalization will
put pressure on domestic regulators and supervisors to ensure consumer protection withregard to services supplied not only by insurers headquartered in Vietnam, but also by otherforeign insurers. Therefore, it is necessary that the supervisory authority should ensure that
too strong competition from foreign insurance services and service suppliers does notseriously affect the solvency of domestic insurers nor undermine public confidence. It meansthat a more liberal insurance sector would require more complex, effective regulatory andsupervisory framework to better ensure the interests of policyholders as well as the stability
and integrity of the insurance market.
3. Compliance with the national treatment principle793
789

Vietnam Insurance Law, Art. 62.2.
See the Official Gazette, No. 145 (6 September 2003), p. 9070 (in Vietnamese language).
791
Cai and Hart (1996), p. 81.
792
An interview with Finance Deputy Minister Le Thi Bang Tam. In “Bao hiem khong thuoc danh mucbao ho lon” (Insurance sector not subject to a high protection list). Thoi bao kinh te Vietnam, May 2005.
Available at http://www.vneconomy.com.vn – Last visited 5 October 2005.
793
This section draws in part from Vu Nhu Thang (2007b), pp. 977-1009.
790


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3.1 Implementation of commitments in insurance services: experience of Japan, the EU
and China
Under the national treatment column, Japan made commitments on liberalizing its
insurance market in the Second Protocol, which was binding to Japan until the end of 1997. In
Mode 3, it undertook a limitation whereby foreign life insurance companies were required toretain in Yen currency an amount corresponding to their technical and claims provisions forYen-dominated insurance policies until the end of June 1996.794 In implementation of thiscommitment, in domestic law, the Yen currency requirement has been abolished since 1 April
1996.795
Moreover, foreign insurance companies must be licensed by the Financial Services
Agency to supply insurance services in Japan, except for cross-border transactions on marine,
aviation and transport insurance. It is reported that the criteria for granting licenses and therequirement of solvency margin are the same for Japanese and foreign insurance service
suppliers. 796 In parallel with ensuring national treatment between domestic and foreign
insurance companies, Japan also amended certain enforcement regulations of the Insurance
Business Law with a view to introducing more stringent solvency margin standards anddisclosure requirements.797
In case of the EU, in order to implement commitments in financial services, including
insurance services, the European Council approved the Fifth Protocol to GATS by Decision
1999/61/EC dated 14 December 1998. While undertaking commitments on national treatment
with regard to trade in insurance services, the EU introduced new legislation in order toincrease solvency requirements for life and non-life insurers, especially in the areas ofmaritime, aviation and general liability business.798
With regard to China, as described in Chapter Four, section 2, China madecommitments on liberalizing life and non-life insurance, reinsurance, and services auxiliary to
insurance. There is no limitation on the national treatment column with regard to the supply of
those insurance services in Modes 1 and 2. China also undertakes the full national treatment
in Mode 3, except for the supply of statutory insurance services and the complete removal of
20 percent cession to Chinese Reinsurance Company by 2006. 799 China has revised its
Insurance Business Law, and provided regulations and rules on implementation of thesecommitments, such as regulations on administration of foreign-funded insurancecompanies, 800 rules on administration of insurance brokerage, insurance agencies, and794
Japan – Schedule of Specific Commitments. GATS Doc. No. GATS/SC/46/Suppl.1/Rev.1, 4 October
1995, p. 3;
795
Japan – Notification pursuant to Article III.3 of the General Agreement on Trade in Services, Council
for Trade in Services, WTO Doc. No. S/C/N/60, 28 May 1997.
796
WTO. Trade Policy Review – Japan, Report by the Secretariat, WT/TPR/S/107, 9 October 2002, p. 62.
797
Id. pp. 62-63.
798
WTO. Trade Policy Review – European Communities, Report by the Secretariat, WT/TPR/S/136, 23
June 2004, p. 121.
799
China – Schedule of Specific Commitments, GATS/SC/135, 14 February 2002, pp. 28-29.
800
China – Notification pursuant to Article III.3 of the General Agreement on Trade in Services, Council
for Trade in Services, WTO Doc. No. S/C/N/224, 24 December 2002.


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reinsurance.801 Foreign-funded insurance companies are allowed to supply property or life andhealth insurance in China.802 A license is required to supply insurance services in China, andforeign-funded insurers must satisfy several requirements, including solvency standards andother prudential measures.803
Moreover, foreign-funded insurers are not required to cede to the China Reinsurance
Corporation a portion of the primary risks for non-life, personal accident, and healthinsurance.804 As observed by Chen and Shih, the level of competition in China’s insurance
market has become more intense due to the implementation of commitments in insurance
services. This includes abolition of discriminatory measures which violate GATS Article
XVII. 805 Accordingly, the supervision of insurance companies has been strengthened,
including monitoring minimum solvency requirements, regulations on allocations of technicalprovisions, and raising capitalization.
Some remarks
In theory, international treaties might be applied directly or implemented by legislativeand other measures.806 From the experience of the above WTO Members, however, there areat least two observations with regard to the implementation of commitments on national
treatment in supplying insurance services. First, for the application, commitments onliberalization of the domestic insurance services sector need to be incorporated into domestic
legislation and other administrative regulations. In other words, specific domestic laws or
regulations in the insurance sector should address the implementation of commitments.
Second, there is evidence that enhancement of solvency requirements of insurers is considereda crucial measure when implementing commitments on national treatment in insurance
services.
3.2 Implementation of commitments under Vietnamese legislation

801

WTO. Trade Policy Review – China, Report by the Secretariat, WT/TPR/S/161/Rev.1, 26 June 2006, p.

222.
802
Regulations of the People's Republic of China on Administration of Foreign-funded Insurance
Companies, Art. 15.
803
Id. Art. 8.
Other prudent measures, according to Article 11 of the Detailed Rules of 22 December 2005 for
implementation of these Regulations include reasonable structure for corporate governance, stable and soundrisk control system, sound internal control system, effective management information system, and good
operating performance.
804
Art. 101 of China Insurance Law 1995 on 20 percent compulsory cession to China Reinsurance
Company was replaced by Art. 102 of China Insurance Law 2002. Accordingly, insurance companies, both
domestic and foreign, are allowed to engage in reinsurance arrangement in accordance with relevant provisionsof the China Insurance Regulatory Commission.
805
Chen, Chien-Hsun and Hui-Tzu Shih. 2004. Banking and Insurance in the New China: Competition and
the Challenge of Accession to the WTO. Edward Elgar: Massachusetts, pp. 146-148.
806
Kong, Qingjiang. 2000. China’s WTO Accession: Commitments and Implications. Journal ofInternational Economic Law, p. 679.


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As Vietnam acceded to the WTO, its commitments in the Protocol on the Accession807
and other multilateral agreements, including GATS, became international treaties to which
Vietnam is a party under Vietnamese legislation. 808 According to the Constitution, theNational Assembly has the power to ratify international treaties, directly signed by or upon
the proposal of the President of State. 809 The ratification of international treaties by the
National Assembly shall be made in the following circumstances: (i) as provided in theinternational treaties, (ii) as signed on behalf of the State, and (iii) as signed on behalf of thegovernment but containing provisions contrary to domestic laws. 810 Since several
commitments are inconsistent with Vietnam’s current legislation, 811 the Protocol on the
Accession of Vietnam was ratified by the National Assembly in 29 November 2006.812
International treaties shall be bound by Vietnam in accordance with the provisions
stated in these treaties.813 In Vietnam, for the purpose of application of international treaties,
an implementation plan is required, which consists of proposals on amendment of andaddition to or repeal of current legislations, or enactment of new laws. 814 Therefore, theresponsibility for implementation is allocated among legislative, administrative and judicial
bodies.
In case of the US-VN BTA, for example, Vietnam commits to extend market accesson banking services, whereby 100 percent equity participation by US banks in subsidiary shallbe allowed by 2010. 815 Accordingly, revisions of the banking law were made in 2004 to
include the form of wholly owned subsidiaries of foreign credit institutions under Mode 3. In
addition, foreign credit institutions are allowed to contribute capital and purchase shares ofcredit institutions operating in Vietnam, in conformity with governmental regulations.816
The application and implementation of international treaties in Vietnam must be
conducted by enacting legislative or other measures. In other words, the National Assembly
has the power to incorporate international treaties into domestic laws and the government may
provide administrative regulations and rules for such implementation. Specifically, any
provisions in the Vietnam Insurance Law which are inconsistent with Vietnam’s obligations
and commitments under GATS, must be revised or removed. This approach is similar to thatof Japan, EU and China as described earlier.
807

Protocol on the Accession of the Socialist Republic of Vietnam done at Geneva (Nov. 7, 2006). WTO
Doc. No. WT/L/662, 15 November 2006.
808
See Law on Signing, Acceding to, and Implementing International Treaty (Jun. 14, 2005) [hereinafter
Law on Treaty] (Vietnam), Art. 2.1.
Under Vietnamese laws, “international treaty” signed or acceded by the Socialist Republic of Vietnam isdefined as an agreement in written form, which is signed or acceded on behalf of the State or the Government of
the Socialist Republic of Vietnam with one or several countries, or international organizations.
809
Resolution of the National Assembly No. 51/2001/QH10, on amendment of and addition to the 1992
Constitution of the Socialist Republic of Vietnam (Dec. 25, 2001) (Vietnam), para. 17.
810
Law on Treaty, Art. 31.
811
For example, in insurance services, Vietnam commits to open market access for foreign non-life
insurance companies to supply insurance services in Vietnam in the form of branches, while this form is
prohibited in the Vietnam Insurance Law.
812
Resolution of the National Assembly No. 71/2006/NQ-QH11 on ratifying the Protocol of Accession to
the WTO Agreement (Nov. 29, 2006) [hereinafter Resolution 71] (Vietnam).
813
Law on Treaty, Art 71.2(c).
814
Id. Art. 31. See also Resolution 71, para. 3.
815
The US-VN BTA, Chapter III, Annex G – Vietnam, p. 21.
816
Law on Amendments of and Additions to some articles of the Law on Credit Institutions, (Jun. 15,
2004) (Vietnam), Art. 1.2.

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On the other hand, direct application of commitments in insurance services is also
permitted. Specifically, insurers are not required to cede a compulsory amount of 20 percent
of non-life insurance liabilities to Vietnam Reinsurance Corporation in case of ceding toinsurers abroad as provided in Article 9.2 of the Vietnam Insurance Law.817 Moreover, incases where there might be conflict between international treaties and domestic laws, themultilateral agreements and commitments shall prevail.818 This indicates a clear legal basis of
direct effect of the WTO obligations and commitments in Vietnam. One explanation for thisdirect application of commitments in reinsurance services is that these commitments are“sufficiently clear and detailed for implementation”.819 It would suggest that there is no needfor any more specific provisions in the domestic legislation concerning compliance with thesecommitments. Another reason might be that Vietnam was required to abolish this compulsory
cession by the end of 2006 under the US-VN BTA as described in Table 4.
3.3 Interpretative issues in the light of the national treatment principle
As Vietnam inscribed “None” in Modes 1, 2 and 3, the full national treatment applies
to these three modes of supply. Under Mode 4, Vietnam accords the full national treatment
only to five categories of natural persons. Accordingly, the general approach to interpretationof this principle governs Vietnam’s Schedule of Specific Commitments in insurance services.
The following section shall examine four elements of the national treatment obligation under
the Vietnam Insurance Law, namely: (i) Vietnam’s scheduled insurance service sub-sectors;(ii) measures affecting trade in insurance services; (iii) the issue of likeness between domestic
and foreign insurance services and service suppliers; and (iv) the standard of “no lessfavourable” treatment.
(i) Scope of insurance sub-sectors
Vietnam undertakes to liberalize direct insurance, reinsurance and retrocession,
insurance intermediation, and services auxiliary to insurance under the multilateral framework.
Table 5 examines the consistency between Vietnam’s current regulations on insurance
services and Vietnam’s commitments in the WTO accession.

817

Resolution 71, para. 2.
Under the Vietnam Insurance Law, Art. 9.2 stipulates that in case of reinsurance abroad, all insurers are
obliged to reinsure a portion of the liability under reinsurance contracts to a domestic enterprise, which isengaging in reinsurance business in conformity with governmental regulations.
818
Id. See also Vietnam Insurance Law, Art. 2.2.
819
Law on Treaty, Art. 6.3. See also Governmental Submission Letter on the Results of the Negotiations
and Ratification of the Protocol on the Accession to the WTO, Doc. No. 155/TTr-PC dated 22 November 2006
(Vietnam), pp. 41-42.

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Table 5: Scheduled insurance services sub-sectors vs. Vietnam Insurance Law

a.

b.
c.
d.

Vietnam’s commitments

Consistent

Vietnam Insurance Law

Direct insurance(a) life, excl. health insurance services(b) non-life
Reinsurance and retrocession
Insurance intermediation (brokerage, agency)
Services auxiliary to insurance (consultancy,
actuarial, risk assessment, claim settlement)

ļ
ļ
ļ
ļ
ĺ

Art. 7.1 (life insurance)
Art. 7.2 (non-life insurance)
Art. 61 (reinsurance)
Art. 90 (brokerage); Art. 85 (agency)
Art. 60.1 (business scope of insurers)

With regard to direct insurance services, both life and non-life insurance are permitted
to be supplied under the Vietnam Insurance Law.820 It is submitted that the scope of life andnon-life insurance is consistent with Vietnam’s commitments.
One legal concern over interpretation of Vietnam’s commitments is whether Vietnam
inscribes health insurance services for liberalization. Apparently, as Vietnam clearly inscribes
sub-sector “life, excl. health insurance services”, one possible interpretation is that Vietnam
does not commit health insurance services under the multilateral liberalization. In other words,
Vietnam implies the inscription of “Unbound” for these services under the national treatment
obligation.
On the other hand, the general approach to inscribing Vietnam’s commitments is that
service sectors and sub-sectors are specifically encoded corresponding to the UN CPC. For allother scheduled service sectors, including business, distribution, education, environment, andtourism, Vietnam inscribes service sub-sectors corresponding to CPC numbers. It could beargued that Vietnam would follow either the WTO Classification or UN CPC for making
commitments in insurance services.821 In terms of the WTO Classification, it would appear
that Vietnam excludes health insurance services from its schedule because the WTO
Classification includes health insurance services into the category of life insurance. The
opposite is true if Vietnam follows the UN CPC. As described in section 3.1 of Chapter Four,because health insurance services are classified under non-life insurance in the UN CPC,
Vietnam would be obliged to liberalize health insurance services.
However, while other service sectors and sub-sectors specifically refer to CPC forundertaking commitments, this is not the case for financial services, including insurance
services. This would suggest that the intent of negotiators is to undertake insurance services
820

Vietnam Insurance Law, Art. 7.
Scope of life insurance services in Vietnam includes: (i) whole life insurance; (ii) pure endowment
insurance; (iii) term insurance; (iv) endowment insurance; (v) annuity; and (vi) other classes of life insurance as
may be prescribed by the Government from time to time.
Scope of non-life insurance service in Vietnam includes: (i) health insurance and personal accident
insurance; (ii) property insurance and casualty insurance; (iii) transit insurance pertaining to land, sea, rivers,
railways and air; (iv) aviation insurance; (v) motor insurance; (vi) fire and explosion insurance; (vii) hull
insurance and ship-owner’s civil liability insurance; (viii) public liability insurance; (ix) credit insurance andfinancial risk insurance; (x) business interruption insurance; (xi) agricultural insurance; and (xii) other classes of
non-life insurance as may be prescribed by the Government from time to time.
821
This reasoning was found in EC – Bananas case. See section 5.3 of Chapter Two.

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based on different services classification, neither the WTO Classification nor UN CPC. The
general structure of inscribing insurance service sub-sectors might imply that Vietnam bases
its schedule on the Annex. However, the Annex does not expressly indicate how healthinsurance services are classified. Accordingly, this would cause an ambiguity in theimplementation of Vietnam’s commitments in this sub-sector. Moreover, under the Vietnam
Insurance Law, health insurance services are not defined in life insurance, but non-life
insurance.822
Therefore, although Vietnam clearly excludes health insurance services under the subsector of life insurance, panels would be likely to interpret Vietnam’s commitments in nonlife insurance services to include health insurance services. This issue is significant in cases
where Vietnam allows foreign non-life insurers to supply insurance services through the formof branches starting from 2012. In other words, branches of foreign non-life insurers would
claim that they are entitled to supply health insurance services under the Vietnam Insurance
Law without being subject to any discrimination under the meaning of GATS Article XVII.
Under the Vietnam Insurance Law, the scope of reinsurance comprises: (1) ceding partof the risk assumed to one or more other insurance companies; and (2) assuming part or theentire risk insured by other insurance companies.823 With regard to insurance intermediation,
the Vietnam Insurance Law has permitted insurance companies to supply insurance brokerage
services,824 and agency services.825 Accordingly, it is submitted that Vietnam’s domestic law
on reinsurance services and insurance intermediation is consistent with its commitments in the
WTO.
The scope of services auxiliary to insurance in the Vietnam Insurance Law includes:(i) prevention and mitigation of risks and losses; (ii) loss surveys; (iii) acting as loss survey
and claim settlement agents and/or third party claim agents; (iv) fund management andinvestment; and (v) other operations as provided by the laws. 826 However, there is noprovision on insurance consultancy services and actuarial services. Although it may be argued
that those two auxiliary services could be included in “other operations as provided by thelaws”, a clear provision on consultancy and actuarial services is necessary. This would ensure
better compliance with Vietnam’s commitments as well as fulfillment of the transparency
obligation under GATS.
(ii) Measures affecting trade in insurance services
822

Vietnam Insurance Law, Art. 7.2.
Id. Art. 61.
824
Id. Art. 90.
Brokerage operations consist of: (i) providing information concerning the class of insurance, terms andconditions of insurance, premiums, and potential insurers to customers; (ii) advising customers on risk
management, selection of suitable class of insurance, terms and conditions of insurance, tariffs, and appropriate
insurers; (iii) negotiating and arranging the conclusion of insurance contracts between insurers and customers;and (iv) carrying out other activities relating to the performance of the insurance contracts as may be requested
by customers.
825
Id. Art. 85.
Agency activities include: (i) offering and selling insurance contracts; (ii) arranging for insurance contracts
to be signed; (iii) collecting premiums; (iv) arranging for claim settlements or payment of indemnity or insurance
benefits upon the occurrence of the insured events; and (v) carrying out other activities relating to theperformance of insurance contracts.
826
Id. Art. 60.1.
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As described in Chapter Two, section 4.2, under the national treatment principle, theterm “measures” would broadly cover any domestic measure of governmental nature andaffecting trade in insurance services. This broad coverage of measures includes, but is not
limited to, substantive and procedural regulations, compulsory and voluntary but legally
enforceable measures, and taxes per se and tax administration measures causing financial
burden on foreign services and service suppliers. It means that trade in insurance services isaffected not only by insurance regulations, but also by other general rules and measures, suchas foreign exchange control, tax policy, competition law, and subsidies.
Thus, Vietnam may be challenged by other WTO Members with regard not only tothose measures which fall within the scope of the Vietnam Insurance Law, but also othermeasures, which directly or indirectly affect trade in insurance services. For example, any
support by the government to domestic insurers or subsidies to consumers in order topurchase domestic insurance services may constitute a “measure affecting trade in services”
under the meaning of GATS national treatment obligation. Moreover, any measures adopted
by the competition authority under the Competition Law of Vietnam on approving merger andacquisition with a view to strengthening domestic insurers could also fall within the scope of
GATS Article XVII.
Accordingly, the assurance of other laws and regulations, which may either directly or
indirectly affect trade in insurance services, consistent with the national treatment obligation,
could be an important factor for Vietnam’s implementation of commitments under the WTO
framework.
(iii) LikenessAs presented in section 4.3 of Chapter Two, the issue of likeness is of significance ininterpreting GATS Article XVII. This is because WTO jurisprudence tends to rely only on
service classification as an exclusive criterion for determining likeness between foreign anddomestic services. Moreover, the likeness of service suppliers seems to be ignored in theassessment of likeness as a whole for the purpose of the national treatment obligation.
Concerning Vietnam’s scheduled insurance service sub-sectors, four important legal
issues need to be clarified here.
The first issue is whether likeness could be established among four different subsectors: direct insurance, reinsurance and retrocession, insurance intermediation, and services
auxiliary to insurance. If all insurance and insurance-related services are like services underthe meaning of GATS Article XVII, Vietnam is required to remove all different treatments
among these four insurance service sub-sectors. For example, any differences in the minimum
legal capital requirement between direct insurers and insurance brokerage companies must be
removed.827

827

See Decree 46/2007/ND-CP, Art. 4.
The current legal capital requirements are VND 300 billion (approximately US$ 18 million) for non-life
insurance company; VND 600 billion (approximately US$ 36 million) for life insurance company; and VND 4billion (approximately US$ 300,000) for insurance brokerage companies.

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However, it is safe for Vietnam to argue that these four insurance service sub-sectors
are unlike under the meaning of GATS Article XVII. There are at least two reasons. Althoughservice classification could not be a decisive factor in determining likeness, this criterion iseffective in excluding likeness when two services fall into different sectors or sub-sectors. As
noted earlier, Vietnam’s schedule seems to follow the Annex, which apparently categorizes
direct insurance, reinsurance and retrocession, insurance intermediation, and services
auxiliary to insurance in different sub-sectors. Especially, by putting these insurance services
in different headings under its Schedule of Specific Commitments, Vietnam intentionallytreats the four sub-sectors differently. In addition, as far as the criterion of products’ end-uses
is concerned, these four insurance services also serve different functions. As described in
section 1.1 of Chapter One, direct insurance services are sold to the public, while reinsurance
services are only sold to insurers. Insurance intermediation involves activities of introducing,proposing and arranging the conclusion of insurance contracts between insurer and insured.828
Services auxiliary to insurance is to support insurers in supplying direct insurance services.829
The other reason is that scheduling practices of the selected WTO Members as
examined in Chapter Four reveal that these four sub-sectors are treated differently in theirinscriptions of commitments. This could suggest that these four insurance service sub-sectors
are unlike under the meaning of the national treatment obligation.
The second issue is whether or not likeness could be established between life and nonlife insurance services. Under Vietnam’s Schedule of Specific Commitments, life and non-life
insurance services are classified under the same sub-sector of “direct insurance”. If life andnon-life insurance services are alike, other WTO Members may challenge, for example,
Vietnam’s higher minimum legal capital requirement on life insurers.830 As Vietnam’s life
insurance market is dominated by foreign insurers, this measure could accord less favourable
treatment to foreign life insurers compared to domestic like non-life insurers.
However, Vietnam can argue that life and non-life insurance services are unlike underthe meaning of GATS Article XVII. The above two reasons could effectively apply to thisargument. More specifically, all three services classifications, i.e. the WTO Classification,
UN CPC, and the Annex, expressly categorize life and non-life insurance services under
different headings. As far as the criterion of products’ end-uses is concerned, life and non-life
insurance services serve different functions. As described in Chapter One, section 1.1, life
insurance is insurance of the person, whereas non-life insurance is to protect property.
Moreover, the scheduling practice of the selected WTO Members as analyzed in Chapter Fouralso shows that life and non-life insurance services are treated differently in theircommitments on national treatment. Therefore, Vietnam may be safe to treat life and non-life

828

According to the explanatory note of the UN CPC to the sub-sector of 81401, insurance intermediation
services are defined as “services of intermediaries between insurance companies and their clients”. See
Provisional CPC (1989).
In a new version of the UN CPC, insurance brokerage and agency services are categorized under the subsector 71610, which covers services of selling insurance and pension products. See also Central Product
Classification of the United Nations, Version 1.1 (CPC Ver. 1.1), 2002.
Available at http://unstats.un.org/unsd/cr/registry/regcst.asp?Cl=16 – Last visited 22 May 2007.
829
According to the explanatory note of the UN CPC to the sub-sector of 8140, services auxiliary to
insurance are defined as “services closely related to management of insurance”. See Provisional CPC (1989).
In a new version of the UN CPC, services auxiliary to insurance are categorized under the sub-sector 716.
See also CPC Ver. 1.1 (2002).
830
See Decree 46/2007/ND-CP, Art. 4.

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NATIONAL TREATMENT PRINCIPLE IN GATS:
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insurance services differently because their likeness is not established under the GATS
national treatment obligation.
The third issue is whether likeness could be established between insurance brokerageand insurance agency services. In all three services classifications, both services are
categorized under the same sub-sector. More specifically, under the UN CPC, insurance
brokering and agency services are in the same heading of CPC 81401. Accordingly, there is apossibility that these two services are alike under the meaning of GATS Article XVII. As far
as service suppliers are concerned, they are alike if they supply these like services.
If likeness is broadly determined by relying on the same heading of “insuranceintermediation”, Vietnam might be found in violation of GATS Article XVII when according
different treatment, which is at the cost of foreign services and service suppliers, between
insurance brokerage and insurance agency services. Under the Vietnam Insurance Law,
insurance brokerage services are supplied by insurance brokerage enterprises, and insurance
agency services are supplied by either natural persons or business entities.831 While insurance
brokerage enterprises are subject to the minimum legal capital requirement of US$ 300,000,
there is no such requirement on corporate agents.832 Even though there is no discrimination
between domestic and foreign owned insurance brokerage enterprises, Vietnam might befound in violation of GATS Article XVII as long as the likeness between insurance brokerage
and agency services is established, because foreign owned insurance brokerage enterprises aretreated less favourably than domestic corporate agents with regard to the measure on legal
capital requirement. Moreover, in practice, as foreign owned insurance brokerage enterprises
dominate Vietnam’s insurance market in terms of the total brokerage fees, this measure of theminimum capital requirement may result in a financial burden on foreign owned brokerage
enterprises.
As discussed in Chapter Two, section 4.3, the scope of likeness under the meaning of
GATS Article XVII would be narrowed down if other criteria for determining likeness aretaken into account, including product’s end-uses and consumers’ tastes and habits. On the one
hand, the criterion of product’s end-uses is to clarify the extent to which two services are able
to carry out the same functions. Both insurance brokerage and agency services may sharesome similar functions, including introducing, proposing and arranging the conclusion of
insurance contracts between insurer and insured. However, as far as the needs of consumers
are concerned, consumers may see that agency services and brokerage do not share common
end-uses. While brokers represent the insured, agents represent insurers in exercising
insurance intermediation services. Therefore, insurance brokerage and agency services serve
very different functions in terms of advising consumers in purchase of insurance contracts. On
the other hand, the criterion of consumers’ tastes and habits is to clarify the extent to which
consumers are willing to purchase those services. Although both insurance brokers and agentsreceive commissions from insurance premiums paid by consumers, it could be argued that
consumers are only willing to use and pay for brokerage services. Moreover, as far as likenessof insurance intermediation service suppliers is concerned, insurance brokers are independent
from insurers, whereas insurance agents are dependent on insurers based on insurance agency
contracts.833 This means that because the likeness of service suppliers is not determined, the831

Vietnam Insurance Law, Art. 84 and 89.
Decree 46/2007/ND-CP, Art. 4.
833
See Vollbrecht, Jorg. 2001. Insurance Regulation and Supervision. In OECD. Policy Issues inInsurance: Insurance Regulation and Supervision in the OECD Countries. Paris: OECD, p. 59.
832


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likeness of insurance brokerage and insurance agency services and suppliers as a whole underthe meaning of GATS Article XVII could not be established.
The last issue is whether other services, including consultancy, actuarial, risk
assessment, and claim settlement under the sub-sector “Services auxiliary to insurance” arealike or not under the meaning of GATS Article XVII. Under Vietnam’s Schedule of SpecificCommitments, all these services are under the same sub-sector. WTO Members may claim
that, for example, because Vietnam would adopt the Annex for scheduling its commitments,
actuary services and claim settlement services are alike because they are under the same subsector. In addition, if Vietnam wished to differentiate between these two services, Vietnam
would expressly put them into different sub-headings, as it does regarding direct insurance
services (between life and non-life). As far as service suppliers supply these like services, they
are alike. Because likeness is established under the meaning of GATS Article XVII, Vietnam isliable for according foreign services and service suppliers no less favourable treatment than it
accords to domestic like counterparts.
Consequently, Vietnam might be at risk and challenged by other WTO Members if it,
for example, imposes indirect tax rate on actuarial services higher than that of risk assessment
services. In practice, foreign insurers dominate Vietnam’s life insurance market while
Vietnamese insurers are the main players in the non-life insurance market. Moreover, as
described below in section 1.2 of Chapter Seven, under Vietnam’s current regulations, only life
insurers are required to employ actuarial services. A higher indirect tax rate on actuarial services
apparently could lead to a higher operational cost for foreign life insurers. By the same token, a
low indirect tax rate on risk assessment services would result in a low operational cost fordomestic non-life insurers. This measure, therefore, could modify the conditions of competitionin favour of Vietnam’s domestic insurers.
However, in the UN CPC, these services are categorized under different sub-headings,
namely consultancy services (81402), actuarial services (81404), and average and loss
adjustment services (81403). As far as the UN CPC is concerned, it could be argued thatlikeness has not been established among services auxiliary to insurance because they are
categorized under different sub-headings. Moreover, if the criterion of product’s end-uses istaken into account for the purpose of GATS Article XVII, these services do not sharesimilarities in functions. Actuarial services involve professional expertise in determining
insurance premiums as well as calculating technical provisions and other financial matters of
insurance companies.834 While risk assessment involves determining levels of risk exposed byinsured or assets, claim settlement services are supplied once risk occurs under the insurance
contract.835 In general, it may be observed that consultancy services may be supplied at any
According to Vollbrecht (2001), in most OECD countries, there is a distinction between supervision of
agents and brokers because agents are directly employed by supervised insurers.
834
According to the explanatory note of the UN CPC to the sub-sector of 81404, actuarial services aredefined as “services consisting in calculation of insurance risks and premiums”. See Provisional CPC (1989).
In a new version of the UN CPC, actuarial services are categorized under the sub-sector 71630, which
covers services of calculating insurance risks and premiums. See CPC Ver. 1.1 (2002). See also IAIS. Guidance
Paper No. 7 on The use of Actuaries as part of a supervisory model, October 2003, pp. 15-17.
Available at http://www.iaisweb.org – Last visited 22 May 2006.
835
According to the explanatory note of the UN CPC to the sub-sector of 81403, average and loss
adjustment services are defined as “evaluation and adjustment services of insurance claims”. See Provisional
CPC (1989).
In a new version of the UN CPC, insurance claims adjustment services are categorized under the sub-sector
71620, which covers (i) services of investigating insurance claims, determining the amount of loss or damages

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time for the purpose of advising, producing, and implementing an insurance contract.836 Even
though consultancy, actuarial, risk assessment, and claim settlement services are categorizedunder the same heading of the Annex, these services could not be alike because they serve
different functions. Accordingly, Vietnam would not be liable for the national treatment
obligation when it accords different treatment to these unlike services auxiliary to insurance.
(iv) The standard of “no less favourable” treatment
As long as domestic and foreign insurance services and service suppliers are alike,
Vietnam is required to ensure the standard of “no less favourable” treatment. This standard
encompasses not only de jure but also de facto discrimination. An illustrative list of several
possible discriminations against foreign insurance services and service suppliers includes:- Any subsidies or favourable treatment by the government accorded to all non-life
insurance companies in Vietnam might constitute de facto discrimination against foreign nonlife insurers because Vietnam’s non-life insurance market is dominated by domestic insurers.
On the other hand, any subsidies or favourable treatment by the government accorded todomestic insurance brokerage companies might constitute de jure discrimination against
foreign counterparts.
- Any tax incentives accorded by the government to foreigners and/or foreign owned
capital companies in Vietnam to acquired non-life insurance services supplied by all insurers
operating in Vietnam might constitute de facto discrimination against foreign insurers who
supply insurance services through Mode 1 because domestic insurers account for more than90 percent of the non-life insurance services market. Similarly, any tax incentives accorded by
the government to all insurers in Vietnam to acquire reinsurance arrangements supplied by reinsurers in Vietnam might constitute de facto discrimination against foreign insurers who
supply reinsurance services under Mode 1 because there is only one reinsurance company inVietnam, which is domestically owned.
- Any incentives or favourable treatment, for example tax deduction, accorded by the
Vietnamese government to its citizens who travel abroad, to acquire personal accident
insurance supplied by domestic insurers, might constitute de jure discrimination against
foreign insurers who supply insurance services through Mode 2.
- Any restrictions on foreign exchange applied by the government to all life insurancecompanies or all insurance brokerage companies in Vietnam might constitute de facto
discrimination against foreign insurers and insurance brokerage companies because they
dominate Vietnam’s life insurance and insurance brokerage markets, respectively.
Concerning the implementation of commitments on national treatment under
Vietnam’s Schedule of Specific Commitments, there are at least three considerations.
covered by insurance policies and negotiating settlements; (ii) services of examining claims which have been
investigated and authorization of payments; and (iii) damage assessment services. See also CPC Ver. 1.1 (2002).
836
According to the explanatory note of the UN CPC to the sub-sector of 81402, consultancy services aredefined as “advisory services to businesses or persons on commercial or personal insurance coverage, with orwithout a profit element”. See Provisional CPC (1989).
In a new version of the UN CPC, consultancy is categorized under the sub-sector 71690, which includes
other services auxiliary to insurance and pensions. See also CPC Ver. 1.1 (2002).

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First, to implement commitments on national treatment in insurance services, Vietnam
has issued governmental regulations to address three discriminatory measures against foreign
owned insurers.837 The first measure on discrimination in business scope between domestic
and foreign insurers has been eliminated.838 This means that foreign insurance companies andinsurance brokerage companies are permitted to supply insurance services to all enterprises inVietnam as well as certain compulsory insurance services. The second measure on thephased-in establishment of internal branching of insurers in Vietnam has been removed.839
Accordingly, clear and nondiscriminatory criteria are applicable to both domestic and foreign
insurance companies.840 The third measure on the compulsory cession of 20 percent of nonlife insurance premiums to Vietnam Reinsurance Corporation in case of ceding to insurers
abroad has been eliminated.841
By passing new governmental regulations, Vietnam has substantially addressed allissues concerning Vietnam’s commitments on the WTO accession. However, as noted in
section 3.2 of Chapter Five, Article 4.2 of the Vietnam Insurance Law maintains favourable
conditions towards state-owned insurers, whereby the State shall invest capital and otherresources in those enterprises to bolster their development and safeguard their dominant rolein the insurance market. This provision indicates a discrimination against both foreign
participation and the domestic private sector.
As far as foreign insurance service suppliers are concerned, other WTO Members may
challenge Vietnam because this provision constitutes de jure discrimination in favour ofdomestic state-owned insurers. As discussed in section 3 of Chapter Three, in order for ameasure inconsistent with Article GATS XVII on National Treatment to be justifiable by theprudential exception, that measure must be concerned with the solvency of insurers. It is
submitted that this measure safeguarding the dominant role of state-owned insurers, isirrelevant to prudential reasons. Accordingly, this measure can not be justified by theprudential exception.

837
Decree 45/2007/ND-CP of the Government on providing guidance on implementation of a number ofarticles of the Law on Insurance Business (Mar. 27, 2007) (Vietnam) replaces Decree 42/2001/ND-CP of theGovernment on providing guidance on the implementation of a number of articles of the Law on Insurance
Business (Aug. 1, 2001) (Vietnam).
838
See Decree 42/2001/ND-CP, Art. 39.1.
Before accession to the WTO, foreign insurance companies and insurance brokerage companies were notpermitted to supply insurance services to SOEs nor to offer certain compulsory insurance services. Moreover, theexpansion of their operations was subject to the Ministry of Finance’s discretion, a demand for market
development, or provisions of international treaties.
839
Id. Art. 39.3, 4 and 5.
Upon the entrance into Vietnam’s insurance market under Mode 3, the commercial presence of foreign
insurers was allowed to set up one domestic branch, in addition to its headquarters, within the first year inoperation, and two additional domestic branches after three years in operation. Additional domestic branches of
the commercial presence of foreign insurers could be permitted after five years in operation in accordance with
the needs and development of Vietnam’s insurance market.
840
Decree 45/2007/ND-CP, Art. 11 sets out criteria for establishing branches of insurance companies,
which are licensed under the Law on Insurance Business: (i) chartered capital in hand consistent with rules of the
MOF; (ii) effective structure for management, operation and internal control and supervision; (iii) charter ofbranch; (iv) experienced management staff; and (v) application dossiers.
841
See Decree 42/2001/ND-CP, Art. 22.1.
While insurance companies are allowed to reinsure for other insurance companies, including insuranceorganizations abroad, the former were required to cede at least 20 percent of the liability under reinsurance
contracts to the Vietnam National Reinsurance Company.


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In response, Vietnam may argue that the dominant role of state-owned insurers has notde facto existed in the insurance market. Until the end of 2006, all state-owned insurers havebeen subjected to privatization – so-called “equitization” in Vietnam. 842 This evidence
indicates that there will be no more state-owned insurers in the domestic insurance market.
Meanwhile, the government has decided to refrain from establishing new state-owned
insurance brokerage enterprises, as well as new insurers wholly-owned by other SOEs.843
However, in a future revision of the Vietnam Insurance Law, it will be necessary to
remove this de jure discrimination of Article 4.2 in order to ensure compliance with
Vietnam’s commitments under the WTO.
Second, Vietnam must refrain from introducing future discriminatory measures, bothde jure and de facto, under the meaning of GATS Article XVII. As Vietnam undertakes thefull market access and national treatment commitments with regard to branches of foreign
non-life insurers, it is necessary to provide concrete regulations on licensing requirements andoperation of such commercial presence. Experiences of several WTO Members show that
Vietnam could apply prudential regulations on branches of foreign non-life insurers, including
minimum capital requirements. The current legal capital requirements applicable to non-life
insurance companies are approximately US$ 18 million.844 Although branches may be subject
to the same prudential requirements as applied to domestic non-life insurers in order for better
protection of consumers, the introduction of requirements on the solvency of branches shouldtake into account the financial back-up by parent companies as well as supervision in theexporting country.845 An excessively high level of minimum capital requirement, as in thecase of China, could make Vietnam more vulnerable to being challenged by other WTO
Members for de facto discrimination against branches of foreign non-life insurers. Although
this measure could be justified by the prudential exception, Vietnam is liable to prove that theapplication of any discrimination against branches of foreign insurers does not constitute a
disguised restriction on trade in insurance services.
Last, with regard to Mode 4 (movement of natural persons), as mentioned in section 1of this chapter, Vietnam undertakes the full national treatment towards the entry andtemporary stay of only five categories of natural persons, namely intra-corporate transferees,
other personnel, service sales persons, persons responsible for setting up a commercial
presence, and contractual service suppliers. It means that any measure adopted by Vietnam
that might limit the ability of those persons to supply insurance services, could constitute a
violation of the national treatment obligation. For example, requirements of paying social
security or obtaining approval on remittance of money abroad might constitute a lessfavourable treatment towards those five categories of natural persons under the meaning of
GATS Article XVII. However, Vietnam may impose restrictions on national treatment withregard to the permanent stay of those five categories of natural persons. In addition, Vietnam

842
See Decision 175/2003/QD-TTg; Decision 310/2005/QD-TTg of the Prime Minister on the equitization
plan and pilot establishment of Baoviet Financial-Insurance Conglomerate (Nov. 28, 2005) (Vietnam), Art. 1.1.
See also Nha bao hiem phai tap trung manh vao dau tu [Insurers must concentrate in investment], 3 October
2006.
Available at http://www.vneconomy.com.vn – Last visited 5 October 2006.
843
Decision 175/2003/QD-TTg, Art. 1. 3.a and b.
844
Decree 46/2007/ND-CP, Art. 4.
845
IAIS. Principles No. 2 on The Supervisions of International Insurers and Insurance Groups and Their
Cross-border Business Operations, December 1999, p. 2.


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may also apply limitations on movement of natural persons other than the five above-said
categories of persons.
As noted in section 3.2 of Chapter Five, under the Vietnam Insurance Law, insurance
agents may be either natural persons or business entities. Individual agents and employees ofcorporate agents who directly carry out insurance agent’s activities must be Vietnamese
citizens permanently residing in Vietnam.846 Clearly, foreign individual agents are prohibitedin supplying agency services. Because this measure involves a nationality requirement insupplying agency service in Vietnam, it falls within the scope of the national treatment
principle. However, as Vietnam undertakes commitments only on the temporary stay of thefive categories of natural persons, but not their permanent stay, the measure on nationality
requirement of individual agents and employees of corporate agents directly carrying out
insurance agents’ activities does not fall within Vietnam’s horizontal commitments under
Mode 4. Moreover, as Vietnam also prohibits Vietnamese citizens who are not permanently
residing in Vietnam, to be individual agents or employees of corporate agents directly
carrying out insurance agents’ activities, this measure does not constitute a discrimination
against foreign individual agents. Accordingly, Vietnam is not required by GATS Article
XVII to revise this measure in order to include individual permanently resident foreigners in
supplying insurance agency services.
4. Concluding remarks
In general, Vietnam’s commitments in insurance services are liberal to foreign
participation and competition. Liberalization of insurance services under the WTO could offersome opportunities for further development of Vietnam’s insurance market. The challenge offierce competition, nevertheless, should not be ignored.
While several WTO-inconsistent measures have been eliminated by the Vietnamese
government, some other measures must be taken through a revision of the Vietnam Insurance
Law. The review of compliance with Vietnam’s commitments on national treatment showsthat uncertainty in interpretation of likeness under GATS Article XVII could put Vietnam athigh possibility of violating this obligation.

846

Vietnam Insurance Law, Art. 86.

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CHAPTER SEVEN
Enhancement of Vietnam’s Prudential Regulations
Chapter Six reveals that compliance with commitments on national treatment would
require Vietnam to enhance regulations to protect consumers and ensure further developmentof the insurance market. Moreover, as concluded in Chapter Three, the meaning of the term“prudential reasons” as applied to the insurance sector is focused on the solvency of an
insurance company. This chapter, therefore, examines and analyzes prudential regulations
under the Vietnam Insurance Law, namely requirements on technical provisions, solvency
margin, and investment rules.847 The experiences of the EU, US and Japan are used to help
analyze and identify problems with the Vietnam Insurance Law.
As discussed in Part One, interpretation of the GATS national treatment principle in
the insurance sector should be read in connection with the prudential exception as stipulated
under Annex paragraph 2(a) on. Based on this two-stage approach, the chapter proceeds toprovide several policy suggestions for further enhancement of prudential regulations in the
Vietnam Insurance Law.848
1. Technical provisions
1.1 Are the technical provisions properly regulated?
Under the Vietnam Insurance Law, technical provisions are defined as:[A]n amount of money which an insurer is required to establish in order to meet its
849
predetermined liabilities arising from the concluded insurance contracts.

Insurers are required to set up technical provisions, which must be calculated from insurance
premiums separately for each class of insurance.850 The minimum amount, equivalent to 25
percent of the total technical provisions in non-life insurance, and 5 percent in life insurance,
must be deposited in a bank in order to ensure regular payment of claims and benefits.851
There are two types of technical provisions applicable to non-life insurers, namely (i)provisions for unearned premiums; and (ii) provisions for claims outstanding.852 The purposeof the unearned premium provisions is to cover the liabilities arising from all contracts in
847

In general, technical provisions are designed to ensure that an insurance company is financially able tomeet the liabilities arising out of accepted risks. In addition to the requirement of establishing technicalprovisions, the solvency margin guarantees that an insurance company has sufficient funds or assets to cover
future insurance contracts. Although funds available from technical provisions may be invested in different
categories of assets, investment rules are required to ensure good risk management with regard to investment
portfolio of an insurance company.
848
This chapter draws in part from Vu Nhu Thang (2007b), pp. 977-1009.
849
Vietnam Insurance Law, Art. 96.1.
850
Id. Art. 96.2.
851
Decree 46/2007/ND-CP of the Government on regulating financial issues of insurance enterprises andinsurance brokerage enterprises (Mar. 27, 2007) (Vietnam), Art. 13.
852
Id. Art. 8.

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force in the subsequent years, while the provisions for claims outstanding are used to coverunsettled claims at the end of the financial year, whether reported or not.853
With respect to life insurance, in addition to the above-said provisions, a life insurer isrequired to set up mathematical provisions, reserve for dividends to policyholders, andequalization provisions.854 The mathematical provisions are to cover guaranteed obligations
upon the occurrence of the insured event, and the reserve for dividend to policyholders is used
to pay for dividend agreed with policyholders in the insurance contracts.855 The equalization
provisions are set up to pay benefits in case of material increase in mortality and otherunexpected factors, such as interest rate.856
In case of the EU, the establishment of technical provisions is required by both lifeand non-life directives in order to ensure that insurers can meet any liabilities arising out of
insurance contracts in respect of their entire business. 857 Technical provisions include
provisions for unearned premiums, life insurance provisions, provisions for claims
outstanding, provisions for bonuses and rebates, equalization provisions, 858 and otherprovisions such as provision for unexpired risks.859 Non-life insurers may be required to set
provision for unexpired risk if it is estimated that claims and administrative expenses, whichmight arise after the end of the financial year from contracts concluded before that date, shallexceed the provisions for unearned premiums and any premiums receivable under thosecontracts.
The establishment of technical provisions has also been addressed intensively by
Japan and the US regulations. In Japan, insurance companies are required to establish
different reserves for liabilities arising from accepted insurance. First, the underwriting
reserve is set up to provide fulfillment of future obligations under insurance contracts. 860
Second, a reserve for outstanding claims is established equivalent to outstanding claims,
premiums returnable, and policyholders’ dividends payable. 861 Third, a price fluctuation
reserve is to buffer losses incurred due to price changes with regard to shares and otherassets.862
In the US, for example, New York Insurance Law requires insurers to establish loss or
claim reserves,863 valuation reserves in the case of life insurance companies,864 and unearned
premium reserve.865
853

Id. Art. 8.
Id. Art. 9.
855
Id. Art. 9.2(a) and (d).
856
Id. Art. 9.2 (ÿ).
857
Directive 2002/83/EC of the European Parliament and of the Council of 5 November 2002 concerning
life assurance, Art. 20; Directive 92/49/EEC of the Council of 8 June 1992 on the coordination of laws,
regulations and administrative provisions relating to direct insurance other than life insurance and amending
Directive 73/239/EEC and 88/357/EEC (third non-life insurance Directive), Art. 17; Directive 2005/68/EC of theEuropean Parliament and of the Council of 16 November 2005 on reinsurance, Art. 32.
858
Directive 91/674/EEC of the Council of 19 December 1991 on the annual accounts and consolidated
accounts of insurance undertaking, Art. 6.
859
Id. Art. 58.
860Japan Insurance Law (2001), Art. 116.1.
861
Id. Art. 117.1.
862
Id. Art. 115.
863
New York Insurance Law, Sec. 1303.
864
Id. Sec. 1304.
865
Id. Sec. 1305.
854


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Some remarks
Technical provisions are regulatory requirements which address the technical risks or
liability risks arising from insurance business. 866 The fundamental purpose of setting up
technical provisions is to ensure that insurers are capable of meeting commitments towards
policyholders at all times. 867 The establishment of sufficient technical provisions is a“cornerstone of a sound capital adequacy and solvency regime”.868 Similar to other WTO
Members, technical provisions of insurers, either life or non-life, have been addressed by the
Vietnam Insurance Law based on both claims and premiums written in order to ensure
financial soundness of insurers.
However, the regulations on establishing technical provisions are based on soundactuarial principles.869 In particular, the actuary plays a critical role in maintaining financial
soundness of insurers.870 Accordingly, actuarial regime is closely connected to the sufficientestablishment of technical provisions, and needs to be examined in the next section.
1.2 Could actuarial principles support compliance with regulation on technical provisions?
As noted in section 3.2 of Chapter Five, the Vietnam Insurance Law has no provisionon actuary. However, under the government regulations, appointment of actuary in life
insurers is obligatory in Vietnam.871 This means that the use of actuary is irrelevant to non-life
insurance companies. Duties of an actuary include setting up mathematical provision,
appraising financial conditions of life insurer, and estimating future performance.872
However, there is no requirement that an appointed actuary reports financial
conditions of insurers to the supervisory authority. In cases where a life insurer is in financial
difficulty, the actuary is required to report to the general director, board of management on
any unusual matters which might adversely affect the financial conditions of the insurer, andto propose remedies. 873 If there are no corrective measures by the life insurer in order toimprove its financial conditions within a reasonable “period of time” as proposed by theabove-mentioned reports, the actuary shall submit reports to the MOF. 874 There is noclarification on what “period of time” is deemed reasonable from the perspectives of an
appointed actuary, the board of management, and the supervisory authority. Consequently, the866
The effect of such technical risks, if occurred, would make the insurer unable to fully meet its
guaranteed obligations because either claim frequency, claim amounts, or administration and settlement
expenses are higher than expected.
See IAIS Sub-Committee on Solvency and Actuarial Issues. Issues Paper on Solvency, Solvency
Assessments and Actuarial Issues, 15 March 2000, p. 10.
Available at http://www.iaisweb.org – Last visited 22 May 2006.
867
Vollbrecht (2001), p. 41.
868
IAIS (2003), ICP 20 on Liabilities, p. 34.
869
Id.
870
IAIS Sub-Committee on Solvency and Actuarial Issues (2000), p. 25.
871
Decree 45/2007/ND-CP, Art. 14.
872
Circular 98/2004/TT-BTC of the Ministry of Finance on guiding the implementation of Decree
42/2001/ND-CP, (Oct. 19, 2004) (Vietnam), Sec. III.1.
873
Id.
874
Id.


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supervisory authority may not be promptly informed of financial conditions of life insurers,
and this may affect their solvency.
Daykin has observed the role of actuaries as follows:… [t]he role of the actuary, both within the insurance companies and in the position ofsupervisor, is critical to the maintenance of financially sound insurance companies, both for875life insurance and general insurance.

This suggests that compliance with solvency requirements of insurers is well supported by therole of actuary. Appointed actuaries are common in both life and non-life insurance in several
countries, such as the US, the United Kingdom, Canada, and Belgium.876 Actuarial skills areimportant to assess risks exposed by insurers as well as to set up technical provisions for bothlife and non-life insurance.877
In Japan, the boards of management of all insurers are required by law to appoint an
actuary. The appointed actuary is required to submit a statement of opinions to the board ofmanagement on: (i) underwriting reserves, (ii) fair and equitable distribution with regard topolicyholder dividend or surplus, and (iii) other matters specified by a Cabinet Officeordinance.878 Moreover, Article 121.2 of Japan Insurance Law stipulates that:… [T]he actuary shall, without delay, submit a copy [of his or her statement of opinions] to thePrime Minister.

This means that the actuary must submit reports to both the insurer’s board of management
and insurance supervisors. By this provision, the supervisory authority shall simultaneously
be able to monitor the appropriateness of financial conditions of insurers, and then may
rightly conduct intervention if the underwriting reserves prove to be insufficient in the light ofprudential regulations.879
In case of the US, every life and non-life insurance company is required to submit anactuarial opinion on an annual basis.880 The opinion given by the actuary must cover theadequacy of reserves, which are in conformity with requirements of insurance laws andregulations.881 If an insurance company fails to provide actuarial opinions, the supervisory
authority has power to assign another actuary to prepare reports at the expense of that
insurance company.882
1.3 A need to strengthen the role of actuary in Vietnam

875
Daykin, Chris. 1999. The Role of the Actuary in the Supervision of Insurance. In OECD. Insurance
Regulation and Supervision in Asia. Paris: OECD, p. 274.
876
Id. p. 272.
877
IAIS. Guidance Paper No. 7 on The use of Actuaries as part of a supervisory model, October 2003, p. 5.
Available at http://www.iaisweb.org – Last visited 22 May 2006.
878
Japan Insurance Law (2001), Art. 121.1.
879
Kinoshita, Koji. 2002. Regulation of Insurance Services: The Japanese Perspective. In Basedow, Jurgen
et al., eds., Economic Regulation and Competition: Regulation of Services in the EU, Germany and Japan. The
Hague/London/New York: Kluwer Law International, pp. 200-201.
880
NAIC, Actuarial Opinion and Memorandum Regulation, V-822-1 (2006), Sec. 5A; and NAIC Property
and Casualty Actuarial Opinion, IV-745-1 (2006), Sec. 2.A.
881
NAIC, Actuarial Opinion and Memorandum Regulation, V-822-1 (2006), Sec. 4A.
882
NAIC, Property and Casualty Actuarial Opinion, IV-745-1 (2006), Sec. 2.C.


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The use of actuary currently is limited to life insurance companies in Vietnam. Given
the fact that the life insurance market in Vietnam is dominated by foreign owned insurers, thisrequirement may impose an additional burden on life insurers compared to non-life insurers.
This measure, nevertheless, may not be challenged by other WTO Members because life
insurance services and non-life insurance services would be unlike under the meaning of
GATS Article XVII.
However, as recommended by the OECD, “actuarial techniques are a key componentof insurance management; the role of the actuarial profession could be encouraged”. 883
Appointment of actuary in both life and non-life insurers is necessary for Vietnam’s insurance
market in order to properly ensure financial soundness of all insurers. Future regulations on
insurance business, therefore, should require actuaries also be appointed in non-life insurers.
This requirement is more important when complicated new solvency regulations are
introduced. As far as the compulsory appointment of non-life insurance actuaries applies
equally to both domestic and foreign owned insurers, as well as branches of foreign non-life
insurers, this requirement does not constitute a violation of the national treatment obligation.
The role of actuary must also be strengthened by requiring direct reporting to theinsurance supervisory authority in case of issues which materially affect the solvency of
insurers. The existing regulation makes the actuary’s role less pro-active in dealing withfinancial difficulties of insurance companies. A more active role of the actuary in this process
will not only foster policyholder protection, but also help the supervisory authority tointervene earlier when an insurance company faces financial difficulties. There should also be
a more stringent requirement that the actuary simultaneously prepares reports to both theboard of management and the supervisory authority.884 An alternative is to require the actuarymake reports to the supervisory authority after a clearly identified period of time lapses
without corrective measures carried out by insurers. Again, Vietnam could differentiate
reporting requirements on the basis of life and non-life insurers. These different treatments
would not constitute a violation of the national treatment obligation because there is no
likeness between life and non-life insurance services. These reporting requirements,
nevertheless, should be applied equally to all life insurers or equally to all non-life insurers,
regardless of their origin.
2. Solvency margin
2.1 Solvency margin under existing regulations

883

OECD. Twenty Insurance Guidelines for Economies in Transition, Rule No. 12, April 1997.
Available at http://www.oecd.org – Last visited 22 May 2007.
884
In recently issued regulations by the MOF, the appointed actuary is required promply to the General
Director, Board of Management and its members, and the Chairman, “on any irregular matter which may
adversely affect the financial situation of insurers.” In “serious circumstances”, the appointed actuary is obliged
to report to the MOF. Although this requirement put an obligation on the appointed actuary with respect to thesolvency of life insurers, it fails to specify how the seriousness could be determined. See Circular 155/2007/TTBTC of the Ministry of Finance on guiding the implementation of Decree 45/2007/ND-CP, (Dec. 20, 2007)(Vietnam), Sec. IV.3.

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In Vietnam, in order to start business, an insurance company must have charteredcapital higher than the legal capital as stipulated by the government. 885 In the on-going
business, the most important requirement is that insurers maintain the state of solvency withrespect to their entire business. This requirement is called “solvency margin”, which isdefined by the difference between the value of the insurer’s assets and its outstanding
liabilities.886 The assets for the purpose of available solvency margin must be liquid, and the
MOF shall regulate the exclusion of part or all of assets for the purpose of calculation ofsolvency margin.887 In other words, Vietnam follows a negative approach towards identifying
assets eligible for the solvency margin.
In principle, capital adequacy requirements must be correspondent to the size,
complexity and risks of an insurer’s operations.888 As noted by Leflaive, different categories
of assets must be weighed for the purpose of examining solvency margin according to thenature, degree of liquidity and class of credit risks.889 More specifically, the solvency positionof an insurance company must reflect the “ultimate collectability” of all income underassets.890
However, what appears to be missing here is a provision on categories of assets thatcan represent the solvency margin. The negative approach towards the solvency margin lacks
transparency as there may be different interpretations of what assets would represent thesolvency margin. Moreover, this approach would suggest that all assets are acceptable for the
purpose of determining a solvency margin, and consequently simplifies credit risks of
insurers’ assets, such as loans, and securities. In other words, a lack of valuation rules may
indicate that all investment portfolios shall represent the solvency margin of insurers without
any deduction for changes in asset value.
In contrast, the approach of both the EU and US is to adopt a positive list of assets thatare acceptable for the solvency margin. In addition, credit risks and liquidity of assets are also
taken into account.
In the EU, the solvency margin shall consist of the following assets: (i) the paid-up
share capital, (ii) statutory and free reserves, (iii) profit or loss brought forward after
deduction of dividends to be paid, profit reserves, (iv) cumulative preferential share capitaland subordinated loan capital up to 50 percent of the lesser of the available solvency margin885

Vietnam Insurance Law, Art. 63.1.
Id. Art. 77.3.
This term varies in different jurisdictions, for example, actual solvency margin, available surplus capital,
eligible capital, free capital. See IAIS Sub-Committee on Solvency and Actuarial Issues (2000), p. 42.
In EU Directives, this term is called as available solvency margin that consists of the assets of the insurer/reinsurer free of any foreseeable liabilities, less any intangible items (See Directive 2002/83/EC, Art. 27.2;
Directive 92/49/EEC, Art. 24; Directive 2005/68/EC, Art. 36.1).
In New York Insurance Law, this term is named as admitted assets that are allowed to determine thefinancial conditions of insurers (See New York Insurance Law, Sec. 1301).
887
Decree 46/2007/ND-CP, Art. 17.
According to Circular 99/2004/TT-BTC of the Ministry of Finance on guiding the implementation of Decree
43/2001/ND-CP, (Oct. 19, 2004) (Vietnam), Sec. V.4, assets for the purpose of available solvency margin shallcover all kinds of assets of insurers, except for (i) capital contribution, which is originated from the owner’s
capital, to other enterprises, (ii) bad debts, and (iii) bonus fund, if any.
888
IAIS (2003), ICP 23 on Capital Adequacy and Solvency, p. 39.
889
Leflaive, Viviane. 2002. Comparative Analysis. In OECD. Insurance Solvency Supervision: OECDCountry Profiles. Paris: OECD, p. 28.
890
Dickinson Gerry. 1999. The Changing Focus in the Supervision of Insurance Company Investment. In
OECD. Insurance Regulation and Supervision in Asia. Paris: OECD, p. 340.
886


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and the required solvency margin, and (v) securities with no specified maturity date and other
instruments up to 50 percent of the lesser of the available solvency margin and the required
solvency margin.891
In the same approach, New York Insurance Law lists twenty-two admitted assets
owned by insurers for the purpose of determining a solvency margin, including cash,
investment and interests.892 In addition, rules for valuation of those assets are also clearlystipulated. For example, investment in securities may be valued at market value, appraisedvalue, or at a price set by the supervisory authority.893
Similarly, the case of Japan also specifies assets eligible for determining the solvency
margin of insurers. In particular, the solvency margin consists of: (i) capital; (ii) pricefluctuation reserve; (iii) risk reserve; (iv) general bad debt reserve; (iii) unrealized
gains/losses on securities and real estate; (iv) any other amounts determined by the Financial
Service Agency, such as subordinated debts, and margin contained in statutory provision.894
For example, 90 percent of latent profit on stocks, 85 percent of latent profit on land, and 100
percent of unrealized losses are calculated for determination of the solvency margin.895
2.2 Insurance companies in financial difficulty(i) Minimum solvency margin
Due to business fluctuations, insurance companies may sometimes have a low
solvency margin and face financial difficulties. In order to assure that insurers holdsufficiently safe capital and assets, Article 78.1 of the Vietnam Insurance Law authorizes the891
Directive 2002/83/EC, Art. 27.2 and 3; Directive 2002/13/EC of the European Parliament and theCouncil of 5 March 2002 amending Council Directive 73/239/EEC as regards the solvency margin requirements
for non-life insurance undertaking, Art. 1.2; Directive 2005/68/EC, Art. 36.1 and 3. However, the available
solvency margin shall be reduced by the amount of own shares directly held by the insurers/re-insurers.
892
New York Insurance Law, Sec. 1301.
These admitted assets cover (i) cash, (ii) investment; (iii) declared and unpaid dividends on shares; (iv) –(vii) interest due or accrued upon a collateral loan, any evidence of indebtedness, deposits in solvent banks ortrust companies, any real estate mortgage loan; (viii) rent due or accrued on real property; (ix) the unaccrued
portion of taxes paid prior to due date on real property; (x) premium notes, policy loans and other policy assets
and liens on policies, contracts or certificates of a life insurer; (xi) premium in course of collection; (xii)
installment premium; (xiii) notes and like written obligations; (xiv) reinsurance recoverable by a ceding insurer;(xv) amounts receivable by an assuming insurer for funds withheld by a ceding insurer under a reinsurance
treaty; (xvi) amounts receivable under a funding agreement; (xvii) deposits or equities recoverable fromunderwriting associations, syndicates and reinsurance funds, or from suspended banking institutions; (xviii)
electronic data processing apparatus and related equipment constituting a data processing, record keeping or
accounting system; (xix) aircraft if prior approval has been secured from the superintendent; (xx) amounts
payable to the insurer from the property/casualty insurance security fund; (xxi) gross deferred tax assets; and(xxii) other assets.
893
Id. Sec. 1414 b(1).
894Japan Insurance Business Law Enforcement Regulations, Art. 86.1 (Tentative translation by the General
Insurance Association of Japan). See also Japan Financial Services Agency. Presentation material for a Meetingof Solvency and Actuarial Issues Subcommittee of International Association of Insurance Supervisors on 3-5
September 2003, p. 2.
Available at http://www.fsa.go.jp – Last visited 5 October 2006.
895
General Insurance Association of Japan. 2006. Fact Book 2004-2005 General Insurance in Japan, p. 70.


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government to set up a control level - the minimum solvency margin.896 Accordingly, Article
16 of Decree 46/2007/ND-CP of the government provides that:
1.

2.

The minimum solvency margin of a non-life insurer shall be equal to the higher of the two
results: (a) 25 percent of retained premiums at the time of determining the solvency
margin; or (b) 12.5 percent of the total premiums and reinsurance premiums at the time ofdetermining the solvency margin.
The minimum solvency margin of a life insurer shall be equal to: (a) 4 percent of technicalprovisions plus 0.1 percent of net amount at risk, in case of life insurance policies withterm of 5 years or less; and (b) 4 percent of technical provisions plus 0.3 percent of net
amount at risk, in case of life insurance policies with term over 5 years.

Insurers are deemed to be solvent if their solvency margin is not less than theminimum solvency margin. It indicates that there is only one control level, which might
trigger the intervention of the MOF. In addition, Vietnam’s approach to the minimum
solvency margin is referred to as “fixed-ratio model”. The main advantage of this fixed-ratio
model is the involvement of simple functions with regard to several items on the balance sheet
or profit and loss account, hence an easy application.897 However, due to its simplicity, one
main disadvantage of this model is that it does not reflect different risk profiles among
different insurers. 898 In other words, these simple functions are irrelevant to different
categories of risks incurred by an insurance company. As far as non-life insurance isconcerned, only the premiums criterion is taken into account in determining the minimum
solvency margin, while claims-based factors are not accounted for.
While the EU follows a fixed-ratio model in determining the required solvency marginof insurers, its model consists of two control levels. In addition, the EU determines theminimum solvency margin of non-life insurers is based not only on premium-based ratio but
also on claim-based ratio, whichever is higher. 899 In the first control level, in order todetermine the solvency margin of a non-life insurer, the said amount must be equal to a higherof 16 percent of the annual premiums written by the insurer or 23 percent of the averageannual claims costs incurred by the insurer. By taking into account the claim basis fordetermining the minimum solvency margin, the EU approach could lessen the drawbacks ofthe fixed-ratio model.900 Specifically, the EU also details the average annual claims during theprevious three to seven years.901
With regard to life insurers, the minimum solvency margin shall be equal to the sumof two results: 4 percent of mathematical provisions of the life insurer plus 0.3 percent of thecapital at risk, i.e. the amount payable on death (maximum payment under life policies) lessthe mathematical provision for main risks. 902 It is submitted that in determination of the896

Vietnam Insurance Law, Art. 78.1 reads as follows:
An insurer may be considered being in danger of insolvency when its solvency margin falls below
the levels of minimum solvency margin provided by the Government.
This term varies in different jurisdictions, for example, required minimum margin, statutory minimum
solvency margin, required surplus, regulatory capital requirement. See IAIS Sub-Committee on Solvency andActuarial Issues (2000), p. 44.
897
Leflaive (2002), p. 13.
898
Id.
For example, because this ratio is based on technical provisions, an insurer having a prudent method ofprovisioning will have to produce a greater solvency margin than an insurer that tends to under-provision.
899
Directive 2002/13/EC, Art. 1.3.
900
Leflaive (2002), p. 13.
901
Directive 2002/13/EC, Art. 1.3.
902
Directive 2002/83/EC, Art. 28.2.

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minimum solvency margin for a life insurance company, Vietnam follows the same formulas
adopted by the EU.
The second control level is the guarantee fund, which is equivalent to one third of therequired solvency margin or not less than EUR 3 million in case of life insurance, certain nonlife insurance, reinsurance, or EUR 2 million in case of other non-life insurance.903
In contrast to this fixed-ratio approach to the minimum solvency margin, the US andJapan have adopted risk-based models, which take various risks into account with respect todetermination of the solvency margin. In the US, the NAIC has approved risk-based capital
since 1992 to supervise capital adequacy standards applicable to both life and non-life
insurance. The objectives of the risk-based model are to equip adequate capital that is related
to risks and improves the financial safety for insurers.904 Categories of risks addressed by therisk-based model include: (i) asset risk; (ii) credit risk (non-life insurance); (iii) risk ofadverse insurance experience with respect to the insurer’s liabilities and obligations (lifeinsurance); (iv) underwriting risks (non-life insurance); (v) interest rate (life insurance); and(vi) all other business risk.905
Insurers must submit an annual report of their risk-based capital levels.906 There are
four control levels applicable to an insurance company: (1) company action level of 200
percent;907 (2) regulatory action level of 150 percent;908 (3) authorized control level;909 and (4)mandatory control level of 70 percent.910 An insurer is considered to have appropriate riskbased capital if the ratio exceeds 200 percent.911
In Japan, to determine the adequacy of insurers’ solvency to satisfy insurance claims,
the solvency margin is calculated based on the total capital, including foundation funds,
reserves and other amounts, one the one hand, and the amounts representing losses in excess
of normal expectations, on the other hand.912 Risks covered for the purpose of determining asolvency margin are: insurance risks, assumed interest rate risks, asset management risks(including price fluctuation risks, credit risk, and other risks for subsidiaries, derivative

Of that, mortality risk is met by 0.3 percent of capital at risk; operating expense risk is met by 1 percent of
the mathematical provision; and investment risk is met by 3 percent of the mathematical provision. The fractionof the second result shall be 0.1 percent in case of life insurance policies with a term of 3 years or less; and 0.15
percent in case of life insurance policies with a term of more than 3 years but not more than 5 years.
903
Directive 2002/83/EC, Art. 29; Directive 2002/13/EC, Art. 1.4; Directive 2005/68/EC, Art. 40.
904
See OECD. 2002. Insurance Solvency Supervision: OECD Country Profiles. Paris: OECD, p. 290.
905
NAIC, Risk-based capital (RBC) for insurers Model Act, II-312-1 (1997), Sec. 2.B and C.
For example, New York Insurance Law, Sec. 1322, requires that risk-based capital of a life insurer musttake into account the following risks:(A) The risk with respect to the insurer's assets;(B) The risk of adverse insurance experience with respect to the insurer's liabilities and obligations;(C) The interest rate risk with respect to the insurer's business; and(D) All other business risks and such other relevant risks.
906
NAIC, Risk-based capital (RBC) for insurers Model Act, II-312-1 (1997), Sec. 2.A.
907
Id. Sec. 3.
908
Id. Sec. 4.
909
Id. Sec. 5.
910
Id. Sec. 6.
911
New York Insurance Law, Sec. 1322 (a) (8).
912Japan Insurance Law (2001), Art. 130.
The solvency margin ratio = solvency margin/(total amount at risk x 0.5)

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transaction, reinsurance and reinsurance recoverable), business management risks, and major
catastrophe risks.913
There are three control levels of the solvency margin.914 The first category is less than
200 percent; the second category is less than 100 percent; and the third category is less than 0
percent. The capital level of an insurer is considered acceptable when its solvency margin
ratio is above 200 percent.
(ii) Available remedial measures in case of financial difficulties
Effective regulation and supervision could not ensure the prevention of insurers
getting into financial difficulties. Crisis in a key insurance company may affect the integrity
and stability of the insurance market as well as the whole financial system, and even financial
difficulty of a small insurer may also affect a wide range of policyholders.915
In Vietnam, an insurance company is considered being in danger of insolvency when
its solvency margin is less than the minimum solvency margin.916 In such a circumstance,
available remedial measures consist of three steps. First, an insurance company in financial
difficulty is required to prepare and submit to the MOF a solvency recovery plan.917 Second,
the MOF is empowered to intervene and order the financially troubled insurance company torestore its solvency.918 Remedial measures applied by the MOF include an increase of theowner’s equity; reinsurance program, restriction of business operations; organizational
restructure, and proposed replacement of the chairman of board of management, and thegeneral director; transfer of the policy portfolio; and other measures.919 If the insurer is unable
to recover its solvency as provided, a solvency control committee shall be established by the
MOF under the third step.920
913

Japan Insurance Business Law Enforcement Regulations, Art. 87 (Tentative translation by the General
Insurance Association of Japan). See also Japan Financial Services Agency. Presentation material for a Meetingof Solvency and Actuarial Issues Subcommittee of International Association of Insurance Supervisors on 3-5
September 2003, p. 3.
Available at http://www.fsa.go.jp – Last visited 5 October 2006.
914
See OECD. 2002. Insurance Solvency Supervision: OECD Country Profiles. Paris: OECD, p. 156.
915
Vollbrecht (2001), p. 54.
916
Vietnam Insurance Law, Art. 78.1.
917
Id. Art. 79.1.
918
Id. Art. 79.2.
919
Decree 46/2007/ND-CP, Art. 19.2.
920
Vietnam Insurance Law, Art. 80. Duties of the solvency control committee include:a) Instructing and monitoring the implementation of the approved solvency recovery plan;b) Notifying relevant State bodies on the introduction of the solvency recovery plan for joint
implementation;c) Restricting the business operations;d) Suspending activities which may cause insolvency to the insurer;e) Requesting the insurer to transfer all or part of its policy portfolio;f) Temporarily suspending board members, the General Director and Deputy General Director(s)in exercising their power, or requesting the insurer to replace them if necessary;g) Requesting the Board of Management, the General Director to dismiss any staff who are inbreaches of the laws or fails to carry out the approved solvency recovery plan;h) Making recommendations to the Ministry of Finance on continuation or termination of thesolvency recovery plan;

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However, there are several concerns over these remedial measures and procedures.
First, there is no specific requirement on what should or must be included in the solvency
recovery plan prepared by financially troubled insurance companies in the first step. It isarguable that more transparency on what measures should be taken by insurers would
constitute a consensus between insurers and the supervisory authority, and thus facilitate theapproval process by the MOF.
Second, as described earlier, Vietnam provides only one solvency control level. In
addition, concerning the MOF intervention as well as establishment of the solvency control
committee, there are no clear quantitative levels for application of those remedial measures. In
other words, it is uncertain in which circumstances or at which level of solvency margin of
insurers MOF intervention is required. It seems that in any case, all three steps must be
applied in sequence. This situation may defer a prompt intervention by the insurance
supervisory authority.
A solvency control level or series of levels, which may trigger supervisoryintervention before an insurance company becomes insolvent, is important for consumer
protection to mitigate undue losses. 921 According to the IAIS, the main purpose of thisrequirement is to: (i) reduce the probability of inability to pay claims, (ii) limit losses incurredby policyholders, (iii) provide early warning system for supervisory intervention andcorrective actions, and promote public confidence in the insurance sector.922 Solvency control
levels, therefore, must be high enough to allow intervention at an early stage of financial
difficulties in order to reduce the risk of failure and minimize losses to policyholders. 923
Timely action by the supervisory authority against a financially troubled insurer is crucial toprotect policyholders as well as to mitigate adverse potential consequences of insolvency,
including loss of public confidence. For example, Japanese Ministry of Finance has been
criticized for failing to exercise prompt action against the insolvency of Nissan Mutual Life
Insurance Company in 1997.924
Third, as far as financial difficulties of an insurer are concerned, even if an insurer isin conformity with the solvency recovery plan, it may still be unable to fulfill its obligations
towards policyholders, and become insolvent. Financial difficulties of insurers may adversely
affect policyholders and insured, and may cause instability of the entire insurance market.925
The danger is that policyholders may not recover financial losses when insured risk occurs
due to the insolvency of the insurer. In such a circumstance, the only solution available to thesupervisory authority under the Vietnam Insurance Law is to appoint other insurers to takeover those contracts. Specifically, the supervisory authority shall appoint an insurer
responsible for taking over transferred insurance contracts in cases where the transferor, who
is in the danger of insolvency, fails to reach agreement on transfer of insurance contracts withother insurers.926 However, consumers could be at risk and the supervisory authority would beconcerned if there were no insurance company willing to take over these insurance contracts.
i)

Making reports to the Ministry of Finance on the implementation of the solvency recovery
plan and its results.
921
IAIS (2003), ICP 23 on Capital Adequacy and Solvency, p. 39.
922
IAIS Sub-Committee on Solvency and Actuarial Issues (2000), p. 17.
923
Janotta-Simons, Frank. 1999. Solvency – Its Definition, Influencing Factors and perspectives of CoOrdinated Solvency Rules. In OCED. Insurance Regulation and Supervision in Asia. Paris: OECD, p. 226.
924
Kwon, Wook Jean and Harold D. Skipper Jr. 1997. Regulatory Changes in the Japanese InsuranceMarket. Journal of Insurance Regulation 16(2), pp. 160-161.
925
Vollbrecht (2001), p. 54.
926
Vietnam Insurance Law, Art. 74.

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To be more specific, there might be a case where other insurers are unwilling or reluctant totake over those transferred contracts because those contracts, according to their calculation,
would cause losses for their future business. In such a case, the supervisory authority has noalternative recourse to deal with such matter. Consequently, the objective of consumer
protection of insurance regulation would not be achieved.
As commented by Mr. Le Song Lai, Deputy Director of Insurance Department under
the MOF, after all corrective measures have been employed, if the solvency of an insurer is
not recoverable and that insurer must be subject to Bankruptcy Law, there are no detailed
regulations on the priority of policyholders in this case. 927 Moreover, even thoughpolicyholders may enjoy priority in bankruptcy proceedings, there is no guarantee of a fullrecovery of their claims and benefits.
The experience of the EU, US and Japan may clarify these concerns. According to EU
directives on insurance business, if the solvency margin of an insurer has fallen below therequired solvency margin, that insurer must submit to the supervisory authority a plan for the
restoration of a sound financial position.928 However, if the solvency margin of an insurer isless than the guarantee fund, that insurer must submit a short-term finance scheme.929 A plan
for recovering financial conditions of insurers must generally be projected for the next threefinancial years with references to: (i) estimates of management expenses; (ii) estimates ofincome and expenditures; (iii) a forecast balance sheet; (iv) estimates of the financial
resources intended to cover underwriting liabilities and the required solvency margin; and (v)overall reinsurance/retrocession policy.930 In any circumstance, the supervisory authority isempowered to restrict or prohibit free disposal of the insurer’s assets in order to safeguard theinterests of policyholders.931
As described earlier, Japan’s approach to problematic insurers consists of three control
levels, depending on solvency margin ratios. An insurer shall be ordered to submit andimplement a management improvement plan if its solvency margin ratio is between 100 and
200 percent.932 If the ratio is less than 100 percent but over 0 percent, an insurer shall be
required by the supervisory authority to implement the following measures: (1) form andexecute a solvency increase plan, (2) restrain or prohibit paying dividends or bonuses tomembers of a board of management, (3) restrain or prohibit paying dividends to policyholders,(4) change the assumed interest rate of new contracts, (5) restrain high–risked investment, (6)restrain operational expenses, (7) reduce business operations, (8) dispose of shares andsubsidiaries, and (9) others.933 The supervisory authority will order suspension of the whole ora part of an insurer’s business operations for a specified period of time if its solvency margin
ratio is less than 0 percent.934 In addition, at this third control level, in some circumstances,
the supervisory authority might include those measures of the second control level.

927

Doanh nghiep bao hiem ngung hoat dong: Quyen loi nguoi mua bao hiem duoc giai quyet ra sao?
(Insurers at Cease: How to deal with rights and interest of policyholders?), 9 September 2005.
Available at http://www.vneconomy.com.vn – Last visited 5 October 2006.
928
Directive 2002/83/EC, Art. 37.2; Directive 92/49/EEC, Art. 13; Directive 2005/68/EC, Art. 42.2.
929
Directive 2002/83/EC, Art. 37.3; Directive 92/49/EEC, Art. 13; Directive 2005/68/EC, Art. 42.3.
930
Directive 2002/83/EC, Art. 38.1; Directive 2002/13/EC, Art. 1.7; Directive 2005/68/EC, Art. 43.1.
931
Directive 2002/83/EC, Art. 37; Directive 92/49/EEC, Art. 13; Directive 2005/68/EC, Art. 42.
932
See OECD. 2002. Insurance Solvency Supervision: OECD Country Profiles. Paris: OECD, p. 156.
933
Id.
934
Id.

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In the US, the NAIC model law stipulates four risk-based capital levels, at which thesupervisory authority may intervene in order to recover the solvency of insurers. At thecompany action level, an insurer must prepare and submit a risk-based capital plan to thesupervisory authority which clarifies reasons and proposals of corrective actions, provides
projections of financial conditions in the current year and at least four succeeding years, andidentifies quality and problems of the insurer’s business.935 If an insurer’s risk-based capital
falls under the regulatory action level, the supervisory authority requires the insurer prepare
and submit a risk-based capital plan; or the supervisory authority will examine the insurer’s
assets, liabilities and operations, and issue a corrective order.936 In terms of the authorized
control level, the supervisory authority will take corrective measures as provided in theregulatory action level, or may place the insurer under rehabilitation or liquidation.937 If theinsurer’s risk-based capital is less than the mandatory control level, the supervisory authority
will take necessary actions to put that insurer under rehabilitation or liquidation.938
Some observations
Experiences of other countries show that concrete quantitative solvency control levels
are critically important for proper intervention by the supervisory authority in case offinancial difficulty. Corresponding to each solvency control level, different remedial measures
shall be applied to restore the solvency. Although Vietnam provides three steps for rescuing afinancially troubled insurer, there are no concrete quantitative solvency control levels forintervention by the MOF. Moreover, if financially troubled insurers fail, there is no
mechanism under the Vietnam Insurance Law to ensure minimum payments for policyholders
against the failed insurers.
2.3 Policyholder protection fund(i) A theoretical approach
The main idea of policyholder protection funds is to protect policyholders in certain
situations, especially where insurers become insolvent, which may cause financial losses totheir customers due to unpaid claims. This measure could ensure public confidence by
providing a safety net for consumer protection, and consequently ensure the stability andintegrity of the insurance market and the whole financial system. As noted by Sekiguchi,
policyholders concern over the solvency of insurers, and consequently, the availability of suchprotection funds would protect them in case of an insurer’s failure.939(1) Advantages
935

NAIC, Risk-based capital (RBC) for insurers Model Act, II-312-1 (1997), Sec. 3.B.
Id. Sec. 4.B.
937
Id. Sec. 5.B.
938
Id. Sec. 6.B.
939
Sekiguchi, Alan. 1999. Policyholders Protection Funds in OECD Countries. In OECD. Insurance
Regulation and Supervision in Asia. Paris: OECD, p. 367.
936


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According to Yasui, there are four main arguments for the establishment of such asafety net in the insurance market, namely protection of non-professional policyholders,maintenance of public confidence, development of competitive markets, and a level playing
field across the financial sector.940 This safety net would provide a mechanism to protect theinterests of policyholders, especially individuals and non-professionals, who may be atdisadvantage in appraising financial soundness of an insurer, in the event of bankruptcy ofsuch insurer. As described in section 1.2 of Chapter One, the most fundamental rationale for
insurance regulation as well as prudential regulation is information asymmetry. Because
individual and non-professional consumers might be unable to collect and analyze
information on the financial soundness of an insurer, their interests would be protected bysuch a safety net scheme.
Moreover, by offering a safety net in insurance market, public confidence in this
sector would be maintained, hence facilitating its sound development. Public confidence in
the insurance market, especially in life insurance, which involves long term savings, iscritically important.
Another reason for setting up a policyholder protection fund is that this safety net
would enable supervisory authorities to handle bankruptcies of insurers without exposing
policyholders to risks of severe losses. Establishing such a mechanism should facilitate acompetitive insurance market. Protection through this safety net would be more flexible andfaster than bankruptcy procedures, and policyholders would be ensured by at least minimum
compensation.941
In addition, the safety net could ensure a level playing field between insurers andbanks. While insurers and banks are competing more directly due to increasing level ofconvergence between the two sectors, deposit insurance systems in the banking area are more
popular than policyholder protection funds. Moreover, as several life insurance products arevery similar to some banking operations, an analogous system would be justifiable in theinsurance market.942 Without such a similar safety net in the insurance sector, insurers would
have difficulty in competing with banks.
From the perspective of consumers, establishment of policyholder protection funds
would ensure equal treatment among consumers of domestic and foreign insurers. 943 This
concern might be true in the case where foreign insurers, who participate in safety net
schemes in their home countries, are permitted to supply insurance services in a domestic
market of another country. Accordingly, consumers of foreign insurers would be better
protected than those of domestic insurers.
940

See Yasui, Takahiro. 2001. Policyholder Protection Fund: Rationale and Structure. In Policy Issues inInsurance: Insurance Regulation and Supervision in the OECD Countries. Paris: OECD, pp. 305-309.
941
European Commission. Insurance Guarantee Schemes. Working Paper MARKT/2525/03-EN (June2003), p. 2.
Available at http://ec.europa.eu/internal_market/insurance/docs/markt-2525-03/markt-2525-03_en.pdf –Last visited 2 April 2007.
942
European Commission. Insurance Guarantee Schemes. Working Paper MARKT/2501/04-EN (Mar. 3,2004), p. 7.
Available at http://ec.europa.eu/internal_market/insurance/docs/markt-2501-04/markt-2501-04_en.pdf –Last visited 2 April 2007.
943
European Commission. Insurance Guarantee Schemes: State of Play and Orientation of the FutureWork. Discussion Paper MARKT/2517/02-EN (Jul. 15, 2002), p. 4.
Available at http://ec.europa.eu/internal_market/insurance/docs/markt-2517/markt-2517-02_en.pdf – Last
visited 2 April 2007.

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NATIONAL TREATMENT PRINCIPLE IN GATS:
A Study of Vietnam’s Insurance Services Market(2) Disadvantages
One of the main drawbacks of policyholder protection funds is the moral hazard
problem, which may provide consumers, insurers and supervisors with a disincentive forappraising financial conditions of insurers,944 especially if it was believed that when a safety
net exists, insurance supervisors would feel less pressure to ensure effective supervision.945
Moreover, while insurers may have a tendency to adopt risky business practices,946 consumers
may be less careful in selecting insurers because they only consider prices rather than service
quality and financial soundness of insurers.947
However, in response, the moral hazard problem might not be intensified due to theexistence of a similar safety net in the financial services market, particularly deposit insurance
systems in the banking sector.948 In other words, although the problem of moral hazard might
exist when introducing a safety net scheme, the experience of the banking sector would be
persuasive for governments to set up a similar system in the insurance sector.
The second argument against policyholder protection fund is that it may impose extra
financial burdens for insurers who participate into this safety net scheme.949 Such a financial
burden may weaken the financial soundness of insurers. Another aspect of this argument isthat prudent insurers may be required to pay for their competitors’ mismanagement.950 In
other words, bad performance of insolvent insurers would be supported at the expense ofother participating insurers, who conduct business operations in a prudent manner.
Sekiguchi commented that, from the social point of view, as policyholder protection
funds provide a safety net for a broad coverage of people, these extra financial costs incurredby insurers could be justifiable, and thus the impact of failure of insurers on policyholders or
beneficiaries is minimized.951 It suggests that the cost of bankruptcy of an insurer would behigher than such financial burdens. A domestic insurance market would experience financial
losses of policyholders and insured, loss in public confidence, and even adverse affects onsoundness of the financial system if there was no such a safety net scheme for consumer
protection.
Another concern over establishment of a safety net scheme in the insurance sector isthat the existence of other available preventive and remedial measures, such as technicalprovisions, would make policyholder protection funds redundant. 952 In other words, theexisting preventive and remedial measures are enough to protect the interests of policyholders.

944

Yasui (2001), p. 309.
Roberts, Paul G. 1989. Insurance Company Insolvencies and Insurance Guaranty Funds: A Look at theNonduplication of Recovery Clause. Iowa Law Review 74, p. 932.
946
Hawkins, Jeff. 2004. Comment: Which Faultless Party Will Be Forced To Pay For Another’s Failure?
A Proposal For Legislative Extending The Use of State Guaranty Funds to Absorb the Orphan Shares of Longtail Claims. Texas Technology Law Review 37, p. 237.
947
European Commission. Insurance Guarantee Schemes: State of Play and Orientation of the FutureWork. Discussion Paper MARKT/2517/02-EN (Jul. 15, 2002), p. 5.
948
Id. p. 4.
949
Yasui (2001), p. 310.
950
Roberts (1989), p. 932.
951
Sekiguchi (1999), p. 367.
952
European Commission. Insurance Guarantee Schemes. Working Paper MARKT/2525/03-EN (June2003), p. 3.
945


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In response, while the main concern of the current existing solvency measurers is toensure sound financial conditions of insurers, the objective of policyholder protection funds is
to, at least, assure a minimum of payment of claims by policyholders in case of the insolvencyof an insurer. Accordingly, even if all preventive and remedial measures were employed, theinsurer would still become insolvent, and there might not be sufficient assets to cover its
obligations against the policyholders. Moreover, it has been observed that no solvency
regulation could assure “complete policyholder satisfaction at all times under all
circumstances”.953 As noted by Yasui, the recently introduced policyholder protection funds
in several countries would suggest some limitations in the supervision of insurers’ solvency
through the current preventive and corrective measures.954(ii) Employing an adequate safety net: Foreign experience and lessons for Vietnam(1) United States
State guaranty associations are operated on state-by-state basis, and were establishedin the late 1970’s with a view to protecting consumers from insurers’ insolvency. 955 One
significant reason for their establishment was an increasing tension in establishing a federal
guaranty fund in 1969, prompting states to adopt guaranty funds in order to prevent federal
intervention into the insurance business. 956 Policyholders are guaranteed to be paid up to a
specified ceiling in case of failures of insurers. The funds are also responsible for preventing
and detecting insolvencies.957
As of 1987, all fifty states had guaranty funds designed to protect policyholders, andmost states had employed the NAIC model act of 1970.958 In general, there are two systems offunds, namely property-casualty guaranty funds and life-health guaranty funds. Although thelanguage of each state’s insurance law is very similar because of the model act, funds differ intheir details, such as the coverage, deductibles, policy limits. 959 All state guaranty funds,
except for New York, operate on post-assessment basis, whereby no permanent fund exists,
but participating insurers shall be assessed to cover payments to policyholders for theuncovered claims.960
The purpose of property and liability insurance guaranty funds is to provide paymentof covered claims under insurance policies as well as to avoid excessive delay in payment to953

Asian Development Bank. 2003. People’s Republic of China: Strengthening the Insurance Industry
Regulatory and Supervisory System. Manila: ADB, p. 99.
954
Yasui (2001), p. 312.
955
Goddard (2003), p. 163.
956
Roberts (1989), pp. 933-34. See also Skeel (1998), p. 732.
957
Giesel, Grace M. 1991. A Proposal for a Tort Remedy for Insureds of Insolvent Insurers Against
Brokers, Excess Insurers, Re-insurers, and the States. Ohio State Law Journal 52, p. 1091.
958
The full name is the National Association of Insurance Commissioners State Post-Assessment
Insurance Guaranty Association Model Act. See Roberts (1989), pp. 933-34.
959
Macey and Miller (1993), p. 72.
960
See Macey and Miller (1993), p. 73. See also Hodkin, Adam. 1992. Insurer Insolvency: Problems &Solutions. Hofstra Law Review 20, p. 744.
New York Insurance Law adopted the pre-insolvency fund or pre-funded system, whereby the fund exists
and the money is available prior to insolvency of insurers.

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NATIONAL TREATMENT PRINCIPLE IN GATS:
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policyholders due to the insolvency of insurers.961 The general characteristics of propertycasualty guaranty funds are as follows: (1) the scope of application covers all direct propertycasualty insurance, except for certain kinds: including life, annuity and health or disability
insurance, credit insurance, and ocean insurance; 962 (2) each licensed insurer must be amember of the fund, and contribute in any year up to two percent of that member insurer’s net
direct written premiums of the preceding year;963 (3) the fund is obliged to pay covered claims
under the policies issued by an insolvent insurer;964 and (4) coverage of compensation does
not exceed US$ 10,000 per policy for a covered claim for the return of unearned premium and
US$ 300,000 per claimant for all other covered claims.965
The purpose of life and health insurance guaranty funds is to protect policyholders,insured, and beneficiaries of life and health insurance policies issued by life insurers in caseof insolvency.966 Accordingly, (1) life-health guaranty funds are designed to cover direct life,
health or annuity policies or contracts;967 (2) compensation coverage with respect to one life is
not exceeding US$ 300,000 in life insurance death benefits, US$ 300,000 for disability
insurance, US$ 500,000 for basic hospital medical or surgical insurance, and US$ 100,000 forother coverage;968 (3) the assessment to a member life and health insurer shall not in one
calendar year exceed two percent of that member insurer’s average annual premiums received
from the policies and contracts during the three preceding calendar years; 969 and (4) if amember insurer is an impaired insurer or an insolvent insurer, the fund may guarantee,
assume or reinsure policies or contracts of that insurer, or assure payment of the contractual
obligations of that insurer.970(2) Japan
The main objective of the policyholder protection fund in Japan is to protect
policyholders and other persons, and then maintain public confidence in the insurance
business in case of insurers in financial difficulties. 971 Historically, the policyholder
961

NAIC, Post-assessment Property and Liability Insurance Guaranty Association Model Act (1996), Sec.

2.
962

Id. Sec. 3.
Id. Sec. 8.A (3).
964
Id. Sec. 8.A(1).
965
Id. Sec. 8.A(1).
For example, the purpose of New York property/casualty insurance security fund is to pay allowed claims
remaining unpaid due to the insolvency of an authorized insurer. Contributions by an insurer to the fund shallequal to 0.5 percent of net direct written premiums on policies. However, payment of any one claim shall not
exceed one million dollars. See New York Insurance Law, Sec. 7603.
966
NAIC, Life and Health Insurance Guaranty Association Model Act (2001), Sec. 2.
967
Id. Sec. 3.B (1).
968
Id. Sec. 3.C (2).
969
Id. Sec. 9.E (1) (a).
For example, the purpose of New York life insurance company guaranty corporation is to provide financial
protection for policyholders, insured, beneficiaries of life and health insurance policies issued by life insurers incase of insolvency. The maximum liability of the corporation shall not exceed 500,000 dollars with respect toany one life or any one covered policy. The corporation shall have the following duties to: (i) guarantee, assume
or reinsure the covered policies of residents; (ii) assure payment of the contractual obligations of insolvent
insurer to residents; and (iii) provide such moneys, pledges, notes, guarantees or other means as are reasonably
necessary to discharge such duties. See New York Insurance Law, Sec. 7708.
970
NAIC, Life and Health Insurance Guaranty Association Model Act (2001), Sec. 8.A and B.
971
Japan Insurance Law (2001), Art. 259.
963


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protection fund was firstly established in 1996 with the effectiveness of Japan Insurance Law(1996). Since it was not compulsory for all insurance companies to join the fund, this safety
net could exist only when there was no rescue insurance company in the event of insolvencyof an insurer.972
The compulsory system was introduced in December 1998 following the enforcementof the revised Japan Insurance Law 1998 with the establishment of the Policyholder
Protection Corporation.973 Similar to the US, there are two types of funds in Japan, one forlife insurance and the other for non-life insurance. 974 Membership of those funds iscompulsory for insurers,975 and the amount of levy shall be calculated based on both insurance
premiums and underwriting reserves for the payment of insurance claims.976 This requirement
would ensure a fair contribution among insurers.977 In order to mitigate the problem of moral
hazard arising from the existence of the safety net, the limitation on compensation is set at 90
percent of both life and non-life claims, and 100 percent for compulsory insurance.978
Duties of the policyholder protection organization include: (1) administration of levies
contributed by insurers; (2) provision of financial assistance in an insurance portfolio transfer;(3) engagement in the management administration for a bridging insurer; (4) acceptance of an
insurance portfolio of an insurer in difficulties; (5) provision of financial assistance inconnection with payments of compensation of insurance claims; and (6) purchase of insurance
claims rights. 979 The rescue insurance company, with an insurance company in financial
difficulties may jointly apply for financial assistance by the policyholder protection
organization relating to insurance portfolio transfer. 980 Such a case occurred withreorganization of Taisei Fire and Marine Insurance Company, when this company and therescue insurance company, Sompo Japan Insurance Corporation, jointly applied for financial
aid from the Policyholder Protection Corporation in 2002 to support their merger.981
If there is no prospective rescue insurance company, the insurance company infinancial difficulty may apply for bridging or acceptance of insurance portfolio,982 whereby
the policyholder protection organization shall establish a new bridging insurance company as
its subsidiary to carry out insurance contracts concluded by the insurance company infinancial difficulty. 983 For example, Daiichi Mutual Fire and Marine Insurance Company
transferred insurance contracts to the Policyholder Protection Corporation and dissolved in
2001, and consequently the Corporation took responsibility for paying claims topolicyholders.984

972

Hara, Nobuo. 1999. Policyholders’ Protection Measures in Japan. In OECD. Insurance Regulation andSupervision in Asia. Paris: OECD, p. 396.
973
Id.
974
Japan Insurance Law (2001), Art. 262.2.
975
Id. Art. 265-3.1.
976
Id. Art. 265-34.1.
977
Hara (1999), p. 398.
978
Yasui (2001), p. 315.
979
Japan Insurance Law (2001), Art. 265-28.1.
980
Id. Art. 266.
981
General Insurance Association of Japan (2006), p. 75.
982
Japan Insurance Law (2001), Art. 267.
983
Id. Art. 270-3-3.
984
General Insurance Association of Japan (2006), p. 74.

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NATIONAL TREATMENT PRINCIPLE IN GATS:
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There is no common approach to the policyholder protection fund because the EU is in
the process of harmonizing its insurance guarantee systems. While most EU Member States
have no general insurance guarantee schemes, 985 the United Kingdom, France and Ireland
have established insurance guarantee systems. 986 For example, the Policyholder Protection
Board was established in the United Kingdom in 1975 by the Policyholder Protection Act,and funded by a levy of up to one percent on premiums.987 Another feature of this safety
scheme in the United Kingdom is that the fund managers are empowered to assist an
insurance company in financial difficulties by financing or arranging transfer of insurance
business. 988 Recently, the Policyholder Protection Board was replaced by the Financial
Service Compensation Scheme, which compensates consumers of failed financial service
suppliers under the Financial Services and Market Access 2002.989
At the EU level, the Working Group on Insurance Guarantee Scheme released anorientation in 2003, which advocated for harmonization of insurance guarantee schemes. The
Working Group emphasized that the moral hazard argument is more theoretical than empiricalbecause there is no concrete evidence that the existence of such a safety net in the banking
sector has led to distortions in that sector.990 In addition, it also observed that the cost offinancing the policyholder protection fund would be of insignificance to premiums.991
A draft Directive on policyholder protection funds, delivered on the Meeting of 1stJune 2005 of the Working Group on Insurance Guarantee Scheme, addresses five important
points of the system.992 First, the insurance guarantee scheme should cover both life and nonlife insurance. Second, the coverage of compensation is up to 90 percent of both life and nonlife claims above 100 EUR. Third, the insurance guarantee system will be triggered when an
insurer is unable to meet its obligations, or to take measures specified in the restoration planor financial scheme. Fourth, branches of non-Member State insurers may obtain a license tosupply insurance services in the EU only when they belong to an insurance guarantee schemeof a Member State. Last, directors, managers, statutory auditors and other holding companies
are excluded from the coverage of compensation by the insurance guarantee system.
Some observations

985

For example, Austria, Belgium, Germany, Denmark, Finland, Greece, Italy, Luxembourg, Netherlands,
Portugal, and Sweden.
986
See European Commission. Insurance Guarantee Scheme: State of Play and Orientation of the Future
Work, Discussion Paper, MARKT/2517/02-EN (Jul. 15, 2002), Annex 1, p. 1.
987
Goddard (2003), pp. 143-144.
988
Birds and Hird (2001), p. 34.
989
Id. pp. 22-23.
990
European Commission. Insurance Guarantee Schemes – Orientation Debate. MARKT/2504/03-EN(Apr. 9, 2003), p. 4.
Available at http://ec.europa.eu/internal_market/insurance/docs/markt-2504-03/markt-2504-03_en.pdf –Last visited 2 April 2007.
991
Id.
992
See European Commission. Meeting on 1st June 2005, Working Group on Insurance Guarantee Scheme,
MARKT/2512/05-EN (May 31, 2005).
Available at http://ec.europa.eu/internal_market/insurance/docs/2005-markt-docs/markt-2512-05_en.pdf –Last visited 2 April 2007.

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CENTER FOR ASIAN LEGAL EXCHANGE, NAGOYA UNIVERSITY CALE BOOKS 3

The practices of the US, EU and Japan demonstrate that the problem of moral hazard
could be mitigated by the design, powers and duties of policyholder protection funds.
Specifically, claims are partially compensated, and certain corporate persons might be
excluded from this safety net. Concerning financial burdens of insurers, the experience of
New York Insurance Law shows that when the fund is well capitalized, the members need not
be required to make a contribution.993 The application of the policyholder protection system
extends not only to an insolvent insurer but also to an insurer in financial difficulties. This
would serve as a good lesson for Vietnam in designing insurance regulations on consumer
protection as well as assuring the stability of the insurance market.
2.4 Future regulations on solvency margin(i) A call for more concrete determination of permissible assets
As mentioned earlier, there is a lack of requirement on categories of assets that could
represent the solvency margin of insurers. Therefore, a needed provision is to identify
permissible assets for the purpose of determining a solvency margin. Mere exclusion of assets
is not persuasive. A list of permissible assets for determining the solvency margin would
provide clearer understanding and better compliance. In other words, it is required to regulate
what categories of assets can be used in the capital base of an insurance company in order thatthose assets can be used to pay claims and benefits to consumers. This provision also
indirectly supports investment rules, whereby an insurance company might refrain fromcreating excessively risky investment portfolios, as they would be partly ineligible forcalculating the solvency margin.
In addition, as different assets shall be treated differently according to their exposure
to risks, it is necessary to establish a requirement regarding the valuation of assets to be
assumed for the purpose of solvency margin.994 The experiences of the EU, US and Japan
show that assets must be largely evaluated at market value in order to ensure proper

993

See New York Insurance Law, Sec. 7603 (c) (1).
No further contribution shall be made when the net value of the property/casualty insurance security fund is
at least 150 million dollars.
994
In recently issued regulations by the MOF, the valuation is stipulated as follows:(i) assets permitted with 100 percent of book value: cash, deposits, government bonds, and assets
corresponding to investment-linked insurance policies;(ii) assets partly permitted:- secured corporate bonds: 99 percent of book value;- unsecured corporate bonds: 97 percent of book value;- listed shares: 85 percent of book value;- unlisted shares: 80 percent of book value;- real estate used by insurers: 92 percent of book value;- other real estate: 85 percent of book value;- capital contribution to other companies, except for insurance companies: 80 percent ofbook value;- overdue receivables: 50-70 percent of book value;- fixed assets, computer software, and stocks: 75 percent of book value;- other assets: 85 percent of book value.
See Circular 156/2007/TT-BTC of the Ministry of Finance on guiding the implementation of Decree
46/2007/ND-CP, (Dec. 20, 2007) (Vietnam), Sec. V.4.3.

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determination of financial health of insurers. Furthermore, several categories of assets must
expressly not be permitted, for example intangible assets, including good will, trade names.995(ii) A need for the inclusion of claims criterion for calculating the minimum solvency marginof non-life insurers
Different fixed ratios of the minimum solvency margin are applied to life and non-life
insurers under the Vietnam Insurance Law. Although Vietnam’s life insurance market isdominated by foreign insurers, other WTO Members could not challenge Vietnam on any
higher ratio of the minimum solvency margin imposed on all life insurers. In other words,
Vietnam can continue to differentiate fixed ratios between life and non-life insurancecompanies without constituting a violation of the national treatment obligation because life
insurance services and non-life insurance services are not alike under the meaning of GATS
Article XVII. Moreover, different levels of minimum solvency margins applicable to life andnon-life insurers are also found in the EU.
As described earlier, there are two main approaches towards the solvency margin,
namely fixed-ratio model and risk-based capital. Vietnam has applied a fixed-ratio model
towards the determination of the minimum solvency requirement of insurers under the EU
model. This approach is simple and standardized. As China’s case, the adoption of the EU
approach would be a good decision because of the ease of administration.996
Under the US and Japan’s risk-based capital model, assets are examined carefully byconsidering actual risks assumed by an insurance company. While the risk-based model could
address disadvantages of the fixed-ratio model by incorporating all relevant risks faced byinsurers, the main drawback is its complexity and difficulty in application.997 Moreover, inJapan, there are some cases where life insurers, whose actual solvency margin standard wasabove 200 percent, still became insolvent. 998 As commented by O’Brien, the risk-based
capital approach is not better at anticipating financial problems. 999 An empirical study by
Cummins et al. found that a risk-based capital approach is less successful in predicting a large
insurance company’s insolvency than in predicting smaller insolvencies in case of the non-life
insurance industry in the US. 1000 Recently, Pottier and Sommer, in comparing different
approaches towards predicting insurer insolvencies, confirmed that the NAIC risk-based995

In recently issued regulations by the MOF, several categories of assets are expressly excluded, forexample intangible fixed assets, capital contribution in other insurance companies, bad debt, and unsecured loans.
See Circular 156/2007/TT-BTC of the Ministry of Finance on guiding the implementation of Decree
46/2007/ND-CP, (Dec. 20, 2007) (Vietnam), Sec. V.4.2.
996
Dickinson, Gerry. 2002. The Development of China’s Insurance Industry. In OECD. China in theWorld Economy: The Domestic Policy Challenges. Paris: OECD, pp. 284-285.
997
Leflaive (2002), p. 14.
998
See Kinoshita (2002), p. 199.
Typical examples are Chiyoda Life and Kyoei Life with solvency ratio of 221 and 203 percent, respectively.
999
O’Brien, Chris. 2003. The Regulation of Life Assurers in a Law Solvency Environment: The UK
Experience. In Institute of Economic Affairs, Economic Affairs: Financial Services Regulation. Oxford:
Blackwell Publishing, p. 18.
1000
Cummins, J. David; Scott E. Harrington; and Robert Klein. 1995. Insolvency experience, risk-based
capital, and prompt corrective action in property-liability insurance. Journal of Banking and Finance 19, p. 526.

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CENTER FOR ASIAN LEGAL EXCHANGE, NAGOYA UNIVERSITY CALE BOOKS 3

capital is not a good predictor of insolvencies, and that a simple non-risk-adjusted capital ratio
is much more effective.1001
Moreover, preconditions for good application of the risk-based approach are highly
developed statistical data and a strong actuarial profession.1002 However, both conditions are
not found in Vietnam as the insurance market has developed for little more than a decade, andactuarial services are still inadequate. Supervision of and compliance with a risk-based capitalmodel is probably not feasible at this stage. Therefore, Vietnam should continue with thefixed-ratio model.
As noted earlier, in case of life insurance, Vietnam’s approach towards the minimum
solvency margin is very similar to that of the EU. However, in case of non-life insurance
business too, Vietnam should adopt the EU approach to overcome drawbacks of the fixedratio model. Therefore, a required provision will be the incorporation of a claims criterion in
calculating the minimum solvency margin of non-life insurers. As far as this suggested
requirement applies equally to both non-life domestic and foreign owned insurers, as well as
branches of foreign insurers, there is no violation of the national treatment obligation.
(iii) A call for more detailed control levels
Adequate and proportionate enforcement measures for different solvency control
levels are important to rectify undesirable situations relating to insurance companies.1003 As
noted by Skipper and Klein, appropriate rules and procedures for identifying and dealing withfinancially troubled insurers are required.1004 Although the Vietnam Insurance Law provides
measures to recover the solvency of a troubled insurance company, including establishment ofa solvency control committee, they seem to be insufficient. Intervention by the supervisory
authority in early stages of financial difficulties would limit adverse impacts of the failure on
consumers and the whole financial system. A clearer procedure in the enforcement ofremedial measures, therefore, would facilitate prompt action by the supervisory authority, andconsequently avoid unnecessary delay in restoring the solvency of insurers. In addition, thesetransparency requirements could also help Vietnam to reduce the risk of violating the national
treatment obligation due to any possible different and more burdensome application ofremedial measures on foreign owned insurers.
Thus, Articles 79 and 80 of the Vietnam Insurance Law must be revised in order toinclude clear and different quantitative solvency control levels applicable to insurancecompanies, the MOF, and the solvency control committee. Different control levels
corresponding with remedial actions by both insurers and the supervisory authority should bemade in greater detail. Concrete remedial measures may include financial forecasts byfinancially troubled insurers for at least the medium term; composition of the solvency control

1001
Pottier, Steven W.and David W. Sommer. 2002. The Effectiveness of Public and Private Sector
Summary Risk Measures in Predicting Insurer Insolvencies. Journal of Financial Services Research 21(1/2), p.
114.
1002
Asian Development Bank (2003), p. 121.
1003
IAIS. Towards a Common Structure and Common Standards for the Assessment of Insurer Solvency:
Cornerstones for the Formulation of Regulatory Financial Requirements, Cornerstone VII, October 2005, p. 11.
Available at http://www.iaisweb.org – Last visited 22 May 2006.
1004
Skipper, Harold D. Jr. and Robert W. Klein. 2002. Insurance Regulation in the Public Interest: The Path
Towards Solvent, Competitive Markets. The Geneva Papers on Risk and Insurance 25(4), p. 497.


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NATIONAL TREATMENT PRINCIPLE IN GATS:
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committee; and prohibition of free disposal of assets by insurers during the period of applying
corrective measures, in order to protect the interests of policyholders.
Nevertheless, the introduction of new prudential regulations on this matter could
require foreign owned insurers to apply more stringent remedial measures than those ofdomestic insurers. For example, foreign owned insurers or branches of non-life foreign
insurers who face financial difficulties might be temporarily prohibited from remitting money
and assets abroad. This situation may constitute a discrimination against those foreign
insurers under the meaning of GATS Article XVII. Vietnam could justify this measure by
relying on the prudential exception under Annex paragraph 2(a). First, as the measure ofprohibition on remittance abroad is concerned with the solvency of a foreign insurancecompany in financial difficulty, it is arguable that the first layer of the prudential exception issatisfied. Second, it can also be argued that this prohibition measure has a close andsubstantial connection with the solvency of the foreign owned insurer because without such ameasure, that insurer could be insolvent, and put policyholders at danger. Under the thirdlayer of the prudential exception, however, Vietnam is obliged to apply this prohibition
measure consistently and transparently. If the application of this measure constitutes a
disguised restriction on trade in insurance services, Vietnam could be found in violation of the
GATS national treatment obligation.
Moreover, this measure might be justified by GATS Article XIV(c)(i), whereby
Vietnam is required to prove that a measure is necessary to secure compliance with, forexample, its foreign exchange law, in order to address “the effects of a default on services
contracts”. Nevertheless, similar to the prudential exception, Vietnam is responsible for
applying this measure in a manner not violating the chapeau of GATS Article XIV.
(iv) Call for establishment of a policyholder protection fundAs commented by Skipper and Klein, some insolvency is inevitable in a competitive
insurance market. 1005 Earlier discussion has shown advantages and disadvantages of apolicyholder protection fund. The discussion also reveals that the experience of somejurisdictions in designing the fund could mitigate adverse impacts of such a safety net scheme
in the insurance sector. Setting up a policyholder protection fund in Vietnam would protect
policyholders against losses in the event that an insurer fails financially and is unable to pay
claims and benefits. This system, therefore, would strengthen public confidence in thedomestic insurance market by providing the funding to pay consumers who have claims andbenefits against a failed company. Establishment of this fund in the insurance sector could
also increase competitiveness of domestic insurers compared to foreign insurers, who enjoy
safety net schemes in their home countries. Moreover, a similar scheme, the deposit insurance
system, has been developed in Vietnam’s banking sector since 1999.1006
The next question considers which model, pre-funded or post-funded, is appropriate
for Vietnam.
One of the main advantages of the pre-funded approach is that the money is always
available for compensation for policyholders.1007 In other words, the safety net shall promptly
respond to the insolvency of any insurer, and thus reduce the disruption to policyholders and1005

Id. p. 496.
Decree 89/1999/ND-CP of the Government on Deposit Insurance (Sep. 1, 1999) (Vietnam).
1007
Macey and Miller (1993), pp. 74-75.
1006


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the danger of rush for money by policyholders. The second advantage is that the existence ofvisible safety net would promote public confidence in the insurance sector.1008 As noted by
Hodkin, the New York pre-funded system has been studied by many other states because thefunds exist prior to insolvency of insurers.1009
However, as insurers are liable to make annual contributions to policyholder
protection funds, the pre-funded system may discourage insurers from monitoring each otherin order to prevent assessment.1010 This would mean that in the post-funded system, in order
to avoid assessment when insolvency of any insurer occurs, all insurers have an incentive topolice their competitors in the market. In response to these issues, Han et al. examineddifferent types of policyholder protection funds in the US and concluded that pre-funded
approach can reduce agency problems while the post assessment approach tends to foster
insurers’ risk.1011
Another concern is that the availability of funds under the pre-assessment approach
may cause administrative costs. In addition, it expropriates insurers from using suchcontributions in profitable investments.1012 On the other hand, the administrative costs andforgone earnings may be justifiable, and reduced by the design and well-structured
organization of policyholder protection funds.
Vietnam, therefore, should adopt a pre-funded policyholder protection system in orderto protect the interests of consumers as well as the soundness of the insurance market. This
would reinforce public confidence in Vietnam’s insurance market after the WTO accession. It
is necessary to design and structure a policyholder protection fund in order to mitigate
disadvantages that may arise from the available safety net. Vietnam, however, can regulatedifferent levels of contributions as well as claim compensations between life and non-life
insurers. This different treatment would not constitute a violation of the national treatment
obligation because there is no likeness between life and non-life insurance services under themeaning of GATS Article XVII. Moreover, other WTO Members also maintain different
systems of safety nets applicable to life and non-life insurers.
Membership in the policyholder protection fund may be compulsory for all insurance
service suppliers in Vietnam, regardless of domestic or foreign owned insurers, or branches offoreign insurers. Foreign insurers, especially branches of non-life insurers, however, mayargue that this measure could constitute additional operating costs because they have paid
contributions to their home country’s policyholder protection funds. Consequently, thismeasure in practice could make them less favouble than domestic like insurance service
suppliers. Vietnam, however, is safe by relying on the prudential exception. In other words, as
this measure is primarily aimed at the solvency of insurers, the first and second layers of theprudential exception are satisfied. Under the third layer, this measure may be justified if
Vietnam ensures that the application of this measure does not constitute a disguised restriction
on trade in insurance services under the anti-avoidance provision.
Nevertheless, Vietnam is obliged to ensure that both substantive and procedural
regulations on the policyholder protection fund must not constitute a discrimination against
1008

Yasui (2001), p. 318.
Hodkin (1992), p. 744.
1010
Macey and Miller (1993), p. 75.
1011
Han, Li-Ming; Gene C. Lai; and Robert C. Witt. 1997. A financial-economic evaluation of insurance
guaranty fund system: An agency cost perspective. Journal of Banking and Finance 21, p. 1127.
1012
Yasui (2001), p. 318.
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foreign insurance services and insurers. For example, in some circumstances, during its
application, the policyholder protection fund may have incentives to grant more favourable
rescue packages, including capital injection, to domestic insurers facing financial difficulties.
Such actions would affect trade in insurance services and constitute a violation of the national
treatment obligation because they accord favourable treatment towards those domestic
insurers. Although Vietnam might persuade a panel that this measure is primarily aimed at thesolvency of those domestic insurers in financial difficulty under the meaning of the prudential
exception, Vietnam could find it hard to prove how the application of this measure would
satisfy the anti-avoidance provision. Similarly, while Vietnam may prove that such a measure
would fall within the scope of “laws and regulations consistent with the WTO” and satisfy thenecessity test under the meaning of GATS Article XIV(c), it may face a risk of qualifying thechapeau of this provision on general exceptions.
3. Regulation of reinsurance services
3.1 Current arrangement on reinsurance services
Re-insurers may contribute to the stability of the insurance market by diversifying risk
profiles, and then enable insurers to improve their financial soundness.1013 However, as notedby Wang, insurance supervisors as well as insurers are much concerned over financial
conditions of re-insurers because the failure of a re-insurer may affect the solvency of insurers,
and thus the interests of policyholders.1014 Default by re-insurers accounted for three percent
of insurance company failures in the US between 1969 and 1998. 1015 Accordingly, as
suggested by the IAIS, re-insurers must be subject to regulation and supervision on technicalprovisions, solvency margin and investment rules.1016
Under the Vietnam Insurance Law, re-insurers are subject to the same solvency
requirements as insurers.1017 However, with regard to reinsurance services, these services may
be supplied by either insurers or re-insurers.1018 It means that an insurer can cede a part of its
premiums to other insurers or re-insurers. Accordingly, one concern over Vietnam’s
regulation on the solvency margin is how reinsurance arrangements ceded by insurers could
be treated. It is unclear whether a full or a part of these reinsurance arrangements canrepresent the solvency margin of a ceding insurer. As there is no specific regulation on thismatter, it might suggest that Vietnam permits allowance for reinsurance up to 100 percent forthe purpose of determining the solvency margin of ceding insurers. This situation could
indicate that a risk of default by an insurer/re-insurer assuming reinsurance services does notreceive due consideration.
1013

IAIS. Principles No. 6 on Minimum Requirements for Supervision of Re-insurers, October 2002, p. 3.
Wang, Wallace. 2002. Developing Reinsurance Markets in emerging Economies: Regulatory
Implication and Challenges. Law and Business Review of the Americas 8, p. 403.
1015
Leflaive (2002), p. 22.
1016
IAIS. Principles No. 6 on Minimum Requirements for Supervision of Re-insurers, October 2002, p. 5.
1017
Vietnam Insurance Law, Art. 3.5 defines insurer as:[A]n enterprise, which is established, organized and operates in compliance with provisions of thisLaw and other applicable laws to conduct insurance business and reinsurance business.
1018
Id. Art. 9.1.
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According to Leflaive, reinsurance services, while limiting risks exposed by insurers,
may cause credit risk to insurers because of the failure of other insurers who assume suchreinsurance services.1019 Therefore, credit risk arising from reinsurance is taken into accountby many jurisdictions when dealing with the solvency requirements of insurers. 1020 As
suggested by the IAIS, the supervisory authority must set rules on making allowance forreinsurance for the purposes of assessing technical provisions as well as the solvency marginof insurers.1021
The experiences of other countries may clarify this point. In EU directives, a Member
State should fix the percentage of allowance for reinsurance recoverables if it allows any
technical provisions to be covered by claims against re-insurers.1022 In addition, only a certain
amount of reinsurance arrangements are taken into account when calculating the solvency
margin of both life and non-life insurance. This threshold is set at 50 percent for non-life
insurance and capital at risk for life insurance,1023 and 15 percent for mathematical provisionin life insurance.1024
Under New York Insurance Law, reinsurance is recoverable in the full amount if thecession is with an insurer authorized to transact reinsurance business in New York or to theextent allowed by the supervisory authority if the cession is with other re-insurers. 1025 In
Japan Insurance Law, reinsurance risk is included in asset management risk and taken into
account for the calculation of risk-based capital.1026
3.2 A need to consider reinsurance risk
The inclusion of reinsurance risk in determining the solvency margin of insurers is
another provision requiring further prudential regulations under the Vietnam Insurance Law.
As suggested in section 2.4 of this chapter, because Vietnam follows the EU approach to
calculating technical provisions and the minimum solvency margin, it should adopt the EU
approach in dealing with reinsurance risks. In other words, Vietnam should set a threshold forreinsurance risks in both life and non-life insurance companies for determining their solvency
margins. Different thresholds might be imposed for life and non-life insurers. Again, thesedifferences would not constitute a violation of the national treatment obligation because
likeness between life and non-life insurance services is not established under the meaning of
GATS Article XVII.

1019

Leflaive (2002), p. 22.
Id. pp. 23-24.
1021
IAIS (2003), ICP 20 on Liabilities and ICP 23 on Capital Adequacy and Solvency, pp. 34 and 39,
respectively.
1022
See Directive 2002/83/EC, Art. 20.4; Directive 92/49/EEC, Art. 17.
1023
Directive 2002/13/EC, Art. 1.3; Directive 2002/83/EC, Art. 28.2 (b).
1024
Directive 2002/83/EC, Art. 28.2 (a).
1025
New York Insurance Law, Sec. 1301 (14).
1026
See Japan Insurance Business Law Enforcement Regulations, Art. 87 (1) e (Tentative translation by theGeneral Insurance Association of Japan). See also Japan Financial Services Agency. Presentation material for a
Meeting of Solvency and Actuarial Issues Subcommittee of International Association of Insurance Supervisorson 3-5 September 2003, p. 3.
Available at http://www.fsa.go.jp – Last visited 5 October 2006.
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4. Investment rules
4.1 Vietnam’s current regulations
Investment regime has been widely recognized as a main function of insurers which
affects their financial soundness. As the nature of liabilities of an insurance company decides
the nature of assets in investment portfolios, a primary consideration of the investment regime
is to secure capital and liquidity in order to convert those assets to cash to pay out claims orsatisfy unexpected claims. 1027 The fundamental aims of investment rules are to protect
policyholders, minimize the probability of the insurer’s failure, and prevent insurers frommanipulating the financial market by prohibiting insurers from owning or controlling otherfinancial institutions and industrial enterprises.1028 According to Leflaive, investment risks, orasset risks, are the second major risks, followed by the technical risks, which must be
addressed by the solvency regulation.1029 In most OECD countries, including the EU,1030 the
US,1031 and Japan,1032 the investment regulations only relate to the funds that constitute thecontractual liabilities to policyholders, i.e. technical provisions, rather than the capital base of
insurers as a whole. The rationale is that, if regulations extend to and restrict investment of thecapital base they may discourage insurers from holding a high level of capital, and thus
weaken financial conditions of insurers.1033
Similarly, in case of Vietnam, in order to ensure good financial situations of insurers,
Vietnam’s investment regime also provides quantitative rules on the usage of funds fromtechnical provisions. Insurers are permitted to make investment up to an amount equivalent tothe balance between the total technical provisions and the fund required for regular payment
of insurance claims or benefits during a period. 1034 In more specific terms, the permitted
capital for the purpose of investment is equal to 75 percent for a non-life insurer, or 95
percent for a life insurer, of the total technical provisions. Investment portfolios of insurers
may cover government bonds, corporate shares and bonds, real estate, equity in othercompanies, loans; deposits in banks. 1035 The overall qualitative requirement on managing
investment portfolios by insurance companies is that “investments by insurers shall be safe,
effective and capable of meeting the demand for regular payments as undertaken underinsurance contracts”.1036
The quantitative restrictions on investment have been set out by the government inorder to limit permitted assets to be included in the investment portfolio of an insurancecompany, and they differ between life and non-life insurance.1037 Maximum limitations are
1027

Outreville (1998), p. 248.
Vollbrecht (2001), p. 43. See also Dickinson (1999), pp. 307-308.
1029
Leflaive (2002), p. 24.
1030
Directive 2002/83/EC, Art. 24; Directive 92/49/EEC, Art. 22; Directive 2005/68/EC, Art. 34.
1031
New York Insurance Law, Sec. 1404 (non-life insurers) and 1405 (life insurers).
1032
Japan Insurance Law (2001), Art. 97.2.
1033
See Vollbrecht (2001), p. 44. See also Dickinson (1999), p. 311.
1034
See Decree 46/2007/ND-CP, Art. 13.2 and 3.
Regular payment of non-life insurance claims is equal to or more than 25 percent of the total technicalprovisions, and life insurance benefit is 5 percent.
1035
Vietnam Insurance Law, Art. 98.2.
1036
Id. Art. 98.1.
1037
Decree 46/2007/ND-CP, Art. 14.
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applied to three categories of assets. Firstly, there is no ceiling restriction for either life or
non-life insurers with regard to government bonds, secured corporate bonds, and deposits inbanks. Secondly, investments in unsecured corporate bonds and corporate shares, capital
contributions to other companies shall not exceed 35 percent for non-life insurers, and 50
percent for life insurers, of the permitted capital. Thirdly, investments in real estate andprovision of loans shall not exceed 20 percent for non-life insurers, and 40 percent for life
insurers, of the permitted capital.
According to the IAIS, the standards on investment activities include “investment
policy, asset mix, valuation, diversification, asset-liability matching, and risk
management”.1038 Different investment-related risks are embedded in an investment portfolio,
and might affect the coverage of technical provisions and the solvency margin.1039 Moreover,as noted by Leflaive, the principle of diversification is aimed at spreading the investment
portfolio over different asset categories or issuers in order to manage depreciation risk,
liquidity risk and concentration risk.1040
There is strong correlation among credit risks of investments in the same issuer, andconsequently an insurance company may be over indebted or insolvent.1041 In examining theeffect of life insurer insolvency in the US - First Executive Corporation on the value of otherlife insurers, Fields et al. concluded that the failure of an insurer may lead to losses ininvestment portfolios of other insurers, substantially for weak insurance companies, and thosethat engaged in more risky investment portfolios, junk bonds and real estate.1042
Although Vietnam’s investment regime lays down some fundamental rules for holding
portfolios, what appears to be missing here is a requirement on investment diversification. As
commented by Mr. Tran Vinh Duc, the Chief Executive Officer of BaoMinh Insurance
Corporation, Vietnam lacks regulations on investment ceilings for corporate shares, unsecured
corporate bonds, and loans granted to enterprises under the same industry. 1043 While aninsurance company is allowed to invest a maximum amount in each of three categories ofassets, there is no restriction on a single investment. In other words, insurers may invest all
permitted capital (20 percent and 40 percent regarding non-life and life insurers, respectively)from technical provisions into one piece of land or building, or provide a loan to one borrower.
Similarly, insurers may also employ all permitted capital (35 percent and 50 percent withregard to non-life and life insurance, respectively) from technical provisions into unsecured
bonds and shares of a single issuer with an expectation of high returns. The concern of risk
concentration may be more intensified in life insurers due to high levels of the permitted
capital for investment. This problem has been found in particular in cases of insurancecompanies facing financial difficulties. 1044 This is more concerning because insurers in

1038

IAIS (2003), ICP 23 on Capital Adequacy and Solvency, p. 39.
IAIS (2003), ICP 21 on Investment, p. 35.
1040
Leflaive (2002), p. 26.
1041
Id.
1042
Fields, Joseph A. et al. 1994. Junk Bonds, Life Insurer Insolvency, and Stock Market Reactions: The
Case of First Executive Corporation. Journal of Financial Services Research, p. 108.
1043
Tran Vinh Duc. 2005. Nang cao hieu qua dau tu von cua cac doanh nghiep bao hiem tai Vietnam[Improving Investment Efficiency of Insurers in Vietnam]. In Symposium on Solutions for facilitating efficientinvestments by insurers into the economy (on file with the Association of Vietnamese Insurers), pp. 63-64.
1044
Petroni, Kathy Ruby. 1992. Optimistic reporting in the property-casualty insurance industry. Journal of
Accounting and Economics 15, p. 504.
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Vietnam have limited professional skill to expand their investment activities to complicatedsectors such as corporate shares and bonds and real estate.1045
While there is a distinction between secured and unsecured corporate bonds, there isno such distinction between secured and unsecured loans. This regulation may be an incentive
for insurers to grant unsecured loans with high risk and high returns, and adopt highly
speculative investment portfolios. Furthermore, investment portfolios of insurers in these
sectors would not be safe because of lacking assets secured for lending activities.1046 In regard
to corporate shares, even though the securities market is in place, the investment rules do not
distinguish between listed shares and unlisted shares under the investment portfolio of
insurers. Consequently, these problems could lead to a mismatched portfolio whereby thetechnical provisions for fulfilling obligations against policyholders are not fully covered bythose investment assets, especially in the case of high exposure to declined share value.
In addition to the concern over investment diversification, no investment abroad ispermitted.1047 As noted by Vollbrecht, foreign investments are advisable because the domestic
capital market might not absorb all investment funds.1048 A too narrow scope of investment
assets would probably adversely affect the insurer’s profit-generating ability.1049 Especiallyregarding marine and other international transport insurance, and reinsurance, regulation
should allow some degree of currency mismatching to enable effective currency risk
reduction.1050 Mr. Trinh Quang Tuyen, the Chief Executive Officer of Vietnam Reinsurance
Company, observed that since all foreign currencies collected from reinsurance premiums are
required to invest in certain projects in Vietnam, which would generate foreign currencies inVietnam, or make deposits in banks, this situation would limit the diversification of
investment portfolios by insurers.1051
4.2 Foreign experience
It may be useful to examine the regulations of the EU, US and Japan on investments
by insurers. All these countries make a distinction between the treatment of assets
representing the technical provisions and assets covering other liabilities, and establish
quantitative restrictions on the former. Accordingly, the concern on investment diversification
has been substantially addressed. In the EU, investment rules applied to life and non-life
insurers are as follow1052:

1045

Le Song Lai (2005), pp. 27-28.
Thoi bao Tai chinh (Financial Times), No. 119, 5 October 2005.
Available at http://www.mof.gov.vn – Last visited 5 October 2006.
1047
Vietnam Insurance Law, Art. 98.2.
1048
Vollbrecht (2001), p. 47.
1049
Chang, Kuan-Chun. 2004. Necessary Reform of Insurance Law in China After Its WTO Accession.
Syracuse Journal of International Law and Commerce 31, p. 62.
1050
Dickinson (1999), p. 313.
1051
Trinh Quang Tuyen. 2005. Thuc trang trong hoat dong dau tu va giai phap khuyen khich dau tu cua cac
doanh nghiep bao hiem [Current issues in investment activities and solutions for investment encouragement byinsurance companies]. In Symposium on Solutions for facilitating efficient investments by insurers into theeconomy (on file with the Association of Vietnamese Insurers), p. 39.
1052
Directive 2002/83/EC, Art. 24.1; Directive 92/49/EEC, Art. 22.1.
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CENTER FOR ASIAN LEGAL EXCHANGE, NAGOYA UNIVERSITY CALE BOOKS 3(a) 10 % of its total gross technical provisions in any one piece of land or building, or anumber of pieces of land or buildings close enough to each other to be consideredeffectively as one investment;(b) 5 % of its total gross technical provisions in shares and other negotiable securities treatedas shares, bonds, debt securities and other money and capital market instruments from thesame undertaking, or in loans granted to the same borrower;(c) 5 % of its total gross technical provisions in unsecured loans, including 1 % for any single
unsecured loan, other than loans granted to credit institutions, assurance undertaking…;(d) 3 % of its total gross technical provisions in the form of cash in hand;(e) 10 % of its total gross technical provisions in shares, other securities treated as shares anddebt securities, which are not dealt in on a regulated market.

In order to increase the flexibility of those investment restrictions, the ceiling of 5 percent of
the total gross technical provisions in securities and loans of the same issuer may be raised to
10 percent if the total value of securities and loans held by an insurance company does notexceed 40 percent of its gross technical provisions.1053
Moreover, the EU approach to qualitative principles on investment seems to bedetailed and comprehensive. The most important requirement is that those investments fromthe technical provisions must be diversified and spread in order to ensure that there is noexcessive reliance on any particular category of asset or investment market.1054 In addition,
investments in high risk assets or non-liquid assets must be ensured to be kept at prudent
levels. 1055 This means that the requirement of investment diversification must be met by
insurers and supervisors.
In the US, insurance laws fundamentally set out complicated rules on admitted assets
and permitted investments. According to Lencsis, the rationale is that such assets held byinsurers for the investment purposes “must be reasonably secure, both as to recovery of theamount invested and as to the rate of return, over a substantial period of time”.1056 While
providing a list of authorized categories of investment,1057 a maximum limitation is set foreach category of assets. 1058 Moreover, individual ceilings of 3 percent and 5 percent ofpermitted assets in life and non-life insurance, respectively, are established for securities of asingle issuer and its affiliates.1059
According to New York Insurance Law, there are nine categories of investments
permitted for insurers: (1) government obligations; (2) obligations of American institutions;(3) preferred shares of American institutions; (4) loans secured by real property; (5) real
property acquired as an investment; (6) foreign investments; (7) development bankobligations; (8) equity interests; and (9) investment companies.1060 Similar to EU directives,
while setting quantitative restrictions on each category of investments, investment regime
under New York Insurance Law also lays down rules on avoidance of concentration risks, forexample, investment in development bank obligations in each bank shall not exceed 5 percent,
1053

Id.
Directive 2002/83/EC, Art. 24.2; Directive 92/49/EEC, Art. 22.2.
1055
Id.
1056
Lencsis, Peter M. 1997. Insurance Regulation in the United States: An Overview for Business andGovernment. Connecticut: Quorum Books, p. 36.
1057
NAIC, Investment of Insurers Model Act, II-238-1 (2004), Sec. 7.
1058
Id. Sec. 8.A.
1059
Id. Sec. 8.B.
1060
New York Insurance Law, Sec. 1404 and 1405.
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and in all banks not exceeding 15 percent of admitted assets; or aggregate amount of foreign
investments not exceeding 10 percent of admitted assets, and investments in any foreigncountry not exceeding one percent (or three percent in case of having a highest sovereign debt
rating) of admitted assets.1061
In addition, with a view to increasing flexibility in investment regimes, an insurer ispermitted to invest up to 5 percent of the total admitted assets without being subject to any
quantitative limitations, except for prohibited investments.1062
A similar approach dealing with the concentration risk has also been found in Japan.
While allowing insurance companies to invest money received as insurance premiums in
different categories of assets, Article 97-2.1 of Japan Insurance Law reads:
No insurance company may use for investment the kinds of assets specified by a Cabinet
Office ordinance in excess of an amount calculated in accordance with such ordinance.

A special account may be created in order to separate those assets corresponding to theunderwriting reserve for insurance contracts. 1063 Accordingly, an insurance company isallowed to hold domestic stocks up to 30 percent, and assets in foreign currency up to 30
percent of the underwriting reserve.1064
In particular, the aggregate of the same asset categories shall not exceed 10 percent of
the total of the special account assets with respect to: (1) corporate bonds and stocks used by
one and the same person/group; (2) loans and lending securities to one and the same
person/group; (3) deposits with one and the same person/group; (4) guarantee of obligationfor one and the same person/group; and (5) assets related to trading in derivatives with one
and the same person/group.1065
4.3 A need for more concrete investment rules
In general, the Vietnam Insurance Law has set limits on the maximum investment foreach category of assets with regard to insurance funds, but not shareholders’ funds. Thisapproach is very similar to that of the EU, US and Japan. In addition, maximum amounts
invested in three categories of assets differentiate between life and non-life insurers. These
regulations are consistent with the national treatment obligation because there is no likenessbetween life and non-life insurance services under the meaning of GATS Article XVII.
However, a more diversified set of investment regulations should be adopted to take
into account all risks relevant to insurers’ investment schemes. Especially, a measure must be
put in place to prevent insurers from credit and concentration risks. Accordingly, moredetailed regulations on investment diversification are needed in order to ensure that insurers
adopt sound risk management with regard to their investment portfolios, and policyholder
protection. Moreover, the insurance sector is closely linked to the securities market, which
offers investment opportunities to insurance companies. As Vietnam’s securities market
1061

Id. Sec. 1404 (a).
Id. Sec. 1404 (b).
1063Japan Insurance Law (2001), Art. 118.1.
1064
The Enforcement Regulation of the Japan Insurance Law, Art. 48. See General Insurance Association ofJapan (2006), pp. 80-81.
1065
Id.
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develops, more concrete investment rules have become necessary. New investment
regulations might include maximum limitations on corporate shares, unsecured bonds of eachissuer and of all issuers; a piece of land, building; and unsecured loans of a single borrower
and of all borrowers.
Although the main advantage of quantitative restrictions is its ease of application by
insurers as well as supervision by the authority, they also have several limitations. The
restrictions only address risk characteristics of the investments per se, but not other relatedrisks arising from liabilities, including interest risk, and maturity risk of insurance policies.1066
In addition, they do not flexibly and rapidly respond to economic developments and structuralchanges in the securities markets.1067 Dickinson commented that qualitative restrictions could
provide an overall guidance for managing investment portfolios and are supported byquantitative restrictions. 1068 As seen through the experience of the US and EU, someflexibility in investment regimes seems to be necessary because different insurers may havedifferent liabilities and free assets. Accordingly, while introducing more concrete quantitative
limitations, a new provision on diversification of investment portfolios under a revised
Vietnam Insurance Law should ensure certain flexibility to enable insurers to adapt.
Furthermore, complete prohibition of investment abroad from technical provisions
seems to be less persuasive. As noted in section 1.4 of Chapter Five, as Vietnam’s securities
market emerges, there might not be sufficiently diversified portfolios for investment schemesof insurers. In addition, as an insurer may assume foreign-currency cessions from foreign
insurers, it is necessary to manage currency-mismatching risk. Particularly, re-insurers’
investment strategies could be more complicated than those of insurers because they might berequired to manage and match assets and liabilities in different currencies and markets.1069
This concern is well-addressed by the EU, whereby a re-insurer can invest up to 30 percent of
the gross technical provisions in currencies other than those in which technical provisions are
set.1070 On the other hand, total deregulation on investment abroad might undermine potential
opportunities to further develop Vietnam’s securities market in particular and the financial
system in general. Therefore, one provision must allow certain amounts of technicalprovisions to be invested abroad by insurers. This measure should be applied equally todomestic and foreign owned insurers in order to fulfill the national treatment obligation.
Nevertheless, Vietnam could regulate different amounts of permitted capital from thetechnical provisions eligible for investment abroad by life insurers and non-life insurers.
These different treatments in investment abroad, again, would not constitute a violation of
GATS Article XVII because there is no likeness between life and non-life insurance services.
An alternative approach is that Vietnam could permit re-insurers to invest abroad first,
and then allow direct insurers later. The main argument for this approach is that re-insurers
are strongly involved in foreign-currency reinsurance and retrocession services. However, as
noted in section 3 of this chapter, under the Vietnam Insurance Law, reinsurance services may
be supplied by either insurers or re-insurers. It means that both domestic and foreign insurers
in Vietnam could offer reinsurance services to other insurers. As described in section 4.3 ofChapter Two, under WTO jurisprudence, likeness of services and service suppliers as a whole
1066

Dickinson (1999), p. 312.
Leflaive (2002), p. 25.
1068
Dickinson (1999), p. 312.
1069
IAIS. Principles No. 6 on Minimum Requirements for Supervision of Re-insurers, October 2002, p. 6.
Available at http://www.iaisweb.org – Last visited 22 May 2006.
1070
Directive 2005/68/EC, Art. 34.4.
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is broadly determined only by the likeness of services. Because direct insurers and re-insurers
supply like reinsurance services, they could be alike. Given the fact that there is only one reinsurer, which is domestically owned, in Vietnam’s insurance market, Vietnam could bechallenged by according less favourable treatment on de facto basis to foreign insurers in
Vietnam as far as reinsurance services are concerned. Consequently, Vietnam could be foundin violation of the national treatment obligation by adopting a measure on prohibiting
investment abroad by direct insurers.
Vietnam would be safe if a panel accepts that likeness under the meaning of GATS
Article XVII must include “like” service suppliers. Re-insurers appear to be distinct anddifferent from insurers. For example, the customer base of the former is only insurers,
whereas that of the latter is diversified, ranging from individuals to institutional customers.
More specifically, even though reinsurance services supplied by direct insurers and those by
re-insurers are alike, likeness in GATS Article XVII can not be established because service
suppliers are unlike.
Vietnam, nevertheless, might not justify this measure by relying on the prudential
exception. As this measure is concerned with the solvency of re-insurers, it could fall within
the scope of “prudential reasons”. Moreover, the measure on investment abroad directly
affects the solvency of re-insurers. Accordingly, the relationship between this measure and“prudential reasons” could satisfy the “primarily aimed at” test. Under the anti-avoidance
provision, Vietnam could establish that the application of this measure is in a transparent
manner. Furthermore, the application of this measure is not rigid because the main businessactivities of re-insurers are to supply of reinsurance and retrocession services, whereas
insurers mainly deal with supply of direct insurance services. The application of this measure
also would not constitute additional financial burden on foreign insurers because if they
accept reinsurance services in foreign currency, they could invest in some foreign-currency
generating projects in Vietnam or deposit in any banks.
Given the fact that insurers and re-insurers in Vietnam are subject to the same
solvency regime as mentioned in section 3 of this chapter, Vietnam might be found notsatisfying the consistency criterion under the anti-avoidance provision. In other words, while
the same regulations on technical provisions and minimum solvency requirements are applied
to both insurers and re-insurers, any difference between them regarding investment rules
might constitute an inconsistency in applying the measure on prohibition of investments
abroad by insurers. Accordingly, the measure on permitting re-insurers to invest abroad first
and then direct insurers later could not be justified by the prudential exception.
5. Regulation of insurance intermediation
5.1 How regulations on insurance intermediation could enhance the solvency of insurers
In the words of the IAIS, “good conduct of intermediaries is essential to protect
consumers and promote confidence in insurance markets”.1071 Leflaive observed that:

1071

IAIS (2003), ICP 24 on Intermediaries, p. 40.

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Failure of a brokerage business therefore entails a considerable loss for the insurer, since the1072
premiums paid by policyholders commit the insurer once the broker has collected them.

Accordingly, financial health of insurance intermediaries also affects the solvency of insurers.
The EC directive on insurance intermediation applies to both brokers and agents, whoare either natural or legal persons.1073 Insurance intermediaries are required to ensure theirfinancial soundness on a permanent basis. Specifically, insurance intermediaries must holdinsurance policies for liabilities arising from professional negligence of at least EUR one
million to each claim and in aggregate EUR 1.5 million per year for all claims.1074 However,an insurance intermediary is discharged from this requirement if such insurance is covered byan insurer, on whose behalf the insurance intermediary is acting.1075 The EC directive also
requires that all necessary measures must be taken in order to protect consumers against theinability of insurance intermediaries to transfer premiums to insurers or remit amount ofclaims to insured. 1076 In addition, insurance intermediaries are required to have financial
capacity equivalent to 4 percent of the sum of annual premiums received, subject to aminimum of EUR 15,000.1077
In the US, in order to limit the credit risk of an insurance agent, the agent is required
to remit all funds due to insurer on a monthly basis, and may retain no more than threemonths’ estimated claims payments and allocated loss adjustment expenses. 1078 Insurance
agents are also required by insurers to maintain a surety bond for the protection of the insurer
with the amount of at least US$ 100,000 or 10 percent of the agent’s total annual written
premiums, but not exceeding US$ 500,000.1079 Moreover, the insurer must have an audited
financial statement or report proving that its insurance agents have good financial
conditions.1080
Under Japan Insurance Law, insurance companies are liable to damages for any losses
caused by their agents to consumers.1081 In return, insurance companies have the right toclaim reimbursement from agents. Concerning brokerage services, Japan Insurance Law
addresses financial conditions of insurance brokers in a detailed manner by requiring deposit
money as security. 1082 This amount of security shall be determined by taking into
consideration the state of activities of brokers and the need to protect policyholders.1083 In
addition, brokers are also required to hold an insurance brokers liability insurance contract inaccordance with a cabinet ordinance.1084
In Vietnam, an insurance broker must be established in a corporate form.1085 As noted
in section 3.3 of Chapter Six, the operations of insurance brokerage enterprises include (i)1072

Leflaive (2002), p. 34.
Directive 2002/92/EC of the European Parliament and of the Council of 9 December 2002 on Insurance
Mediation, Art. 2.
1074
Id. Art. 4.3.
1075
Id. Art. 4.3.
1076
Id. Art. 4.4.
1077
Id. Art. 4.4(b).
1078
NAIC, Managing General Agents Act, 225-1 (2006), Sec. 4.B and C.
1079
Id. Sec. 4.G.
1080
Id. Sec. 5.A.
1081
Japan Insurance Law (2001), Art. 283.
1082
Id. Art. 291.1.
1083
Id. Art. 291.2.
1084
Id. Art. 292.
1085
Vietnam Insurance Law, Art. 89.
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providing information on terms, conditions and premiums of insurance contracts to consumers,(ii) consulting consumers on risk management, insurance services and insurance service
suppliers, (iii) negotiating and arranging insurance contracts between suppliers and consumers,and (iv) other activities. There are two important provisions in the Vietnam Insurance Law
which aim to ensure a sound financial situation of insurance brokerage enterprises. First, thelegal capital requirement applicable to insurance brokerage enterprises is no less than VND
four billion (approximately US$ 300,000). 1086 Second, insurance brokerage enterprises are
required to hold professional indemnity insurance with regard to their activities.1087
Insurance agents may be either a business entity or an individual authorized underinsurance agency contracts by an insurer. 1088 Similar to brokers, insurance agents may bedelegated by insurers to collect premiums, settle claims or pay benefits to insured.1089 In orderto supply insurance agency services, agents may be required by an insurer to make deposit or
mortgage assets.1090 In addition, when an insurance agent violates agency contracts and thus
causes loss or danger to insured, the insurer is responsible for fulfilling its obligations under
the insurance contract with the insured, and consequently the insurance agent is obliged tocompensate the sum which the insurer has paid as indemnity to the insured.1091
In general, it may be observed that, compared to other jurisdictions, the Vietnam
Insurance Law has substantially dealt with the credit risk of insurance intermediaries withregard to professional indemnity insurance and capital requirement of brokers, and deposit
money by agents. However, there is no clearer guidance on a minimum level of coverage withrespect to the professional indemnity insurance. This issue becomes problematic wheninsurers delegate to insurance brokerage enterprises to collect premiums, settle claims or pay
benefits to insured.1092 In such circumstances, liability of the insurer against the insured is notdischarged even if its claims have been paid by the insurer to a broker, but not the insured.1093
Similarly, in the case of insurance agents, if the deposit or mortgaged assets of insurance
agents are insufficient to pay back the insurer, there is no other available remedy as provided
in the Vietnam Insurance Law. Especially, there is no specific requirement on financial
matters of corporate agents.
5.2 A call for more concrete regulations on intermediation
The solvency of insurers partly depends on the fulfillment of obligations by insuranceintermediation. The failure of insurance brokers and agents in effecting claim and benefit
payments as well as transfer of premiums may affect financial health of insurers, andconsequently public confidence.
An insurance brokerage company acts as an agent of consumers by advising andarranging insurance contracts with insurers, and dealing with claims settlement. In doing so,
1086

Decree 46/2007/ND-CP, Art. 4.
Vietnam Insurance Law, Art. 92.
1088
Id. Art. 84.
1089
Id. Art. 85.3 and 4.
1090
Decree 45/2007/ND-CP, Art. 30.2(b).
1091Vietnam Insurance Law, Art. 88.
1092
Decree 45/2007/ND-CP, Art. 29.1.
1093
Id. Art. 29.2(e).
1087


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the broker provides independent, objective and professional advice for customers. Its
professional indemnity is needed to meet possible claims for negligence. As noted earlier,although the existing regulations in the Vietnam Insurance Law have addressed this concern,they do not specify the level of professional indemnity insurance to be held by insurance
brokerage enterprises. Therefore, future regulations on insurance intermediation should
address in depth professional indemnity insurance, including clarifying levels, types ofcoverage, as well as other necessary arrangements. As far as this suggested requirement
applies equally to both domestic and foreign owned insurance brokerage companies, there isno violation of the national treatment obligation.
Insurance agents act as agents of an insurer by advising and arranging insurance
policies with insured, as well as dealing with claims settlement. In the existing regulation,legal responsibilities of insurer for its agents against consumers have been clearly stated, andthis would ensure consumer protection. However, any misconduct by an insurance agent
which leads to financial losses by an insurer that is not fully recoverable, might affect thesolvency of that insurer. Hence, a provision setting a specific amount of money deposited byinsurance agents is more persuasive. In addition, a clearer requirement on corporate agents
could also limit the credit risk of insurance agents. Accordingly, these regulations might
guarantee the fulfillment of insurance agents’ obligations against insurers, and contribute to
the stability of the whole insurance market.
As pointed out in section 3.3 of Chapter Six, if likeness is broadly determined byrelying on the heading of “insurance intermediation” in the Annex, Vietnam might be foundin violation of GATS Article XVII because foreign owned insurance brokerage enterprises aretreated less favourably than domestic corporate agents with regard to the measure on legal
capital requirements. Therefore, by setting a pre-determined amount of money to be depositedby insurance agents, including corporate agents, Vietnam might limit the possibility ofviolating the national treatment obligation. Thus, although likeness could be established underthe meaning of GATS Article XVII based on only the criterion of service classification, there
is no de facto discrimination between foreign owned insurance brokers and domestic
insurance corporate agents.
6. Regulation of insurance holding companies
6.1 Is the supervisory authority adequately empowered to supervise the solvency of
insurers?
As described earlier, the MOF is responsible for supervision of insurance business.
Insurers must get approval from the MOF on application of as well as on any alterations inmethods of calculating technical provisions.1094 Appointment and alteration of actuaries bylife insurers must also be approved by the MOF.1095
Insurers are required to periodically submit financial statements and technical reports
to the MOF.1096 Annual financial statements of an insurer must be certified by an independent
1094

Decree 46/2007/ND-CP, Art. 10.
Decree 45/2007/ND-CP, Art. 14.2.
1096
Vietnam Insurance Law, Art. 103.1.
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auditor, who is authorized to conduct business in Vietnam. 1097 Moreover, the MOF isempowered to require insurers to submit ad hoc reports when (i) there are material changes
during the course of their business; and (ii) financial conditions are not satisfied to meet their
obligations towards the insured.1098 Those reporting requirements would ensure that insurance
supervisors have sufficient information to conduct off-site supervision in order to evaluate
financial conditions of each insurer as well as the whole insurance market.1099
As commented by Randall, one reason for the weak supervision and insolvencies in
the US in the 1980s was a time lag in getting information, whereby insurance supervisors had
no means of detecting financial difficulties in a financial year until it received financial
reports in the next financial year. 1100 Furthermore, several states did not carry out on-site
supervision at all.1101 According to the IAIS, the main objective of on-site supervision is toensure compliance with supervisory requirements, including solvency regulations, 1102 andappraise insurers’ current and prospective solvency, as well as identify risks and detect any
problems that may affect the ability of insurers to meet their obligations towards
policyholders.1103 Referring back to the Vietnam Insurance Law, the MOF has the power toexamine and inspect compliance with the financial regulations by insurers.1104 The frequencyof those on-site inspections shall not exceed one time per year, and the duration of eachinspection shall not exceed 30 days.1105 Arguably, this provision is to restrain the supervisor
from abusing inspection power as well as intervening into daily business operations. The
MOF is only permitted to conduct ad hoc inspection in cases where there is evidence of
violation of laws and regulations by insurers.1106
In addition to on-site and off-site supervision, the MOF is also entitled to impose
administrative sanctions. Any incompliance with prudential regulations shall be considered as
constituting breaches of insurance law and regulations.1107
As described in section 2.3 of Chapter Five, there is a tendency for banks to expand
their activities into the insurance sector by establishing insurance subsidiaries. On the other
hand, insurance companies also seek involvement into banking and securities sectors. The firstattempt was the foundation of BaoViet Financial-Insurance Conglomerate, which has abanking subsidiary and holds shares in three other commercial banks and two insurers.1108
Accordingly, this trend would raise a concern over prudential regulation and supervision of
those financial conglomerates. 1109 Although the current regulations have adequately
1097

Id. Art. 102.
Id. Art. 103.2.
1099
IAIS (2003), ICP 12 on Reporting to Supervisors and Off-site Monitoring, p. 24.
1100
Randall, Susan. 1999. Insurance Regulation in the United States: Regulatory Federalism and the
National Association of Insurance Commissioners. Florida State University Law Review 26, p. 643.
1101
Id.
1102
IAIS (2003), ICP 13 on On-site Inspection, pp 25.
1103
IAIS. Supervisory Standard No. 2 on On-site Inspections, October 1998, p. 5.
Available at http://www.iaisweb.org – Last visited 22 May 2006.
1104
Vietnam Insurance Law, Art. 120.10.
1105
Id. Art. 122.1.
1106
Id. Art. 122.1.
1107
Id. Art. 124.
1108
Decision 310/2005/QD-TTg, Art. 1.2 (g) and (i).
1109
The IAIS defines financial conglomerate as “any group of companies under common control, whose
exclusive or dominant activities consist of providing significant services in at least two different financial sectors(banking, securities, insurance)”. See IAIS, Supervisory Standard No. 5 on Group Coordination, p. 6.
Available at http://www.iaisweb.org – Last visited 22 May 2006.
1098


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empowered the MOF to ensure compliance of insurers with solvency requirements, the MOF
lacks power in supervising insurance holding companies. Maybe like China, in Vietnam, as
financial conglomerates are only at initial stages, supervisory issues and problems might beoverlooked.1110
The rationale for financial services integration, according to Skipper is cost advantage
and revenue effects. 1111 Challenges of a financial conglomerate remain, however, inunderstanding its risk profiles as a whole, and to develop an appropriate risk management
system for the whole group. 1112 Leflaive observed that the fundamental concern is toformulate solvency requirements applicable to a group and conglomerate because of an“increased contagion risk”.1113 This contagion risk may occur when a financial conglomeratewould “make good the financial losses of other company” and thus reduce the capacity
available to cover its obligations towards customers.1114 In more specific terms, the necessity
to make an intervention into financial conglomerates has been underlined by Chang as:
The problems of risk concentration and risk contagion can certainly materially affect theoperation of the insurance holding company system in such a way that the holding company is1115
duty bound to disclose it and thus trigger an examination by the regulator.

Therefore, the scope of supervision on financial conglomerates must address, inter alia, theircapital adequacy, reinsurance and risk concentration, intra-group transactions and exposure,and risk management.1116
6.2 Lessons from other jurisdictions
The experiences of other countries may be useful references for Vietnam in its
revision of insurance regulations in this area. In the case of insurance groups in the EU,
additional supervision is extended to the insurance company, which is a parent company of or
holds participation in at least one insurance company, or the parent company of which is an
Under the EC law, financial conglomerate means “a group which meets five conditions, including at least onof the entities in the group is within the insurance sector and at least one is within the banking or investment
services sector.” See Directive 2002/87/EC of the European Parliament and of the Council of 16 December 2002
on the supplementary supervision of credit institutions, insurance undertakings and investment firms in afinancial conglomerate, Art. 2.14.
Under Japanese regulations, financial conglomerate means a corporate group falling under one or more than
one of the following definitions: (1) financial holding company group, (2) de-facto holding company group, (3)financial institution parent company group, or (4) foreign holding company, etc. group. See Japan Financial
Services Agency, Guideline for Financial Conglomerate Supervision, May 2006, Sec. I-1.
1110
Chang (2003), p. 2.
1111
Skipper, Harold D. Jr. 2001c. Financial Services Integration Worldwide: Promises and Pitfalls. In
OECD. Policy Issues in Insurance: Insurance Regulation and Supervision in the OECD Countries. Paris: OECD,
pp 105-108.
Cost advantage of financial conglomerate could materialize through economies of scale (increase of
production leading to decrease of average cost), economies of scope (multiple products produced at less costthan the sum of costs producing each separately), and operational efficiencies. Revenue effect might materialize
through economies of scope in consumption and market power.
1112
Id. p. 115.
1113
Leflaive (2002), p. 36.
1114
Id.
1115
Chang (2003), p. 17.
1116
IAIS (2003), ICP 17 on Group-wide Supervision, p. 31.

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insurance holding company or non-insurance holding company.1117 Accordingly, the adjusted
solvency margin of insurance groups shall be calculated based on one of three methods: (i)deduction and aggregation method, (ii) requirement deduction method, and (iii) accounting
consolidation-based method.1118
In regard to insurance holding companies in Japan, there is a distinction between
company and the supervisory levels. An insurance holding company is required by law tosecure sound and proper operations of insurance companies that are its subsidiaries. 1119
Moreover, an insurance holding company must prepare and submit to the supervisory
authority a business report, including activities and assets of the company as a whole and its
subsidiaries. 1120 At the supervisory level, additional supervision is focused on capital
adequacy;1121 and risk management system, including risk contagion, credit risk, market risk
and liquidity risk.1122 The supervisory authority is empowered to require an insurance holding
company to submit or alter reform plans in order to secure its sound and proper operations
and to protect policyholders.1123
In the US, rules are provided for the solvency supervision of insurance holding
companies relating to acquisition of control or merger, standards and management,
examination, and receivership. 1124 More specifically, under New York Insurance Law,
insurance holding companies are required to disclose information, which materially affects
their financial conditions.1125 In addition, the supervisory authority has the power to examine
holding insurance companies if supervisors believe that their operations materially affect thefinancial conditions of such companies.1126

1117

Directive 98/78/EC of the European Parliament and of the Council of 27 October 1998 on the
supplementary supervision of insurance undertakings in an insurance group, Art. 2.
1118
Id. Annex I, Sec. 3.
In the deduction and aggregation method, the adjusted solvency situation of the insurance conglomerate isequal to  [(a) the elements eligible for the solvency margin of the insurance conglomerate, and (b) the
proportional share of the insurance conglomerate in the elements eligible for the solvency margin of the related
insurance company] -  [(a) the book value in the insurance conglomerate of the related insurance company, (b)the solvency requirement of the insurance conglomerate, and (c) the proportional share of the solvency
requirement of the related insurance company]. According to the requirement deduction method, the adjusted
solvency of the insurance conglomerate is equivalent to  [the elements eligible for the solvency margin of theinsurance conglomerate] -  [(a) the solvency requirement of the insurance conglomerate, and (b) the
proportional share of the solvency requirement of the related insurance company].
In case of the accounting consolidation-based method, the adjusted solvency of the insurance conglomerate
equals to  [the elements eligible for the solvency margin calculated on the basis of consolidated data] – [(a) thesum of the solvency requirement of the insurance conglomerate and of the proportional shares of the solvency
requirements of the related insurance companies, based on the percentages used for the establishment of theconsolidated accounts] or [(b) the solvency requirement calculated on the basis of consolidated data].
1119
Japan Insurance Law (2001), Art. 271-5.2.
1120
Id. Art. 271-8.1.
1121
See Japan Financial Services Agency, Guideline for Financial Conglomerate Supervision, May 2006,
Sec. II-2.1.
Capital adequacy of financial conglomerate may be calculated based on either combined equity capital or
requisite equity capital, with adjustment for treatment of companies who are not subject to prudential regulations.
1122
Id. Sec. II-2.2.
1123
Japan Insurance Law (2001), Art. 271-13.1.
1124
NAIC, Insurance Holding Company System Regulatory Act (2006), 440-1.
1125
New York Insurance Law, Art. 1504(a).
1126
Id. Art. 1504(b).

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6.3 A need for clearer power of the supervisory authority with regard to insurance holding
companies
The tendency of banks to intrude on the insurance sector, and the expansion of an
insurance company to other financial sectors in Vietnam would raise concern over financial
supervision, especially intra-group risk contagion and risk concentration. The solvency of an
insurance subsidiary in the insurance holding company may be affected by the financial
conditions of the whole group, or vice verse, the insurance holding company may be infinancial difficulty due to problems of another insurance subsidiary. Moreover, financial
problems of an unregulated subsidiary (non-financial company) may also cause losses to an
insurance holding company.
Accordingly, in a revised Vietnam Insurance Law, there should be a provision
requiring insurance holding companies to cope with the above potential risks, including thoserisks arising from an unregulated subsidiary. Consideration should, therefore, be given torequiring an insurance holding company to disclose financial information relating to thewhole group. Moreover, the calculation of adjusted solvency for insurance holding companies
seems to be necessary to give a fuller picture on financial health of the whole group. The
supervisory authority should be empowered to take necessary measures, includingintervention when necessary, to ensure financial soundness of the insurance holding company.
7. Limits to the legal reform
7.1 Factors influencing the enhancement of prudential regulations
Several deficiencies in the existing solvency regulations under the Vietnam Insurance
Law might have negative impacts on consumer protection as well as soundness of the entire
financial system. Therefore, prudential regulations must be enhanced. In introduction of newprudential regulations, Vietnam should refrain from any discriminatory measures, either dejure or de facto, against foreign insurance services and service suppliers. The tendency
towards a level playing field for all insurance companies, irrespective of origin, could be apositive factor for Vietnam in adopting and implementing new prudential regulations in theinsurance sector.
However, if there is any discrimination against foreign insurance services and service
suppliers as a result of introducing prudential measures, Vietnam would still be safe if themeasures satisfy the three-layer test under the prudential exception. In such circumstances,another factor, which also influences the enhancement of prudential regulations, is therelationship between measures at issue and prudential reasons. New regulations and measuresin the insurance sector must have a close and substantial connection with the solvency of
insurance companies in order to satisfy the “primarily aimed at” test. In addition, as discussed
in section 3.3 of Chapter Three, the interpretation of the anti-avoidance provision suggeststhat Vietnam could exercise the right to regulate its insurance market in conformity with theAnnex as long as the application of measures affecting trade in insurance services does notconstitute a disguised restriction. In other words, the application of new prudential measures
introduced by Vietnam must not be, inter alia, rigid, inconsistent, or opaque. Otherwise, any

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measure found to be discriminatory against foreign insurance services and service suppliers
under the meaning of the national treatment principle, could not be justified by the prudential
exception because it would be deemed a means of avoiding Vietnam’s commitments andobligations under GATS.
Figure 8: Roadmap for enhancing prudential regulations in Vietnam

9 Regulating and supervising the solvency of insurance holding companies:
information disclosure, adjusted solvency margin, remedial measures for the wholegroup
9 Establishing a policyholder protection fund: a pre-funded model in both life andnon-life insurance
9 Identifying permissible assets for the solvency margin
9 Including a claims criterion for calculating the minimum solvency margin of nonlife insurers
9 Incorporating the reinsurance risk into determination of the solvency margin of
insurers
9 Concretizing quantitative limitations on maximum investment on each categoryof assets: corporate shares and unsecured bonds of each issuer and all issuers,
unsecured loans of each borrower and all borrowers, a piece of land and building,and some flexibility for prudent management
9 Limited permission for investment abroad by insurers

9 Strengthening the actuarial role to support compliance with regulations ontechnical provisions: Compulsory appointment of non-life actuary Reporting requirements of actuary
9 Concretizing requirements on professional indemnity insurance to be kept byinsurance brokerage companies in order to limit the credit risk of insuranceintermediation exposed to insurance companies
9 Concretizing requirement on a pre-determined specific amount to be depositedby insurance agents
9 Detailing quantitative solvency control levels to enable an early intervention by
the supervisory authority in financially troubled insurers: company level, the MOF
level, and the solvency control committee level
9 Concretizing remedial measures corresponding to each solvency control level:
financial forecast in medium term, prohibition of free disposal of assets, compositionof the solvency control committee

In a
later
periodAt
present

Another factor which might influence the enhancement of prudential regulations issequence of legal reform. Revision and introduction of new prudential regulations may beburdensome for law makers as well as the supervisory authority. Policy suggestions need not
all be implemented at once. Accordingly, the enhancement of prudential regulations should

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proceed in accordance with phased-in liberalization of the insurance sector and its
development. Figure 8 summarizes the roadmap for further enhancement of prudential
regulations in the Vietnam Insurance Law.
At present, because weaknesses of Vietnam’s insurance market include a lack ofmanagement skills of insurance companies and inexperienced individual consumers, more
supportive measures for compliance with the current solvency regime are a priority. The roleof actuary must be strengthened, including requirements on appointed actuaries for non-life
insurance companies, and reporting requirements. In addition, detailed quantitative control
levels correspondent with remedial measures are necessary. The reason is that those measures
could enable prompt intervention by the insurance supervisory authority in case of financiallytroubled insurers, and thus improve public confidence in the insurance market. Detailed
regulations on insurance intermediation must also be improved at this stage in order toenhance the solvency of insurers. Success in implementing those measures could facilitate
conditions for introducing more complicated prudential regulations.
In a later period, with further growth of the insurance market by diversifying market
players, more stringent prudential measures will be required. Accordingly, there would be afundamental improvement of solvency regime, including a clear identification of permissible
assets and an incorporation of reinsurance risk for the purpose of determining a solvency
margin, as well as inclusion of a claims criterion for calculating the minimum solvency
margin of non-life insurers. In addition, diversification of investment portfolios and limited
permission to invest abroad must be in place. These measures would allow the supervisory
authority to cope with an increasingly competitive insurance market, including merger andacquisition as a result of competition. During this stage, more detailed regulations onsupervision of insurance holding companies and establishment of a policyholder protection
fund would provide an additional remedial mechanism to mitigate adverse impacts that mightarise from liberalization.
7.2 Unsolved issues and future study
The previous analysis and discussion reveals several problems in the Vietnam
Insurance Law with regard to the solvency regime of insurance companies. A number ofpolicy suggestions on enhancing prudential regulations have been offered in the light of
GATS national treatment principle. These suggestions could contribute to a more efficient andeffective supervision of insurers in the context of fierce competition after Vietnam’s accession
to the WTO. Sound solvency of insurance companies in Vietnam would ultimately bringabout better consumer protection as well as the stability and integrity of the financial system
as a whole. Nevertheless, there are at least two unsolved matters for further research.
First, experience of other selected countries with regard to prudential regulations could
offer a direction on future enhancement of Vietnam’s solvency regime. The study reveals that
despite emergence of financial conglomerates in Vietnam, there is a lack of regulations andproper supervision over the operations of insurance holding companies. Although the study
emphasizes the need for enhancing prudential regulations in this area based on the experienceof the US, EU and Japan, the next question is to what extent the solvency regime of thosefinancial conglomerates should be regulated. Which adjusted level of the minimum solvency


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margin and what corrective measures should be applied by the supervisory authority? These
are critically important matters which need to be concretely researched in the future.
Second, the study also reveals that the lack of a policyholder protection fund would
adversely affect the public interest as well as the stability and integrity of Vietnam’s insurance
market. While the study proposes that a pre-funded model of the policyholder protection fundshould be adopted, the questions of how this fund should be established, operated andmanaged are clearly another important matter for future detailed research. Especially, level ofcontribution should not create a financial burden for insurance companies in the context ofVietnam’s emerging insurance market. In addition, it is necessary to research appropriate
levels of compensation coverage as well as possible measures offered by the policyholder
protection fund in case of insurers facing financial difficulties.


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CHAPTER EIGHT
Conclusions

The main purpose of this study is to examine the interpretation and application of
GATS national treatment principle in insurance services, and the case of Vietnam’s
liberalization of its insurance services market under the WTO framework. While Part One
provided general aspects of interpretation of this principle in the insurance sector, Part Two
examined the specific application of this principle to Vietnam’s insurance services sector.
Different findings were pointed out throughout each chapter. This concluding chapter
presents an overall review of the previous chapters on this topic.
1.
Contrary to GATT, where the national treatment obligation is automatically applied toforeign goods upon the custom clearance, the national treatment principle in GATS is theobject of negotiations. The result of such negotiations is inscribed into WTO Members’schedules of specific commitments. Thus, a WTO Member is obliged to respect the national
treatment obligation for service sectors and/or sub-sectors as well as level of commitmentsthat a Member undertakes in its schedule.
2.
The national treatment principle in GATS requires WTO Members to eliminate andrefrain from adopting any discriminatory measures, either de jure or de facto, against foreign
services and service suppliers in comparison with domestic “like” counterparts. However, thescope of the GATS national treatment principle addresses all discriminatory measures which
do not fall within the scope of Article XVI on Market Access between foreign services andservice suppliers, on the one hand and domestic counterparts, on the other hand.
3.
Similar to the national treatment obligation in GATT, the national treatment principle
in GATS consists of three core interpretative elements, namely measures affecting trade inservices, likeness, and the standard of “no less favourable” treatment. WTO jurisprudenceshows that the first element is broadly interpreted to cover all measures that directly or
indirectly affect trade in services. The possibility of transplanting GATT jurisprudence oninterpretation of likeness to GATS would bring about a broad scope of likeness under thesecond element due to the intangible and non-storable nature of services. In the event ameasure in question is found to modify conditions of competition in favour of domestic like
services and service suppliers, there is a breach of the third element of “no less favourable”
treatment.
Several possible ways have been discussed to limit the broad scope of likeness and thestandard of “no less favourable” treatment, and then reduce the high possibility of violation of
the national treatment principle. They include considering other criteria in comparing likeness,such as consumers’ tastes and habits, products’ end-uses; a reference to likeness of service
suppliers and modes of supply; and inscription of limitations and restrictions in schedules of
specific commitments. Nevertheless, the problem of high possibility of violating the GATS
national treatment principle has not yet been satisfactorily resolved due to uncertainty incriteria for determination of likeness and broad coverage of discrimination on the one hand,
and the objective assessment of this principle on the other hand.


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4.
A two-stage approach has been proved to be an appropriate solution to balance against
the broad scope of the national treatment principle. By relying on GATS Article XIV on
General Exceptions, WTO Members could have a proper space to pursue legitimate domestic
policy aims. In other words, although in an objective assessment a measure could be founddiscriminatory against foreign services and service suppliers, it does not constitute a violationof the national treatment principle as far as that measure is not discrimination withprotectionist aims under the meaning of Article XIV.
5.
In addition to the general framework of GATS, liberalization of the financial services
sector, including insurance services, is governed by the Annex on Financial Services. This
Annex represents a balance between concerns over the incorporation of financial services,
including insurance services, into GATS and a need to pursue prudential objectives. The
Annex, therefore, is submitted to constitute a second stage in the two-stage approach for theapplication of the national treatment principle in the insurance sector. This means that
although in an objective assessment a measure may be found to be discriminatory against
foreign insurance services and service suppliers, it would not constitute a violation of thenational treatment principle as far as that measure is not discrimination with protectionist aims
in the context of prudential exception as provided in Annex paragraph 2(a).
6.
Pursuant to the Annex, in the financial market, including insurance services sector, a
WTO Member may adopt a measure inconsistent with its commitments on the national
treatment principle for prudential reasons. However, in order for a WTO Member to exercise
the prudential exception, that Member is required to provide evidence that a measure which isinconsistent with rules and obligations under GATS, including the national treatment
principle, satisfies a three-layer examination. First, that measure must be concerned withpreservation of the solvency of insurance service suppliers to fulfill their obligations towards
policyholders and other relevant persons, and towards the stability and integrity of thefinancial system as a whole. Second, a degree of connection between that measure andprudential objectives must be demonstrated through the “primarily aimed at” test. The thirdlayer is to ensure that the application of that measure must not constitute disguised restrictions
on trade in insurance services. This understanding of GATS prudential exception would
maintain the balance between the rights of a WTO Member to regulate its insurance services
sector, and the rights of other Members to rely on the performance of that Member’s
obligations and commitments with regard to liberalization of trade in insurance services.
7.
A clear tendency towards a level playing field for all insurance companies,
irrespective of ownership and origin, has been introduced in a sequence over time in
Vietnam’s insurance market. This tendency is a positive factor in Vietnam’s implementationof its commitments under the Protocol of Accession to the WTO. In the insurance services
sector, Vietnam inscribed the full national treatment in Modes 1, 2, and 3, and commitmentswith limitations in Mode 4. This means that, with respect to all measures affecting trade ininsurance services under the meaning of GATS Article XVII, Vietnam is obliged to accord
insurance services and service suppliers of any other WTO Member treatment no lessfavourable than it accords to its own like insurance services and service suppliers.
8.
An overall evaluation of Vietnam’s commitments in insurance services under the
WTO accession shows that there are some opportunities, both medium term and long term,
for further development of Vietnam’s insurance market. However, threats of fierce
competition and underdeveloped regulation should not be ignored, especially given


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weaknesses in both insurance companies per se and the whole financial system. To mitigate
negative impacts of such threats and maximize benefits of liberalization of the insurance
services sector under GATS, more complex regulations should be enhanced in order topromote the solvency of insurance companies for consumer protection as well as for thestability and integrity of the whole financial system.
9.
The review of insurance sub-sectors for liberalization in the WTO shows that
regulations in the Vietnam Insurance Law are consistent with Vietnam’s commitments, except
for services auxiliary to insurance. Accordingly, a legal provision on the supply of actuary
and consultancy services is required.
In addition to the Vietnam Insurance Law, assurance of other laws and regulations
which may affect trade in insurance services, consistent with the national treatment principle,
could be an important factor for Vietnam’s implementation of commitments under the WTO
framework.
Likeness under the meaning of GATS Article XVII could not be established amongfour insurance sub-sectors inscribed in Vietnam’s schedule of specific commitments, namely
direct insurance, reinsurance and retrocession, insurance intermediation, and services
auxiliary to insurance. For the purpose of the national treatment obligation, life and non-life
insurance services are also unlike. However, likeness between insurance brokerage and agency
services could be established if only the criterion of services classification is taken into account.
In addition, there is a high possibility that all services, including consultancy, actuarial, risk
assessment, and claim settlement, under the sub-sector “Services auxiliary to insurance” could
be alike because they are under the same sub-sector.
As far as likeness under the meaning of GATS Article XVII is determined, Vietnam isrequired to ensure the standard of “no less favourable” treatment. This standard encompasses
not only de jure but also de facto discrimination. While Vietnam has amended its
administrative regulations in order to remove certain discriminatory measures against foreign
insurance services and service suppliers, Article 4.2 of the Vietnam Insurance Law
safeguarding the dominant role of state-owned insurers in the domestic insurance market
should be eliminated in a future revision of this law.
10.
The solvency regime of insurance companies is regulated by the Vietnam Insurance
Law with regard to technical provisions, solvency margin, and investment. This system ismainly based on the EU approach. However, compared to the EU as well as the US and Japan
experience, there are several regulatory weaknesses in the current solvency system.
Different policy suggestions on enhancement of prudential regulations have been
made in the light of GATS national treatment principle. They include: (i) enhancement of theactuarial role to support compliance with regulations on technical provisions; (ii) clear
identification of permissible assets for calculating the solvency margin; (iii) incorporation of
the reinsurance risk into the determination of solvency margin of insurers; (iv) inclusion of aclaims criterion for calculating the minimum solvency margin of non-life insurers; (v) moredetailed quantitative solvency control levels to enable an early intervention by the supervisory
authority in financially difficult insurers; (vi) concrete remedial measures corresponding toeach solvency control level; (vii) establishment of a policyholder protection fund; (viii)
introduction of more concrete quantitative limitations on maximum investment on eachcategory of assets; (ix) limited relaxation on investment abroad from the technical provisionsof insurers; (x) a more detailed requirement on the professional indemnity insurance to be
kept by insurance brokerage companies; (xi) a pre-determined specific amount to be deposited

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NATIONAL TREATMENT PRINCIPLE IN GATS:
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by insurance agents; and (xii) concrete requirements on calculation of the adjusted solvency
margin of an insurance holding company as well as group-wide information disclosure. These
legal enhancements could protect the interests of consumers, and improve public confidence.
Consequently, they would ensure the stability and integrity of the domestic insurance sector
after Vietnam’s accession to the WTO.
Nevertheless, in introducing new prudential regulations, some measures might befound in violation of GATS Article XVII due to uncertainty in interpretation of the national
treatment obligation. In such a circumstance, it would be safe if Vietnam could satisfy Annex
paragraph 2(a) that those new regulations and measures in the insurance sector are “primarily
aimed at” the solvency of insurance companies. In addition, Vietnam must ensure that the
introduction and application of these suggested solvency regulations is in a manner of, interalia, flexibility, consistency, necessity and transparency, in order to avoid the possibility ofviolating the anti-avoidance provision under the prudential exception.


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BIBLIOGRAPHY

INTERNATIONAL AGREEMENTS

The Agreement Establishing the World Trade Organization, 15 April 1994
The General Agreement on Tariffs and Trade 1947 (GATT).
The General Agreement on Trade in Services (1994).
The Decision on Certain Dispute Settlement Procedures for the General Agreement on
Trade in Services (1994).
The Understanding on Rules and Procedures Governing the Settlement of Disputes, theWorld Trade Organization (1994).
The North American Free Trade Agreement (1994).
The Vienna Convention of the Law of the Treaties, done at Vienna, 23 May 1969.
ASEAN Framework Agreement on Services (1995).
Bilateral Trade Agreement between the United States and Vietnam (2000).
European Union-Vietnam Agreement on Mutually Beneficial Trade Liberalization (2003).

STATUTES

Vietnam
Law on Foreign Direct Investment (Dec. 29, 1987), amended in 1990 and 1992.
Law on Foreign Direct Investment Law (Nov. 12, 1996), amended in 2000.
Company Law (Dec. 21, 1990).
Law on Private Enterprise Law (Dec. 21, 1990).
Marine Code (Jun. 30, 1990), (Jun. 14, 2005).
Civil Code (Oct. 28, 1995), (Jun. 14, 2005).
Law on Aviation (Dec. 26, 1991).
Law on Insurance Business (Dec. 9, 2000).

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NATIONAL TREATMENT PRINCIPLE IN GATS:
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Resolution of the National Assembly No. 51/2001/QH10, on amendment of and addition
to the 1992 Constitution of the Socialist Republic of Vietnam (Dec. 25, 2001).
Accounting Law (Jun. 26, 2003).
Law on Amendments of and Additions to some articles of the Law on Credit Institutions(Jun. 15, 2004).
Law on Signing, Acceding to, and Implementing International Treaty (Jun. 14, 2005).
Law on Enterprises (Nov. 29, 2005).
Investment Law (Nov. 29, 2005).
Resolution of the National Assembly No. 71/2006/NQ-QH11 on ratifying the Protocol ofAccession to the WTO Agreement (Nov. 29, 2006).
Ordinance on the State Bank (May 23, 1990).
Ordinance on Commercial Banks, Credit Cooperatives and Financial Companies (May 23,
1990).
Decision 179/CP of the Government Council on establishing the Vietnam Insurance
Corporation (Dec. 17, 1964).
Decree 100/CP of the Government on business insurance (Dec. 18, 1993).
Decree 48/1998 of the Government on securities and securities exchange (Jul. 11, 1998).
Decree 89/1999/ND-CP of the Government on Deposit Insurance (Sep. 1, 1999).
Decree 24/2000/ND-CP of the Government giving guidance on the implementation of the
Law on Foreign Direct Investment (1996) and Law on amendments (2000) (Jul. 31, 2000).
Decree 43/2001/ND-CP of the Government providing regulations on financial issues of
insurance enterprises and insurance brokerage enterprises (Aug. 1, 2001).
Decree 42/2001/ND-CP of the Government providing guidance on the implementation of
a number of articles of the Law on Insurance Business (Aug. 1, 2001).
Decree 77/2003/ND-CP of the Government on functions, rights, responsibilities, andstructure of the Ministry of Finance (Jul. 1, 2003).
Decree 46/2007/ND-CP of the Government regulating financial issues of insurance
enterprises and insurance brokerage enterprises (Mar. 27, 2007).
Decree 45/2007/ND-CP of the Government on providing guidance on implementation of anumber of articles of the Law on Insurance Business (Mar. 27, 2007).
Decision 51/1999/QD-BTCCBCP of the Ministry of Personnel and Organization on
establishment of the Association of Vietnamese Insurers (Jul. 9, 1999).

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Decision 163/2003/QD-TTg of the Prime Minister on approving the Strategy on
Development of Vietnam Securities Market by the year 2010 (Aug. 5, 2003).
Decision 175/2003/QD-TTg of the Prime Minister on approving the Strategy on
Development of Vietnam Insurance Market 2003 – 2010 (Aug. 29, 2003).
Decision 310/2005/QD-TTg of the Prime Minister on the equitization plan and pilot
establishment of Baoviet Financial-Insurance Conglomerate (Nov. 28, 2005).
Decision 254-TC/QD-BH of the Finance Minister permitting Vietnam Insurance
Corporation to supply marine insurance services (May 25, 1990).
Circular 45-TC/CDKT of the Ministry of Finance on Financial Regime of Insurance
Companies (May 30, 1994).
Circular 78/1998/TT-BTC of the Ministry of Finance on reinsurance business (Jun. 9,
1998).
Decision 134/2003/QD-BTC of the Finance Minister on functions, rights, responsibilities,
and structure of the Insurance Department (Aug. 20, 2003).
Circular 98/2004/TT-BTC of the Ministry of Finance on guiding the implementation of
Decree 42/2001/ND-CP (Oct. 19, 2004).
Circular 99/2004/TT-BTC of the Ministry of Finance on guiding the implementation of
Decree 43/2001/ND-CP (Oct. 19, 2004).
Circular 155/2007/TT-BTC of the Ministry of Finance on guiding the implementation of
Decree 45/2007/ND-CP (Dec. 20, 2007).
Circular 156/2007/TT-BTC of the Ministry of Finance on guiding the implementation of
Decree 46/2007/ND-CP (Dec. 20, 2007).

European Union
Directive 91/674/EEC of the Council of 19 December 1991 on the annual accounts andconsolidated accounts of insurance undertaking.
Directive 92/49/EEC of the Council of 8 June 1992 on the coordination of laws,
regulations and administrative provisions relating to direct insurance other than life
insurance and amending Directive 73/239/EEC and 88/357/EEC (third non-life insurance
Directive).
Directive 98/78/EC of the European Parliament and of the Council of 27 October 1998 on
the supplementary supervision of insurance undertakings in an insurance group.
Directive 2002/13/EC of the European Parliament and the Council of 5 March 2002
amending Council Directive 73/239/EEC as regards the solvency margin requirements for


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NATIONAL TREATMENT PRINCIPLE IN GATS:
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non-life insurance undertaking;Directive 2002/83/EC of the European Parliament and of the Council of 5 November 2002
concerning life assurance.
Directive 2002/92/EC of the European Parliament and of the Council of 9 December 2002
on Insurance Mediation.
Directive 2002/87/EC of the European Parliament and of the Council of 16 December
2002 on the supplementary supervision of credit institutions, insurance undertakings andinvestment firms in a financial conglomerate.
Directive 2005/68/EC of the European Parliament and of the Council of 16 November
2005 on reinsurance.

China
China Insurance Law (1995), (2002).
Regulations of the People's Republic of China on Administration of Foreign-funded
Insurance Companies (December 5, 2001).
Detailed Rules of the China Insurance Regulatory Commission for implementation ofthese Regulations on Administration of Foreign-funded Insurance Companies (June 15,2004).
Regulations on Administration of Insurance Companies of the China Insurance
Regulatory Commission (June 15, 2004).
Provisional Measures on the Administration of the Oversea Utilization of Insurance
Foreign Exchange Funds (August 9, 2004).
Japan
The Insurance Business Law of Japan (as amended up to June 2001). 2002. Tokyo: The
Non-life Insurance Institute of Japan.
Japan Insurance Business Law Enforcement Regulations.

United States
New York Insurance Law.
NAIC, Risk-based capital (RBC) for insurers Model Act, II-312-1 (1997).
NAIC, Actuarial Opinion and Memorandum Regulation, V-822-1 (2006).

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NAIC, Property and Casualty Actuarial Opinion, IV-745-1 (2006).
NAIC, Post-assessment Property and Liability Insurance Guaranty Association Model Act(1996).
NAIC, Life and Health Insurance Guaranty Association Model Act (2001).
NAIC, Investment of Insurers Model Act, II-238-1 (2004).
NAIC, Managing General Agents Act, 225-1 (2006).
NAIC, Insurance Holding Company System Regulatory Act (2006).

GATT/WTO CASES

Italian Discrimination against Imported Agricultural Machinery: Report of the Panel(L/33 – 7S/60), adopted on 23 October 1958.
EEC – Measures on Animal Feed Proteins: Report of the Panel (L/4599 - 25S/49),
adopted on 14 March 1978
Canada – Administration of the Foreign Investment Review Act: Report of the Panel(L/5504 – 30S/140), adopted on 7 February 1984.
Japan – Customs Duties, Taxes and Labelling Practices on Imported Wines and Alcoholic
Beverages: Report of the Panel (L/6216 - 34S/83), adopted on 10 November 1987.
Canada – Measures Affecting Exports of Unprocessed Herring and Salmon: Report of the
Panel (L/6268 – 35S/98) adopted on 22 March 1988.
United States – Section 337 of the Tariff Act of 1930: Report of the Panel (L/6439 36S/345), adopted on 7 November 1989.
EEC – Regulation on Imports o Parts and Components: Report of the Panel (L/6657 37S/132), adopted on 16 May 1990.
Thailand – Restrictions on Importation of and Internal Taxes on Cigarettes: Report of the
Panel (DS10/R – 37S/200), adopted on 7 November 1990.
United States – Restriction on Imports of Tuna: Report of the Panel (DS 21/R – 39S/155)
3 September 1991, unadopted.
United States – Measures Affecting Alcoholic and Malt Beverages: Report of the Panel(DS23/R - 39S/206) adopted on 19 June 1992.
United States – Taxes on Automobiles: Report of the Panel (DS31/R), 11 October 1994,
unadopted.


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United States - Standards for Reformulated and Conventional Gasoline: Report of theAppellate Body WT/DS2/AB/R, adopted on 20 May 1996.
Japan – Taxes on Alcoholic Beverages: Report of the Appellate Boy WT/DS8/AB/R,
WT/DS10/AB/R, WT/DS11/AB/R, adopted on 1 November 1996; Report of the Panel
WT/DS8/R, WT/DS10/R, WT/DS11/R, adopted on 1 November 1996.
United States – Measure Affecting Imports of Woven Wool Shirts and Blouses from India:
Report of the Appellate Body WT/DS33/AB/R, adopted on 23 May 1997.
Canada – Certain Measures Concerning Periodicals: Report of the Appellate Body
WT/DS31/AB/R, adopted on 30 July 1997.
European Community – Regime for the Importation, Sale and Distribution of Bananas:
Report of the Appellate Body WT/DS27/AB/R, adopted on 25 September 1997; Report of
the Panel WT/DS27/R/USA, adopted on 25 September 1997.
European Communities – Customs Classification of Certain Computer Equipment: Reportof the Appellate Body, WT/DS62/AB/R, WT/DS67/AB/R, WT/DS68/AB/R, adopted 22
June 1998.
European Communities – Measures Affecting the Importation of Certain Poultry
Products: Report of the Appellate Body, WT/DS69/AB/R, adopted on 23 July 1998.
United States – Import Prohibition of Certain Shrimp and Shrimp Products: Report of theAppellate Body WT/DS58/AB/R, adopted on 6 November 1998.
Korea – Taxes on Alcoholic Beverages: Report of the Appellate Body WT/DS75/AB/R,
WT/DS84/AB/R, adopted on 17 February 1999; Report of the Panel WT/DS75/R,
WT/DS84/R, adopted on 17 February 1999.
European Communities – Regime for the Importation, Sale and Distribution of Bananas:
Recourse to Article 21.5 by Ecuador: Report of the Panel WT/DS27/RW/ECU, adopted
on 6 May 1999.
Canada – Certain Measures Affecting the Automotive Industry: Report of the Appellate
Body WT/DS139/AB/R, WT/DS 142/AB/R, adopted on 19 June 2000; Report of the
Panel WT/DS139/R, WT/DS 142/R, adopted 19 June 2000.
Korea – Measures Affecting Imports of Fresh, Chilled and Frozen Beef: Report of theAppellate Body WT/DS161/AB/R, WT/DS169/AB/R, adopted on 10 January 2001;
Report of the Panel WT/DS161/AB/R, WT/DS169/AB/R, adopted on 10 January 2001.
Argentina – Measures Affecting the Export of Bovine Hides and the Import of Finished
Leather: Report of the Panel WT/DS155/R, adopted on 16 February 2001.
European Communities – Measures Affecting Asbestos and Asbestos-containing Products:
Report of the Appellate Body WT/DS135/AB/R, adopted on 5 April 2001.
United States – Import Prohibition of Certain Shrimp and Shrimp Products: Recourse to


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Article 21.5 of the DSU by Malaysia: Report of the Appellate Body WT/DS58/AB/RW,
adopted on 21 November 2001.
European Communities – Conditions for the Granting of Tariff Preferences to Developing
Countries: Report of the Panel WT/DS246/R, adopted on 20 April 2004.
United States – Measures Affecting the Cross-Border Supply of Gambling and Betting
Services: Report of the Appellate Body, WT/DS285/AB/R, adopted on 20 April 2005;
Report of the Panel WT/DS285/R, adopted on 20 April 2005.
Dominican Republic – Measures Affecting the Importation and Internal Sale ofCigarettes: Report of the Appellate Body, WT/DS302/AB/R, adopted on 19 May 2005;
Report of the Panel, WT/DS302/R, adopted on 19 May 2005.

BOOKS

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Ariff, Mohamed and Ahmed M. Khalid. 2000. Liberalization, Growth and the Asian
Financial Crisis: Lessons for Developing and Transitional Economies in Asia. UK:
Edward Elgar.
Arkadie, Brian Van and Raymond Mallon. 2003. Vietnam: A Transition Tiger? Canberra:
Asia Pacific Press.
Beresford, Melanie. 1989. National Unification and Economic Development in Vietnam.
Basingstoke: Macmillan Press.
Birds, John and Norma J. Hird. 2001. Birds’ Modern Insurance Law. London: Sweet &Maxwell (Fifth edition).
Brannon, Gerard M. 1991. Public Policy and Life Insurance. In Richard W. Kopcke andRichard E. Randall, eds., The Financial Condition and Regulation of Insurance
Companies. Boston: Federal Reserve Bank.
Brown, Frederick Z. 1997. U.S.-Vietnam Normalization – Past, Present, Future. In James
W. Morley and Masashi Nishihara, eds., Vietnam Joins the World. Armonk, N.Y.: M.E.
Sharpe, pp. 200-224.
Carter, Robert. 1990. Obstacles to International Trade in Insurance. In Edward P.M.
Gardener, ed., The Future of Financial Systems and Services. Essays in Honour of Jack
Revell, Macmillan, London, pp 205-221. Reprinted in Mervyn K. Lewis ed. 1999. The
Globalization of Financial Services. UK: Edward Elgar Publishing Limited, pp. 85-101.
Carter, Robert L. and Gerard M. Dickinson. 1992. Obstacles to the Liberalization of Tradein Insurance. Great Britain: Harvester Wheatsheaf (Thames Essay No. 58).


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NATIONAL TREATMENT PRINCIPLE IN GATS:
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Chen, Chien-Hsun and Hui-Tzu Shih. 2004. Banking and Insurance in the New China:
Competition and the Challenge of Accession to the WTO. Edward Elgar: Massachusetts.
Cottier, Thomas and Krista N. Schefer. 2000. Good Faith and the Protection of Legitimate
Expectations in the WTO. In Marco Bronckers and Reinhard Quick, eds., New Directionsin International Economic Law: Essays in Honour of John H. Jackson. The
Hague/London/Boston: Kluwer Law International, pp. 47-68.
Daykin, Chris. 1999. The Role of the Actuary in the Supervision of Insurance. In OECD.
Insurance Regulation and Supervision in Asia. Paris: OECD.
Dickinson Gerry. 1999. The Changing Focus in the Supervision of Insurance Company
Investment. In OECD. Insurance Regulation and Supervision in Asia. Paris: OECD.
______________ 2002. The Development of China’s Insurance Industry. In OECD.
China in the World Economy: The Domestic Policy Challenges. Paris: OECD.
Dobson, Wendy and Pierre Jacquet. 1998. Financial Services Liberalization in the WTO.
Washington. D.C.: Institute for International Economics.
Ebashi, Masahiko. 1997. The Economic Take-off. In James W. Morley and Masashi
Nishihara, eds., Vietnam Joins the World. Armonk, N.Y.: M.E. Sharpe, pp. 37-65.
Feketekuty, Geza. 2000. Assessing and Improving the Architecture of GATS. In Pierre
Sauve and Robert M. Stern eds., GATS 2000: New Directions in Services Trade
Liberalization. Washington, D.C.: Brookings Institution Press, pp. 85-111.
_______________ 1988. International Trade in Services: An Overview and Blueprint for
Negotiations. Cambridge, Massachusetts: Ballinger Publishing Company.
Footer, Mary E. and Carol George. 2005. The General Agreement on Trade in Services. In
Patrick F. J. Macrory, Arthur E. Appleton and Michael G. Plummer, eds., The World
Trade Organization: Legal, Economic and Political Analysis. New York: Springer(Volume I), pp. 799-953.
Gamberale, Carlo and Aaditya Mattoo. 2002. Domestic Regulations and Liberalization ofTrade in Services. In Bernard Hoekman, Aaditya Mattoo, and Philip English, eds.,
Development, Trade and the WTO - A Handbook. Washington, D.C.: World Bank, pp.
290-303.
Gart, Alan. 1994. Regulation, Deregulation, Re-regulation – The Future of the Banking,Insurance, and Securities Industries. U.S.A.: John Wiley & Sons.
Gates, Carolyn L. and David H.D. Truong. 1995. “Development Strategy and Trade andInvestment Policies for Structural Change.” In Irene Norlund, Carolyn L. Gates and Vu
Cao Dam, eds., Vietnam in a Changing World. Richmond: Curzon Press.
Goodhart, Charles; Philipp Hartmann; David Llewellyn; Liliana Rojas-Suarez; and Steven
Weisbrod. 1998. Financial Regulation: Why, how and where now? London: Routledge.


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CENTER FOR ASIAN LEGAL EXCHANGE, NAGOYA UNIVERSITY CALE BOOKS 3

Griffin, Keith. 1998. Restructuring and Economic Reforms. In Keith Griffin, ed.,Economic Reform in Vietnam. Basingstoke, Hampshire: Macmillan Press, pp. 1-19.
Hara, Nobuo. 1999. Policyholders’ Protection Measures in Japan. In OECD. Insurance
Regulation and Supervision in Asia. Paris: OECD.
Harrington, Scott E. 1991. Public Policy and Property-Liability Insurance. In Richard W.
Kopcke and Richard E. Randall, eds., The Financial Condition and Regulation of
Insurance Companies. Boston: Federal Reserve Bank.
Herring, Richard J. and Robert E. Litan. 1995. Financial Regulation in the Global
Economy. Washington, D.C.: The Brookings Institution.
Hoekman, Bernard. 2002. Assessing the General Agreement on Trade in Services. In Kym
Anderson and Bernard Hoekman, eds., The Global Trading System. London-New York: I.
B. Tauris Publishers (Volume 3), pp. 137-168.
________________ 1994. General Agreement on Trade in Services. In OECD, The New
World Trading System: Readings. Paris: OECD.
Janotta-Simons, Frank. 1999. Solvency – Its Definition, Influencing Factors andperspectives of Co-Ordinated Solvency Rules. In OCED. Insurance Regulation andSupervision in Asia. Paris: OECD.
Key, Sydney J. 2003. The Doha Round and Financial Services Negotiations. Washington,
D.C.: The AEI Press.
_____________ 2005. Financial Services. In Patrick F. J. Macrory, Arthur E. Appleton,and Michael G. Plummer, eds., The World Trade Organization: Legal, Economic andPolitical Analysis. New York: Springer (Volume I), pp. 955-988.
Kinoshita, Koji. 2002. Regulation of Insurance Services: The Japanese Perspective. In
Jurgen Basedow, Harald Baum, Klaus J. Hopt, Hideki Kanda and Toshiyuki Kono, eds.,
Economic Regulation and Competition: Regulation of Services in the EU, Germany andJapan. The Hague/London/New York: Kluwer Law International, pp. 189-210.
Kokko, Ari. 2004. Growth and reform since the Eighth Party Congress”. In Duncan
McCargo, ed., Rethinking Vietnam. London and New York: Routledge Curzon.
Kovsted, Jens; John Rand; and Finn Tarp. 2005. From Monobank to Commercial Banking– Financial Sector Reforms in Vietnam. Singapore: NIAS Press.
Krajewski, Markus. 2003. National Regulation and Trade Liberalization in Services: The
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Regulatory Autonomy. The Hague/London/New York: Kluwer Law International.
Leflaive, Viviane. 2002. Comparative Analysis. In OECD. Insurance Solvency
Supervision: OECD Country Profiles. Paris: OECD.
Lencsis, Peter M. 1997. Insurance Regulation in the United States: An Overview for


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Business and Government. Connecticut: Quorum Books.
Low, Patrick and Aaditya Mattoo. 2000. Is There a Better Way? Alternative Approaches
to Liberalization under GATS. In Pierre Sauve and Robert M. Stern eds., GATS 2000:
New Directions in Services Trade Liberalization. Washington, D.C.: Brookings Institution
Press.
Mattoo, Aaditya and Pierre Sauve. 2003. Domestic Regulation and Trade in Services:
Looking Ahead. In Aaditya Mattoo and Pierre Sauve, eds., Domestic Regulation andService Trade Liberalization. Washington D.C.: World Bank, Oxford University Press,
pp. 221-230.
Mayer, Colin. 2001. Regulatory Principles and the Financial Services and Markets Act
2000. In Eilis Ferran and Charles Goodhart eds., Regulating Financial Services andMarkets in the Twenty First Century. Oxford: Hart Publishing, pp. 25-36.
McRae, Donald M. 2000. GATT Article XX and the WTO Appellate Body.” In Marco
Bronckers and Reinhard Quick, eds., New Directions in International Economic Law:
Essays in Honour of John H. Jackson. The Hague/London/Boston: Kluwer Law
International, pp. 219-236.
Nguyen Xuan Nghia. 2005. Banking Reform in Vietnam. In William T. Alpert, ed., The
Vietnamese Economy and its Transformation to an Open Market System. Armonk, New
York: M.E. Sharpe, pp. 200-214.
Nguyen Xuan Oanh. 1990. Vietnam: Recent Economic Developments and the World
Economy. In Seiji Naya and Akira Takayama, eds., Economic Development in East andSoutheast Asia: Essays in Honor of Professor Shinichi Ichimura. Singapore: Institute ofSoutheast Asia Studies, pp. 94-103.
Nicolaidis, Kalypso and Joel P. Trachtman. 2000. From Policed Regulation to Managed
Recognition in GATS. In Pierre Sauve and Robert M. Stern eds., GATS 2000 – New
Directions in Services Trade Liberalization, Washington D.C.: The Brookings Institution,
pp. 241-282.
O’Brien, Chris. 2003. The Regulation of Life Assurers in a Law Solvency Environment:
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OECD. 2001. Insurance Regulation and Supervision in Asia and Latin America. Paris:
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OECD. 2002. Insurance Solvency Supervision – OECD Country Profiles. Paris: OECD.
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Panourgias, Lazaros E. 2006. Banking Regulation and World Trade Law: GATS, EU and
Prudential Institution Building. Oxford and Portland, Oregon: Hart Publishing.


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CENTER FOR ASIAN LEGAL EXCHANGE, NAGOYA UNIVERSITY CALE BOOKS 3

Revell, Jack R. S. 1981. The Complementary Nature of Competition and Regulation in the
Financial Sector. In Albert Verheirstraeten, ed., Competition and Regulation in Financial
Markets. New York: St. Martin’s Press, pp. 16-31.
Reyna, Jimmie V. 1993. Services. In Terence P. Stewart, ed., The GATT Uruguay Round:A Negotiating History (1986-1992). Deventer: Kluwer Law and Taxation Publishers(Volume II: Commentary), pp. 2335-2661.
_______________ 1999. Services. In Terence P. Stewart, ed., The GATT Uruguay Round:A Negotiating History (1986-1994). The Hague: Kluwer Law International (Volume IV:
The End Game (Part I)), pp. 777-828.
Seibel, Hans Dieter. 1992. The Making of a Market Economy: Monetary Reform,
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Sekiguchi, Alan. 1999. Policyholders Protection Funds in OECD Countries. In OECD.
Insurance Regulation and Supervision in Asia. Paris: OECD.
Skipper, Harold D. Jr. 2002. Liberalization of Insurance Markets: Issues and Concerns.”
In Robert E. Litan, Paul Masson and Michael Pomerleano eds., Open Doors: Foreign
Participation in Financial System in Developing Countries., Washington, D.C.: Brookings
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__________________ 2001a. Liberalization of Insurance Markets: Issues and Concerns.
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Convergence – Insurance and Pensions. Paris: OECD__________________ 2001b. Insurance in the General Agreement on Trade in Services.
Washington, D.C.: The AEI Press.
__________________ 2001c. Financial Services Integration Worldwide: Promises andPitfalls. In OECD. Policy Issues in Insurance: Insurance Regulation and Supervision in
the OECD Countries. Paris: OECD.
__________________ 1996. International Trade in Insurance. In Claude E. Barfield, ed.,Harmonization versus Competition: International Financial Markets. Washington, D.C.:
The AEI Press, pp. 151-223.
Snape, Richard H. and Malcolm Boswoth. 1996. Advancing Services Negotiations. In
Jeffrey J. Schott, ed., The World Trading System: Challenges Ahead. Washington, D.C.:
Institute for International Economics, pp. 185-203.
Spencer, Peter D. 2000. The Structure and Regulation of Financial Markets. Oxford:
Oxford University Press
Stewart, Terence P. 1993. The GATT Uruguay Round: A Negotiating History (19861992). Deventer: Kluwer Law and Taxation Publishers (Volume III: Documents).
Tenev, Stoyan; Amanda Carlier; Omar Chaudry; and Quynh-Trang Nguyen. 2003.
Informality and the Playing Field in Vietnam’s Business Sector. Washington, DC.: IFC,

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NATIONAL TREATMENT PRINCIPLE IN GATS:
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Than, Mya. 1993. Vietnam’s External Trade, 1975-91: A Survey in the Southeast AsianContext. In Mya Than and Joseph L.H. Tan, eds., Vietnam’s Dilemmas and Options: The
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Thant, Myo and Richard W.A. Vokes. 1993. Vietnam and ASEAN: Near-Term Prospects
for Economic Co-operation. In Mya Than and Joseph L.H. Tan, eds., Vietnam’s Dilemmas
and Options: The Challenge of Economic Transition in the 1990s. Singapore: Institute ofSoutheast Asia Studies, pp. 237-258.
Trachtman, Joel P. 2003a. Lessons for the GATS from Existing WTO Rules on Domestic
Regulation. In Aaditya Mattoo and Pierre Sauve, eds., Domestic Regulation and Service
Trade Liberalization. Washington D.C.: World Bank, Oxford University Press, pp. 57-81.
Trebilcock, Michael J. and Robert Howse. 2005. The Regulation of International Trade.
London and New York: Routledge (Third Edition).
Verhoosel, Gaetan. 2002. National Treatment and WTO Dispute Settlement: Adjudicating
the Boundaries of Regulatory Autonomy. Oxford: Hart Publishing.
Vo Tri Thanh and Pham Hoang Ha. 2004. Vietnam’s Recent Economic Reforms andDevelopments: Achievements, Paradoxes, and Challenges.” In Philip Taylor, ed., Social
Inequality in Vietnam and the Challenges to Reform. Singapore: Institute of Southeast
Asia Studies, pp. 63-89.
Vollbrecht, Jorg. 2001. Insurance Regulation and Supervision. In OECD. Policy Issues inInsurance: Insurance Regulation and Supervision in the OECD Countries. Paris: OECD.
Vu Tuan Anh. 1995. Economic Policy Reforms: An Introductory Overview. In Irene
Norlund, Carolyn L. Gates and Vu Cao Dam, eds., Vietnam in a Changing World.
Richmond: Curzon Press, pp. 17-30.
Yasui, Takahiro. 2001. Policyholder Protection Fund: Rationale and Structure. In Policy
Issues in Insurance: Insurance Regulation and Supervision in the OECD Countries. Paris:
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Waincymer, Jeff. 2002. WTO Litigation: Procedural Aspects of Formal Dispute
Settlement. London: Cameron May.
White, Lawrence J. 1996. Competition versus Harmonization – An Overview ofInternational Regulation of Financil Services. In Claude E. Barfield ed., Harmonization
versus Competition: International Financial Markets. Washington, D. C.: The AEI Press
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Zdouc, Werner. 2004. WTO Dispute Settlement Practice Relating to the General
Agreement on Trade in Services. In Federico Ortino and Ernst-Ulrich Petersmann eds.,
The WTO Dispute Settlement System 1995-2003. The Hague/London/New York: Kluwer
Law International (Vol. 18), pp. 381-420.

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Vietnamese books
BaoViet Insurance Corporation. 2005. Bao Viet 40 nam xay dung va phat trien
15/01/1965 – 15/01/2005 [BaoViet in Forty Years of Establishment and Development Jan
15, 1965 – Jan. 15, 2005]. Hanoi: Nha xuat ban van hoa thong tin.
Ministry of Finance. 2005. Vietnam Insurance Market 2004. Hanoi: Nha xuat ban Tai
chinh.
Ministry of Finance. 2006. Vietnam Insurance Market 2005. Hanoi: Nha xuat ban Tai
chinh.
Ministry of Finance. 2007. Vietnam Insurance Market 2006. Hanoi: Nha xuat ban Tai
chinh.
Ministry of Planning and Investment and UNDP. 2006. Studies on the Competitivenessand Impact of Liberalization in Financial Services: The Case of Banking Services. Hanoi:
UNDP.
Phan Thanh Pho. 2005. Vietnam Voi Tien Trinh Gia Nhap To Chuc Thuong Mai The Gioi
[Vietnam’s Accession to the World Trade Organization]. Hanoi: Nha xuat ban Chinh Tri
Quoc Gia.
Thai Ba Can and Tran Nguyen Nam. 2004. Phat trien Thi truong Dich vu Tai chinh
Vietnam trong Boi canh Hoi nhap [Developing Vietnam’s Financial Services Market in
the Context of International Integration]. Hanoi: Institute of Financial Science.
Van kien Dang Toan tap [Communist Party Documents] (Volume 40). 2005. Hanoi: Nha
xuat ban Chinh tri Quoc gia.
Vu Nhu Thang. 2007. Tӵ do hoá thѭѫng mҥi dӏch vө trong WTO: LUҰT VÀ THÔNG Lӊ
[Service trade liberalization in WTO: LAW AND PRACTICE]. Hanoi: Hanoi Publisher.

JOURNALS

Foreign journals
Aghatise, Esohe. 1990. Services and the Development Process: Legal Aspects of
Changing economic Determinants. Journal of World Trade 24(5), pp. 103-113.
Bagheri, Mahmood and Chizu Nakajama. 2002. Optimal Level of Financial Regulation
under the GATS: A Regulatory Competition and Cooperation Framework for Capital
Adequacy and Disclosure of Information. Journal of International Economic Law 5(2),pp. 507-530.
Cai, Wenguo and Michael Hart. 1996. Vietnam’s Accession to the World Trade


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NATIONAL TREATMENT PRINCIPLE IN GATS:
A Study of Vietnam’s Insurance Services Market
Organization. Journal of World Trade 30(6), pp. 75-102.
Chang, Kuan-Chun. 2003. The Supervision of Financial Conglomerates in China in the
Post WTO Era – The Challenges of Risk Concentration and Risk Contagion. University ofMiami International and Comparative Law Review 11, pp. 1-38.
________________ 2004. Necessary Reform of Insurance Law in China After Its WTO
Accession. Syracuse Journal of International Law and Commerce 31, pp. 25-64.
Condon, Bradly. 2001. Smoke and Mirrors: A Comparative Analysis of WTO and
NAFTA Provisions Affecting the International Expansion of Insurance Firms in North
America. Connecticut Insurance Law Journal 8, pp. 97-130.
Cummins, J. David; Scott E. Harrington; and Robert Klein. 1995. Insolvency experience,risk-based capital, and prompt corrective action in property-liability insurance. Journal of
Banking and Finance 19, pp. 511-527.
Das, Dilip K. 1998. Trade in Financial Services and the Role of the GATS: Against the
Backdrop of the Asian Financial Crisis. Journal of World Trade 32(6), pp.79-114.
Drake, William J. and Kalypso Nicolaidis. 1992. Ideas, Interests, and Institutionalization:“Trade in Services” and the Uruguay Round. International Organization 46(1), pp. 37100.
Desmedt, Axel. 2001. Proportionality in WTO Law. Journal of International Economic
Law 4(3), pp. 441-480.
Ehring, Lothar. 2002. De Facto Discrimination in World Trade Law: National and MostFavoured-Nation Treatment – or Equal Treatment? Journal of World Trade 36(5), pp.
921-977.
Fields, Joseph A.; James B. Ross; Chinmoy Ghosh; and Keith B. Johnson. 1994. Junk
Bonds, Life Insurer Insolvency, and Stock Market Reactions: The Case of First Executive
Corporation. Journal of Financial Services Research, pp. 95-111.
Gaines, Sanford. 2001. The WTO’s Reading of the GATT Article XX Chapeau: A
Disguised Restriction on Environmental Measures. University of Pennsylvania Journal ofInternational Economic Law 22, pp. 739-862.
Giesel, Grace M. 1991. A Proposal for a Tort Remedy for Insureds of Insolvent Insurers
Against Brokers, Excess Insurers, Re-insurers, and the States. Ohio State Law Journal 52,
pp. 1075-1130.
Goddard, William. 2003. The Revolution of the Times: Recent Changes in U.K. Insurance
Insolvency Laws and the Implications of Those Changes Viewed from a U.S. Perspective.
Connecticut Insurance Law Journal 10, pp. 139-170.
Han, Li-Ming; Gene C. Lai; and Robert C. Witt. 1997. A Financial-economic Evaluationof Insurance Guaranty Fund System: An Agency Cost Perspective. Journal of Banking
and Finance 21, pp. 1107-1129.

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CENTER FOR ASIAN LEGAL EXCHANGE, NAGOYA UNIVERSITY CALE BOOKS 3

Hawkins, Jeff. 2004. Comment: Which Faultless Party Will Be Forced To Pay For
Another’s Failure? A Proposal For Legislative Extending The Use of State Guaranty
Funds to Absorb the Orphan Shares of Long-tail Claims. Texas Technology Law Review
37, pp. 215-241.
Hodkin, Adam. 1992. Insurer Insolvency: Problems & Solutions. Hofstra Law Review 20,
pp. 727-756.
Jarreau, J. Steven. 1999. Interpreting the General Agreement on Trade in Services and theWTO Instruments Relevant to the International Trade of Financial Services: The Lawyer’s
Perspective. North Carolina Journal of International Law & Commercial Regulation 25,
pp. 3-42.
Kennedy Kevin C. 2003. A WTO Agreement on Investment: A Solution in Search of a
Problem? University of Pennsylvania Journal of International Economic Law 24, pp. 77188.
Key, Sydney J. 1999. Trade Liberalization and Prudential Regulation: The International
Framework for Financial Services. International Affairs (Royal Institute of International
Affairs 1944-) 75(1), pp. 61-75.
Kong, Qingjiang. 2000. China’s WTO Accession: Commitments and Implications.
Journal of International Economic Law, pp. 655-690.
Kwon, Wook Jean and Harold D. Skipper Jr. 1997. Regulatory Changes in the JapaneseInsurance Market. Journal of Insurance Regulation 16(2), pp. 151-169.
Leroux, Eric H. 2002. Trade in Financial Services under the World Trade Organization.
Journal of World Trade 36(3), pp. 413-442.
Macey, Jonathan R. and Geoffrey P. Miller. 1993. The McCarran-Ferguson Act of 1945:
Reconceiving the Federal Role in Insurance Regulation. New York University Law Review
68, pp. 13-88.
Mattoo, Aaditya. 1997. National Treatment in the GATS: Corner-Stone or Pandora’s
Box? Journal of World Trade 31, pp. 107-135.
_______________ 2000. Financial Services and the WTO: Liberalization Commitmentsof the Developing and Transitional Economies. The World Economy 23(3), pp. 251-286.
Neumann, Jan and Elisabeth Turk. 2003. Necessity Revisited: Proportionality in World
Trade Organization Law After Korea-Beef, EC-Asbestos and EC-Sardines. Journal ofWorld Trade 37(1), pp. 199-233.
Nicolaides, Phedon. 1989. Economic Aspects of Services: Implications for GATT
Agreement. Journal of World Trade 23(1), pp. 125-136.
Ortino, Federico. 2006. Treaty Interpretation and the WTO Appellate Body Report in US– Gambling: A Critique. Journal of International Economic Law 9(1), pp. 117-148.


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NATIONAL TREATMENT PRINCIPLE IN GATS:
A Study of Vietnam’s Insurance Services Market
Pauwelyn, Joost. 2005. Rien ne Va Plus? Distinguishing domestic regulation from market
access in GATT and GATS. World Trade Review 4(2), pp. 131-170.
_____________ 1998. Evidence, Proof and Persuasion in WTO Dispute Settlement: Who
Bear the Burden? Journal of International Economic Law 1, pp. 227-258.
Petroni, Kathy Ruby. 1992. Optimistic Reporting in the Property-casualty Insurance
Industry. Journal of Accounting and Economics 15, pp. 485-508.
Pottier, Steven W.and David W. Sommer. 2002. The Effectiveness of Public and Private
Sector Summary Risk Measures in Predicting Insurer Insolvencies. Journal of Financial
Services Research 21(1/2), pp. 101-116.
Randall, Susan. 1999. Insurance Regulation in the United States: Regulatory Federalism
and the National Association of Insurance Commissioners. Florida State University Law
Review 26, pp. 625-699.
Randhawa, P. S. 1987. Punta del Este and After: Negotiations on Trade in Services andthe Uruguay Round. Journal of World Trade Law 21(4), pp. 136-171.
Regan, Donald H. 2002. Regulatory Purpose and “Like Products” in Article III:4 of the
GATT (With Additional Remarks on Article III:2), Journal of World Trade 36(3), pp.
443-478.
Roberts, Paul G. 1989. Insurance Company Insolvencies and Insurance Guaranty Funds:
A Look at the Nonduplication of Recovery Clause. Iowa Law Review 74, pp. 927-950.
Sapir, Andre. 1999. The General Agreement on Trade in Services: From 1994 to the Year
2000, Journal of World Trade 33(1) pp. 51-66.
Sauve, Pierre. 1995. Assessing the General Agreement on Trade in Services: Half-Full or
Half-Empty? Journal of World Trade 29(4), pp. 125-145.
Skeel, David A. Jr. 1998. The Law and Finance of Bank and Insurance Insolvency
Regulation. Texas Law Review 76, pp. 723-780.
Skipper, Harold D. Jr. 1987. Protectionism in the Provision of International Insurance
Services. The Journal of Risk and Insurance 54(1), pp. 55-85.
Skipper, Harold D. Jr. and Robert W. Klein. 2002. Insurance Regulation in the Public
Interest: The Path Towards Solvent, Competitive Markets. The Geneva Papers on Risk
and Insurance 25(4), pp. 482-504.
Trachtman, Joel P. 1995. Trade in Financial Services under GATS, NAFTA and the EC:
A Regulatory Jurisdiction Analysis. Columbia Journal of Transnational Law 34, pp. 37122.
Vu Nhu Thang. 2006a. Interpreting GATS National Treatment Principle: Possibilities andProblems of Transplant from GATT. Forum of International Development Studies 32, pp.
173-194.


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CENTER FOR ASIAN LEGAL EXCHANGE, NAGOYA UNIVERSITY CALE BOOKS 3____________ 2007a. Applicability of GATS Prudential Exception to Insurance Services:
Some Interpretative Issues. Manchester Journal of International Economic Law 4(2), pp.
88-123.
____________ 2007b. Necessary reform of Insurance Business Law in Vietnam after its
Accession to the World Trade Organization: Prudential Regulatory Aspects. Fordham
Journal of Corporate and Financial Law 12(6), pp. 977-1009.
Wang, Wallace. 2002. Developing Reinsurance Markets in emerging Economies:
Regulatory Implication and Challenges. Law and Business Review of the Americas 8, pp.
395-431.
Zdouc, Werner. 1999. WTO Dispute Settlement Practice Relating to the GATS. Journalof International Economic Law 2(2), pp. 295-346.

Vietnamese journals
Tran Dac Sinh. 2006. Thi truong chung khoan tap trung nam 2005 – Tao da tang truong
cho cac nam tiep theo [The Official Securities Market in 2005 – A Locomotive for Further
Development]. Vietnam Securities Review 1+2.
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[Vietnam Insurance Sector – A History]. Vietnam Insurance Review 2, pp. 1-4.
Vu Nhu Thang. 2006b. Taking out a Policy on the Nation’s Insurance Industry in the
Post-WTO Era. Vietnam Law and Legal Forum 13(148), pp. 12-16.
_____________ 2004. Vietnam’s Insurance Market: Opportunities and Challenges.
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Asian Development Bank. 2003. People’s Republic of China: Strengthening the Insurance
Industry Regulatory and Supervisory System. Manila: ADB.
Cornford, Andrew. 2004. The WTO Negotiations on Financial Services: Current Issues
and Future Directions. Geneva: United Nations Conference on Trade and Development(Discussion Papers No. 172).
Dinh Van Nha. 2002. Cac Giai phap Tong the Phat trien Thi truong Von va Thi truong
Dich vu Tai chinh o Vietnam [Comprehensive Solutions for Developing Capital Market
and Financial Services Market in Vietnam] (academic research paper, Minitry of
Fianance, Vietnam) (on file with the Financial Scientific Institute).
Do Hoai Nam. 2003. Opportunities and Challenges for Vietnam in WTO Accession. In
Symposium on Vietnam: Readiness for WTO Accession. Hanoi, Hochiminh City: National


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NATIONAL TREATMENT PRINCIPLE IN GATS:
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Centre for Social Sciences and Humanities, and the World Bank.
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General Insurance Association of Japan. 2006. Fact Book 2004-2005 General Insurance inJapan.
Hoekman, Bernard and Pierre Sauve. 1994. Liberalizing Trade in Services., Washington,
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Institute of Financial Science. 2004. Assessment on the impacts of opening market for
Vietnam insurance sector and some suggestions to develop insurance market in line with
global integration process. Hanoi: Ministry of Finance (Vietnam).
Kono, Masamichi; Patrick Low; Mukela Luanga; Aaditya Mattoo; Maika Oshikawa; andLudger Schuknecht. 1997. Opening Markets in Financial Services and the Role of the
GATS. Geneva: WTO (Special Studies).
Leipziger, D. M. 1992. Awakening the Market – Vietnam’s Economic Transition.
Washington, D.C.: World Bank (Discussion Papers 157).
Le Song Lai. 2005. Thuc trang va Giai phap nang cao hieu qua hoat dong dau tu cua cac
doanh nghiep tren thi truong bao hiem Viet Nam [Current situation and Solutions on
improving investment efficiency by companies in Vietnam’s Insurance Market]. In
Symposium on Solutions for facilitating efficient investments by insurers into the economy(on file with the Association of Vietnamese Insurers).
Mattoo, Aaditya. 1999. Financial Services and the World Trade Organization:
Liberalization Commitments of the Developing and Transition Economies. Washington
D.C.: World Bank (Working Paper 2184)
Nguyen Trong Nghia. 2004. Thuc trang va Giai phap Hoan thien He thong Phap luat Phattrien Thi truong Tai chinh va Dich vu Tai chinh [Current Situation and Solutions for
Improving Legal System on the Development of Financial Markets and Financial
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Negotiations under the GATS: the Case of Insurance Services. Paris: OECD
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State Securities Commission of Vietnam. 2004. Symposium on Finding Solutions for
Further Development of Vietnam’s Securities Market. Hanoi.

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Tran Vinh Duc. 2005. Nang cao hieu qua dau tu von cua cac doanh nghiep bao hiem tai
Vietnam [Improving Investment Efficiency of Insurers in Vietnam]. In Symposium on
Solutions for facilitating efficient investments by insurers into the economy (on file with
the Association of Vietnamese Insurers).
Trinh Quang Tuyen. 2005. Thuc trang trong hoat dong dau tu va giai phap khuyen khich
dau tu cua cac doanh nghiep bao hiem [Current issues in investment activities andsolutions for investment encouragement by insurance companies]. In Symposium on
Solutions for facilitating efficient investments by insurers into the economy (on file with
the Association of Vietnamese Insurers).
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and Issues. Geneva: WTO, (Special Studies 6).

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MARKT/25/2/05-EN.


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International Association of Insurance Supervisors website http://www.iaisweb.org- Insurance Core Principles and Methodology, approved in Singapore in 30 October
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October 2003.
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giai quyet ra sao? (Insurers at Cease: How to deal with rights and interest ofpolicyholders?), dated 9 September 2005.


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Bao hiem khong thuoc danh muc bao ho lon” (Insurance sector not subject to ahigh protection list), May 2005.

Vietnam Investment Review website http://www.vir.com.vn.
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WT/MIN(96)/DEC dated 18 December 1996.
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Services, GATS/SC/48/Suppl.3/Rev.1 dated 18 November 1999.


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Singapore – Schedule of Specific Commitments. WTO Doc. No.
GATS/SC/76/Suppl.3 dated 26 February 1998.
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WT/TPR/S/136 dated 23 June 2004.
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GATT Doc. No. MTN.GNS/25, dated 23 October 1989.


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Group of Negotiations on Services, Note on the Meeting of 23-25 October 1989,
GATT Doc. No. MTN.GNS/26 dated 17 November 1989.
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GATT Doc. No. MTN.GNS/44, dated 8 August 1991.
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GATT Doc. No. MTN.GNS/45, dated 18 October 1991.
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Doc. S/C/M/66 dated 18 June 2003.
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September 2003, WTO Doc. S/CSC/M/30 dated 1 December 2003.


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Council for Trade in Services, Draft of the Fifth Decision on Negotiations on
Emergency Safeguard Measures, in Communication from the Chairperson of theWorking Party on GATS rules, WTO Doc. No. S/C/W/236, dated 15 March 2004.
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2004, WTO Doc. No. S/FIN/M/45 dated 19 July 2004.
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September 2004, WTO Doc. No. S/FIN/M/46 dated 29 October 2004.
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September 2005, WTO Doc. No. S/FIN/M/50, dated 23 September 2005.
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News and Communications- Communication from the United States, GATT Doc. No. MTN.GNS/FIN/W/2,
dated 12 July 1990.
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MTN.GNS/FIN/W/3 dated 12 September 1990.
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dated 8 November 2004.
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November 2004.
- Communication from Chinese Taipei, WTO Doc. No. S/FIN/W/41 dated 15
November 2004.


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