United States International Trade Commission

Investigation No. 332-499

USITC Publication 4068

March 2009

Property and 

Casualty Insurance 

Services: 

Competitive 

Conditions in 

Foreign Markets 
Address all communications to 

Secretary to the Commission 

United States International Trade Commission 

Washington, DC 20436

U.S. International Trade Commission

Director, Office of Industries

Karen Laney-Cummings

Director of Operations

Robert A. Rogowsky

COMMISSIONERS 

 

Shara L. Aranoff, Chairman 

Daniel R. Pearson, Vice Chairman 

Deanna Tanner Okun 

Charlotte R. Lane 

Irving A. Williamson 

Dean A. Pinkert
U.S. International Trade Commission

Washington, DC 20436 

www.usitc.gov

Publication 4068 March 2009

Property and Casualty Insurance Services: 

Competitive Conditions in Foreign Markets 

Investigation No. 332-499
This report was prepared principally by 

Project Leader 

Eric Forden 

eric.forden@usitc.gov

Deputy Project Leader 

Jeremy Wise 

jeremy.wise@usitc.gov

Office of Industries 

Lisa Ferens Alejandro, Tamar Asadurian, Jennifer Baumert, Laura Bloodgood, 

Samantha Brady, Allison Gosney, Erick Oh, and Audry Tafoya 

 

Office of Economics

Tani Fukui and Marinos Tsigas 

Primary Reviewers 

Robert Feinberg and Katherine Linton 

Administrative Support 

Phyllis Boone, Cynthia Payne, and Monica Reed 

Under the direction of 

Richard W. Brown, Chief, Services Division 
i

Abstract 

The global property and casualty (P&C) insurance market, measured in terms of total 

revenue, is concentrated in three geographic regions, North America, Europe, and North 

Asia (Japan, China, and Korea), with automobile insurance representing the single largest 

market segment. Overall, the P&C insurance markets of developed countries are mature, 

whereas the markets of many developing countries are growing rapidly. Demand for 

P&C insurance services is driven by many factors, including economic growth and 

compulsory lines requirements, whereas the supply of such services is a function of the 

number of competing firms and the regulations imposed on such firms. P&C insurance is 

sold in global markets through cross-border trade and through the sales of affiliates 

located in foreign countries, with affiliate sales accounting for the dominant share of 

international trade. Although most countries establish prudential regulations pertaining to 

the provision of insurance services, Commission research suggests that many countries 

maintain nontariff measures (NTMs) that restrict the participation of foreign insurance 

firms in domestic markets. Econometric models developed by the Commission estimate 

that NTMs have a significant effect on the profitability of insurance companies in foreign 

markets. Moreover, the model results suggest that removal of NTMs in foreign countries 

would result in increased U.S. cross-border insurance exports and affiliate sales, and 

result in higher levels of employment in the U.S. P&C insurance industry. 

iii

CONTENTS 

Page

Abstract.................................................................................................................................. i

Executive Summary...................................................................................................... vii

Acronyms.............................................................................................................................. xi

Glossary.................................................................................................................................. xiii

Chapter 1 Introduction.............................................................................................. 1-1

 Background and purpose.................................................................................................... 1-1

 Scope.................................................................................................................................. 1-2

 Approach and organization ................................................................................................ 1-2

Chapter 2 Global Industry and Market ..................................................... 2-1

 Insurance market profiles ................................................................................................... 2-5

 The property and casualty insurance industry.................................................................... 2-10

 How property and casualty insurance firms operate ..................................................... 2-10

 Supply and demand factors ................................................................................................ 2-14

 Supply factors................................................................................................................ 2-14

 Demand factors.............................................................................................................. 2-15

 Factors affecting both supply and demand.................................................................... 2-18

Chapter 3 International Trade in Property and 

Casualty Insurance ............................................................................................. 3-1

 Nature of trade: Cross-border trade vs. affiliate sales ........................................................ 3-1

 Factors driving international competition in P&C insurance ........................................ 3-3

 Factors driving firms to compete internationally .......................................................... 3-4

 Cross-border trade as a share of the global insurance market ............................................ 3-4

 U.S. cross-border insurance trade ...................................................................................... 3-6

 Global cross-border insurance trade................................................................................... 3-10

 Affiliate transactions .......................................................................................................... 3-12

 U.S. insurance trade through affiliate sales................................................................... 3-13

 Global insurance trade through affiliate sales ............................................................... 3-17

 Trends in reinsurance trade ................................................................................................ 3-18

 U.S. cross-border trade in reinsurance services ................................................................. 3-18

Chapter 4 Market Access and Competitive Conditions.................. 4-1

 Identification of measures affecting trade in insurance services........................................ 4-1

 Summary of market access and national treatment NTMs................................................. 4-7

 The insurance trade restrictiveness index........................................................................... 4-10

 Effects of liberalization ...................................................................................................... 4-10

 Trade effects.................................................................................................................. 4-12

 Economic development effects ..................................................................................... 4-12

 Profit effects.................................................................................................................. 4-13

 Employment effects....................................................................................................... 4-15
iv

CONTENTS―Continued

Page

Bibliography...................................................................................................................... Biblio-1

Appendices 

A. Request letter ........................................................................................................................ A-1

B. Federal Register notice ........................................................................................................ B-1

C. Hearing participants.............................................................................................................. C-1

D. Bivariate model results ......................................................................................................... D-1

E. Exports and affiliate sales effects estimation........................................................................ E-1

F. Profit effects estimation........................................................................................................ F-1

Boxes 

2.1 Effects of the 2008 financial crisis on the insurance industry .............................................. 2-2

2.2 Lloyd’s of London................................................................................................................ 2-5

2.3 Reinsurance .......................................................................................................................... 2-17

3.1 The GATS and trade in insurance services .......................................................................... 3-1

3.2 Captive insurers.................................................................................................................... 3-8

3.3 The growth of Ireland’s insurance industry.......................................................................... 3-12

3.4 Bermuda’s international insurance industry......................................................................... 3-16

Figures 

ES.1 Insurance trade restrictiveness index (ITRI), selected countries.......................................... viii

2.1 P&C insurance density and GDP per capita, 78 countries, 2002–07 ................................... 2-9

2.2 P&C insurance penetration and GDP per capita, 78 countries, 2002–07............................. 2-10

2.3 Flow of funds through P&C insurance firms ....................................................................... 2-11

2.4 Growth of P&C premiums and growth of GDP per capita, 78 countries, 2002–07............. 2-16

3.1 Total U.S. cross-border exports and imports of primary insurance services, 2000–2007.... 3-6

3.2 U.S. insurance exports by major country, 2007 ................................................................... 3-7

3.3 U.S. insurance imports by major country, 2007................................................................... 3-8

3.4 Insurance sales by the foreign affiliates of U.S.-based firms, 2000–2005........................... 3-13

3.5 Foreign affiliates of U.S. P&C insurers ............................................................................... 3-14

3.6 Sales by U.S. affiliates of foreign firms, 2000–2005 ........................................................... 3-15

3.7 Destinations for U.S. cross-border exports of reinsurance services, 2007........................... 3-20

3.8 Sources of U.S. cross-border imports of reinsurance services, 2007 ................................... 3-20

4.1 Insurance trade restrictiveness index (ITRI), selected countries.......................................... 4-11

Tables 

2.1 Insurance market profiles, top developed-country markets for P&C insurance, 2006 ........ 2-6 

2.2 Insurance market profiles, top developing-country markets for P&C insurance, 2006 ....... 2-7 

3.1 Cross-border exports as a share of total P&C insurance, 2006 ............................................ 3-5 

3.2 Fastest-growing markets for cross-border insurance trade, 2000 and 2007......................... 3-9 

3.3 Global cross-border trade in P&C insurance services, selected markets, 2000–2006 ......... 3-11 

3.4 Share of global sales of P&C insurance by U.S.-owned foreign affiliates, by 

 country, 2000–2005 ......................................................................................................... 3-15 
v

CONTENTS―Continued

Page

Tables—Continued

3.5 Regional shares of sales of P&C insurance services by U.S. affiliates of foreign 

 companies, 2000–2005 ................................................................................................... 3-16

3.6 Market share of foreign companies in the domestic P&C market for direct 

 insurance, 2006 ............................................................................................................... 3-17

3.7 U.S. cross-border trade in insurance services, 2000–2007 .................................................. 3-19

4.1 Countries with derogations from the model schedule ......................................................... 4-4

4.2. Estimated profit effects in the P&C insurance industry....................................................... 4-14

D.1 Bivariate linear regression results corresponding to figures 2.1, 2.2, and 2.4 ..................... D-3

E.1 Exports—data summary ...................................................................................................... E-4

E.2 Affiliate sales—data summary............................................................................................. E-4

E.3 Exports—correlation matrix ................................................................................................ E-5

E.4 Affiliate sales—correlation matrix ...................................................................................... E-5

E.5 Gravity model results........................................................................................................... E-7

E.6 Estimated effects of liberalization, 2005 ............................................................................. E-8

F.1 Summary statistics of firm-level data .................................................................................. F-6

F.2 Country distribution of firm-level data................................................................................ F-6

F.3 Stage 1 results, dependent variable: ln (profit margin)........................................................ F-9

F.4 Stage 2 results, dependent variable: Adjusted profit margin ............................................... F-10

F.5 Estimated profit effects on P&C insurance industry............................................................ F-11

vii 

Executive Summary

This report, requested by the United States Trade Representative, focuses on the property 

and casualty (P&C) insurance industry. P&C insurance protects a person or business 

from damage to, or loss of, insured property, as well as legal liability for losses caused by 

injury to other people or their property. P&C insurance is divided into personal lines and 

commercial lines. P&C insurance contributes to economic growth and development by 

mitigating financial volatility resulting from large losses, motivating investment in 

property and commercial activity with inherent risks, and facilitating commerce and 

trade. 

Key Findings 

An inventory of 72 countries reveals a multitude of nontariff measures (NTMs) that limit 

access to, and competition in, national markets for P&C insurance. Many of the countries 

most encumbered by NTMs also have the highest insurance premium growth rates and 

the lowest levels of insurance penetration, making them potentially attractive markets for 

U.S. firms. 

In order to systematically examine NTMs across countries, the Commission developed an 

Insurance Trade Restrictiveness Index (ITRI). The ITRI facilitates cross-country 

comparisons (figure ES.1), and serves as the trade policy variable in econometric models 

used to examine the effect of NTMs on P&C industry profits, trade, and employment. 

The ITRI survey shows that Belgium, the Czech Republic, Ecuador, Spain, and the 

United Kingdom are among the most open P&C insurance markets. 
viii 

Bangladesh

Malaysia

Russia

Indonesia

Thailand

Vietnam

Venezuela

China

Korea

Pakistan

Barbados

Saudi Arabia

South Africa

Argentina

Brazil

India

Mexico

Morocco

Poland

Italy

Tunisia

Croatia

Sri Lanka

Peru

Philippines

Singapore

Australia

Chile

Guatemala

Ireland

Norway

Canada

Colombia

Netherlands

Sweden

Egypt

Bolivia

Iceland

Japan

Luxembourg

Portugal

Romania

Switzerland

Austria

Bulgaria

Hong Kong

Hungary

Jordan Germany

Latvia

Slovenia

Finland

Lithuania

Panama

Denmark

France

New Zealand

United Kingdom

Spain

Ecuador

Czech Republic

Belgium

0 0.125 0.25 0.375 0.5 0.625 0.75 0.875 1

Least restrictive Most restrictive

Source: Compiled by Commission staff.

Note: The ITRI value for Belgium, Czech Republic, Ecuador, Spain, and the United Kingdom is zero.

FIGURE ES.1 Insurance Trade Restrictiveness Index (ITRI), selected countries
ix 

The Commission’s econometric analysis suggests that P&C insurers’ adjusted profit 

margins in the most restrictive markets—Bangladesh, Malaysia, Russia, Indonesia, 

Thailand, Vietnam, and Venezuela—are inflated by more than 35 percent due to trade 

restrictions. As such, liberalization in these countries may promote economic growth and 

stability by providing individuals and businesses with the means to manage risk at more 

affordable prices. 

The Commission’s analysis also suggests that cross-border exports and sales by U.S.-

owned affiliates abroad could expand markedly if foreign insurance markets were 

liberalized. For example, a 10 percent reduction in foreign restrictiveness could increase 

U.S. exports by 9.9 percent. If all countries examined were to fully liberalize, U.S. 

exports could increase by 48 percent, or $870 million. 

Liberalization could produce an even greater effect on affiliate sales, the predominant 

means of trade in P&C insurance. The Commission’s analysis indicates that a 10 percent 

reduction in foreign restrictiveness could yield a 14.5 percent increase in the sales of U.S. 

affiliates. If all countries fully liberalized, U.S.-owned affiliates could increase sales by 

28 percent, or $39.1 billion. 

The Commission’s partial equilibrium analysis also offers support for industry 

representatives’ statements that, in the event of foreign liberalization, the establishment 

of P&C affiliates in overseas markets could produce an increase in the U.S. P&C 

industry’s domestic employment. Under such circumstances, U.S. P&C employment 

could increase by 0.72 percent, meaning that a firm with 10,000 employees could add 72 

positions in its U.S. offices. Many of these jobs would likely pay well above the average 

U.S. wage.

Market Dynamics 

The global market value of P&C insurance, measured by total revenue, grew by 5 percent 

in 2007 to $1.5 trillion. More than 90 percent of the global market was concentrated in 

three geographic regions: Europe (45 percent), North America (38 percent), and North 

Asia (China, Japan, and Korea) (9 percent). 

With the exception of select insurance firms dealing in mortgage-related securities, the 

P&C insurance industry is one of the healthier subsectors of the financial services 

industry. Thus far, the financial crisis has mainly impacted P&C insurance firms through 

their investment portfolios, which have experienced negative returns due to global 

financial market turmoil. 

The P&C insurance markets in developing countries are growing faster than those in 

developed countries, spurring greater interest in entering and competing in those markets. 

In 2006, total premiums in the developing countries grew at an annual rate of 19 percent, 

compared to a rate of 3 percent in developed countries. 

Insurance firms sell P&C insurance in global markets via both cross-border exports and 

affiliate sales, with the latter estimated to be as much as 30 times larger. During the 

2000–2006 period, U.S. cross-border exports grew by 31 percent. The fastest growing 

U.S. export markets included Switzerland, Canada, the Philippines, and Malaysia. U.S.-
x 

owned affiliates’ sales grew by 8 percent during the 2000–2005 period, with the largest 

host markets being the United Kingdom, Ireland, and Canada. 
xi 

Acronyms

ABI Association of British Insurers 

ABS Asset-Backed Securities 

AIA American Insurance Association 

AIG American International Group 

BEA Bureau of Economic Analysis 

BLS Bureau of Labor Statistics 

CAGR Compound Annual Growth Rate 

CDS Credit Default Swap 

CIAB Council of Insurance Agents and Brokers 

CSI Coalition of Service Industries 

FDI Foreign Direct Investment 

FLG Financial Leaders Group 

FLWG Financial Leaders Working Group 

FTA Free Trade Agreement 

GATS General Agreement on Trade in Services 

GDP Gross Domestic Product 

IFSC International Financial Services Center 

IMF International Monetary Fund 

ITRI Insurance Trade Restrictiveness Index 

MAT Marine, Aviation, and Transport 

NAIC National Association of Insurance Commissioners 

NAICS North American Industry Classification System 
xii 

Acronyms–Continued

NTM Nontariff Measure 

OECD Organization for Economic Cooperation and Development 

P&C Property and Casualty 

PRI Property Rights Index 

RAA Reinsurance Association of America 

TRI Trade Restrictiveness Index 

UNCTAD United Nations Conference on Trade and Development 

USITC U.S. International Trade Commission 

USTR Office of the U.S. Trade Representative 

USDOC U.S. Department of Commerce 

USDOL U.S. Department of Labor 

WDI World Development Index 

WTO World Trade Organization 
xiii 

Glossary 

Agent—An individual who sells insurance, either as an independent or captive agent. Captive 

agents sell insurance for only one insurance company, whereas independent agents sell insurance 

for multiple companies. 

Asset-backed security—A financial security backed by a pool of loans, typically loans of similar 

type, duration, and interest rate. The issuer of such securities uses the cash flow from loan 

payments to fund interest payments on the security. Almost any type of loan with regular 

principle and interest payments can be securitized, including auto loans, credit card receivables, 

and mortgage loans. 

Bancassurance—The practice of selling insurance through banks and/or postal centers. 

Broker—An individual that acts as an intermediary between a client and an insurance company; 

brokers typically work on behalf of clients, rather than insurance companies. 

Captive insurance company—A company that is created and funded by one or more 

noninsurance companies to provide the owners with insurance coverage; a form of self-insurance. 

Commercial line—Property and casualty insurance for businesses and other institutions. 

Compulsory insurance—Insurance coverage required by law. For example, many countries 

require automobile owners to carry a minimum amount of automobile liability insurance. 

Directors and officers (D&O) errors and omissions liability insurance—D&O liability 

insurance, a type of P&C insurance, covers directors and officers of a company for negligent acts 

or omissions, and for misleading statements that result in lawsuits against the company. 

Insurance density—Insurance premiums per capita; the ratio of total insurance premiums in a 

country divided by that country’s total population. 

Insurance penetration—The ratio of total insurance premiums in a country divided by that 

country’s national gross domestic product. 

Marine, Aviation, and Transport (MAT) insurance—Insurance covering goods in transit as well 

as the commercial vehicles that transport them via land, air, or water. 

Mortgage-backed security—A financial security backed by a pool of mortgages; the issuer of 

such securities uses the cash flow from mortgage payments to fund interest payments on the 

security. 

Multiple peril insurance—Personal or commercial property insurance that combines, in one 

policy, several types of property insurance covering numerous perils, including, for example, 

damage caused by flood, fire, or wind. 

Personal lines—Property and casualty insurance for individuals, typically homeowners and 

automobile insurance. 
xiv 

Policyholders’ surplus—The excess of an insurance company’s assets above its legal obligations 

to meet its liabilities, i.e., the benefits payable to its policyholders. 

Premium—The price a person or entity pays for insurance; an insurance company assumes the 

risks of people and entities in exchange for a premium payment. 

Premiums written—Total premiums written by an insurer during a specified period of time. 

Property and casualty insurance—Insurance covering a person or entity from damage to, or loss 

of, insured property, as well as legal liability for losses caused by injury to other people or 

damage/loss to property. 

Reinsurance—Reinsurance, commonly referred to as insurance for insurance companies, is an 

insurance transaction in which one company (the assuming insurer, or reinsurer) indemnifies, for 

a premium, an insurance company (the ceding insurer) against all or part of the loss that it may 

sustain from its insurance policies. 

Underwriting—The process of examining and accepting or rejecting insurance risks, and 

classifying accepted risks, in order to charge the proper premium for each. 

Underwriting capacity—The maximum amount of insurance that an insurance company can 

underwrite. 

Underwriting cycle—The tendency of P&C insurance markets to fluctuate between “hard” and 

“soft” market conditions. Soft markets are characterized by high levels of competition and falling 

premium prices, whereas hard markets are characterized by decreasing competition and rising 

premium prices. 

Unearned premium—The portion of an annual premium received from a policyholder but not 

recognized as revenue, in accounting terms. For example, an up-front, annual premium of $1,200 

on a 1-year insurance policy would typically be placed in an unearned premium reserve, with 

revenue recognition occurring at a rate of $100 per month for the 12-month policy term. 

Source: Compiled by Commission staff from Rubin, Dictionary of Insurance Terms, 2008; and RAA, “RAA 

Fundamentals of Property Casualty Reinsurance,” 2008. 
1-1

CHAPTER 1 

Introduction 

Background and Purpose 

Property and casualty (P&C) insurance is a critical component of economic 

infrastructure, promoting economic growth and stability principally through risk 

management. P&C insurers manage risk by assessing the likelihood and cost of losses, 

pricing premiums sufficiently to cover all or part of predicted losses, and risk pooling.1

P&C insurers also provide economic incentives, in the form of lower premiums, to 

encourage policyholders to reduce their exposure to loss.2

Successful risk management yields significant economic benefits, such as mitigating the 

financial volatility that could follow large, noninsured losses; motivating investment in 

property and commercial activity with inherent risk; and facilitating commerce and trade 

through vehicles such as marine, aviation, and transport (MAT) insurance. The P&C 

insurance industry also promotes the efficient allocation of capital by gathering and 

assessing information in the underwriting process and extending insurance to (and 

perhaps investing in) commercial enterprises that are deemed to have a high likelihood of 

success.3

As background information for discussions of P&C insurance taking place in the World 

Trade Organization (WTO) and other trade fora, the Office of the United States Trade 

Representative (USTR) requested that the Commission prepare a report that (1) provides 

an overview of global and selected foreign markets for P&C insurance services, including 

factors affecting supply and demand in these markets; (2) examines the nature and extent 

of cross-border trade and affiliate sales in the global market for P&C insurance services; 

and (3) identifies and examines policies and practices that affect U.S. firms’ access to, 

and competitiveness in, foreign markets for such services.4

 The USTR further requested 

that the geographic scope of the report include examples from both developed- and 

developing-country markets.5

The majority of research and analysis conducted in connection with the USTR’s request 

covers the situation in the P&C insurance industry through the end of 2007. In the second 

half of 2008 and into 2009, severe financial instability in many parts of the world 

impacted the financial services industry. This report briefly notes the impact of these 

events, although discussion is limited by their unfolding nature (box 2.1). 

 1

 Risk pooling is the collection of premiums from many policyholders to cover the insurable losses 

experienced by a few. 2

 For instance, insurers may offer discounts to homeowners who install fire alarms in their homes. 3

 Skipper, “Foreign Insurers,” 1997, 10–13; ABI, Insurance Liberalization and the Model Schedule, April 

2003, 2–3. 4

 The USTR requested this report pursuant to authority delegated by the President under section 332(g) of 

the Tariff Act of 1930 (19 U.S.C. 1332(g)). A copy of the request letter can be found in app. A. 5

 Public notice of this investigation was posted by the Office of the Secretary, U.S. International Trade 

Commission, Washington, DC 20436, and published in the Federal Register (73 F.R. 48392). A copy of the 

Federal Register notice is included in app. B. 
1-2

Scope 

This report focuses on the P&C insurance industry, which supplies insurance that protects 

a person or business from damage to, or loss of, insured property, as well as legal liability 

caused by injury to other people or damage/loss to the property of others.6

 P&C insurance 

is frequently divided into personal insurance (or personal lines), which covers 

individuals, and commercial insurance (or commercial lines), which covers businesses. 

Although personal lines consist primarily of automobile and homeowners insurance, a 

large number of additional insurance products are written as personal lines, including 

renters, condominium, flood, personal liability, travel, boat, and valuable items insurance. 

Commercial lines largely consist of automobile, multiple peril,7

 and workers=

compensation insurance, as well as insurance products protecting against legal liability 

resulting from negligence, carelessness, or failure to act. Like personal lines, the 

commercial insurance category includes a wide range of insurance products, including 

inland marine, fire, medical malpractice, farm owners’ multiple peril/crop, and product 

liability insurance. It also includes a wide range of insurance products covering financial 

and business transactions, such as financial guaranty, mortgage guaranty, credit, and 

surety insurance. The information and analyses in this report cover both the personal and 

commercial segments of the P&C insurance market. Reinsurance, a related industry, is 

introduced in chapter 2 and discussed as it pertains to international trade in insurance 

services in chapter 3. 

Approach and Organization 

This report addresses the three elements of the USTR’s request sequentially and provides 

both qualitative and quantitative analyses. Chapter 2 describes the global market and how 

P&C insurers operate, identifies supply and demand factors, and provides country 

profiles of the 10 largest developed and 10 largest developing P&C insurance markets. 

The market and macroeconomic data contained in these profiles are drawn principally 

from country reports published by AXCO Insurance Information Services, the 

Organization for Economic Cooperation and Development’s (OECD) Insurance Statistics 

Yearbook, and the International Monetary Fund’s (IMF) International Financial Statistics 

database. 

 

Chapter 3 examines the nature of, and motivations behind, P&C insurance trade, and 

examines trends in cross-border trade through 2007 and sales by foreign-owned affiliates 

in host markets through 2006. Trade data are based on the Survey of Current Business

published by the Bureau of Economic Analysis (BEA) and the OECD yearbook 

referenced above. Insurance experts in both private industry and academia were also 

consulted on certain trade data issues. 

Chapter 4 identifies and analyzes policies and practices that affect U.S. firms’ access to, 

and competitiveness in, foreign markets. In particular, the Commission analyzes nontariff 

measures (NTMs) that limit market access or place foreign service suppliers at a 

competitive disadvantage. To identify such measures, the Commission referred to the 

 6

 Outside the United States, P&C insurance is commonly referred to as nonlife or general insurance. 7

 Multiple peril insurance incorporates several different types of property insurance coverage, such as 

flood, fire, and wind. In its broadest application, the term is synonymous with all-risks insurance, which 

covers loss or damage to property from accidental circumstances not specifically excluded from coverage. 
1-3

model schedule and best practices list developed by the Financial Leaders Working 

Group (FLWG).8

 Divergences from industry-identified best practices are interpreted as 

NTMs. Chapter 4 also identifies countries that implement such NTMs and provides an 

Insurance Trade Restrictiveness Index (ITRI), a quantitative measure of the NTMs found 

in each country. The Commission uses econometric models incorporating the ITRI, as 

well as firm-level financial data and country-level market, macroeconomic, and 

institutional data, to estimate the effects such measures have on profit margins, as well as 

the potential effect of liberalization on U.S. exports and affiliate sales of P&C insurance.9

Chapter 4 also presents the results of a partial equilibrium analysis that measures the 

likely effect that the liberalization of foreign P&C insurance markets would have on 

employment in the U.S. P&C insurance industry. 

 

In developing chapter 4, Commission staff conducted primary and secondary research. 

Primary research included interviews with insurance firms, trade associations, and 

academics in the United States, as well as extensive communications with U.S. 

Department of State and U.S. Foreign Commercial Service officials abroad, in-country 

industry representatives, and foreign government officials. The Commission held a public 

hearing at which all interested parties were invited to present testimony.10 Secondary 

research included a review of pertinent literature produced by the U.S. government, the 

insurance industry, multinational organizations, academics, and research consultancies, 

including country reports published by AXCO Insurance Information Services.11 Firmlevel financial data are from the Orbis Companies Database developed by Bureau van 

Dijk. 

 8

 The Financial Leaders Group (FLG) and its working group, the FLWG, represent companies and 

industry associations in financial services, including banking, insurance, insurance intermediation, asset 

management, securities, and pensions. The FLWG’s membership is drawn from companies and associations 

located in Australia, Canada, Hong Kong, Japan, Switzerland, and the United States, as well as EU member 

countries. FLWG, “Financial Leaders Group Calls Further Financial Services Liberalization Essential,” 

February 10, 2006. 9

 See apps. E and F for full details on the econometric models used in this report. 10 The public hearing was held on September 23, 2008, in Washington, DC. A list of hearing participants 

is included in appendix C and the hearing transcript, as well as written submissions submitted by interested 

parties in conjunction with this investigation, may be found at the Commission’s Internet site 

(http://www.usitc.gov) under the dockets section. 11 AXCO’s Insurance Market Reports Database provides firm- and country-level data, as well as detailed 

information on regulation and supervision, for the insurance markets of 141 countries. 

2-1

CHAPTER 2 

Global Industry and Market 

In 2007, the global market for P&C insurance,1

 measured in terms of total revenue, grew 

by 5 percent to approximately $1.5 trillion.2

 Collectively, more than 90 percent of the 

global market was concentrated in three geographic regions: Europe (45 percent), North 

America (38 percent), and North Asia3 (9 percent).4 Slow growth in most developed 

countries contrasted with more rapid growth in many developing markets. Overall, P&C 

premiums in developed countries registered flat or declining growth rates, due in large 

part to market maturity and high levels of competition. Although financial market turmoil 

affected investment and commercial banking much more heavily in 2008, the P&C 

insurance industry was also affected. In addition to serious financial problems at 

American International Group (AIG), one of the world’s largest P&C insurers, the P&C 

insurance industry was also affected by the declining value of investment holdings, 

particularly asset classes favored by P&C insurers such as equities, corporate bonds, and 

tax-exempt securities (box 2.1).5

In 2007, commercial lines and personal lines accounted for 30 percent and 70 percent, 

respectively, of the global market. Personal lines represent the dominant share of global 

premiums largely because individual consumers, the single largest customer group, 

typically maintain both private passenger automobile insurance and some form of 

home/contents insurance. Private passenger automobile insurance represents the single 

largest product segment of the global P&C insurance industry, accounting for 

approximately 50 percent of global premiums. The large and growing fleet of privately 

owned automobiles worldwide, and regulations requiring some form of automobile 

insurance in most countries, largely account for the dominance of the automobile 

insurance segment.6

 Other important product segments include fire, allied, and multiple 

peril insurance (20 percent) and workers’ compensation insurance (6 percent). 

 1

 The P&C insurance industry comprises establishments primarily engaged in the initial underwriting of 

various types of insurance policies referred to as P&C insurance or general insurance; establishments 

engaged in underwriting mortgages and other real estate transactions are also included. Life, disability 

income, accidental death and dismemberment, and health and medical insurance policies are not included in 

this industry definition. IBISWorld, Global Direct General Insurance Carriers, September 30, 2008, 3. 2

 Total revenue comprises both gross premiums and net investment income. 3

 North Asia comprises Japan, China, and Korea. 

4

 IBISWorld, Global Direct General Insurance Carriers, January 27, 2009, 3, 11–12. 5

 Fitch Ratings, “Review and Outlook 2008–2009,” December 18, 2008, 1–3. 

6

 By contrast, commercial automobile insurance accounted for 6 percent of global premiums. 

IBISWorld, Global Direct General Insurance Carriers, September 30, 2008, 8–10. 
2-2

BOX 2.1 Effects of the 2008 Financial Crisis on the Insurance Industry 

Introduction 

In the second half of 2008 and into 2009, severe instability in global financial markets impacted financial 

services firms around the world, particularly commercial and investment banks. With the exception of select 

insurance firms dealing in mortgage-related securities, however, the property and casualty (P&C) insurance 

industry is one of the healthier subsectors of the financial services industry.a

 Thus far, the financial crisis has 

mainly impacted P&C insurance companies through their investment portfolios, which have experienced 

negative returns due to global financial market turmoil.b 

The U.S. P&C Insurance Industry: Financial Results in 2008 

In the first nine-months of 2008, U.S. P&C insurers’ net income fell by 92 percent to $4.1 billion, compared 

to $49.4 billion in the first nine months of 2007.c

 This large decline in net income is largely attributable to two 

main factors: a decline in underwriting income resulting from large catastrophe losses and decreasing 

investment income due to financial market turmoil. In the first nine months of 2008, catastrophe losses 

stemming from Hurricanes Gustav and Ike, among more than 30 other serious weather events, totaled 

approximately $24.9 billion. These storm losses, comprising approximately 2.5 million claims, were the 

primary factor behind a $19.9 billion underwriting loss recorded by the U.S. P&C insurance industry during 

this period.d Turmoil in global financial markets, particularly equity and fixed income markets, also took a toll 

on U.S. P&C insurers’ investment portfolios. Overall, net investment income declined by approximately 4 

percent in the first nine months of 2008 to $38 billion.e

American International Group 

In September 2008, American International Group (AIG), the United States’ second largest P&C insurance 

company, based on 2007 written premiums, was saved from financial collapse by U.S. government 

intervention. The source of AIG’s financial instability was not its core insurance operations, which even now 

are fundamentally sound,f

 but instead the issuance of credit default swaps (CDSs),g a type of credit 

insurance, by its London-based derivatives trading business, AIG Financial Products (AIG FP).h

 Attracted by 

high profit margins, AIG FP became one of the largest sellers of CDSs, developing a portfolio of such 

securities with a notional value of approximately $446 billion by the second quarter of 2008.i

 Buyers of such 

securities were attracted to AIG FP’s offer to post generous collateral if the value of insured securities 

dropped, or if AIG’s own credit rating fell.j In 2007 and 2008, the deterioration of the U.S. residential 

mortgage market, and subsequent problems in broader capital and credit markets, resulted in heavy losses 

to AIG FP’s CDS portfolio. AIG FP, for example, lost more than $10 billion in 2007 and $14.7 billion in the 

first half of 2008.k

 The deterioration of AIG FP’s CDS portfolio required it to post large amounts of collateral, 

activities which cut deeply into its capital reserves. In May 2008, AIG attempted to replenish its capital 

position by raising approximately $20 billion.l However, continuing deterioration of financial markets, in 

general, and AIG’s financial position, in particular, caused several ratings agencies to downgrade AIG’s 

credit ratings in September 2008, actions which required AIG FP to post an additional $14.5 billion in 

collateral to its CDS clients.m Unable to post such collateral, or raise additional capital, AIG was forced to 

accept an $85 billion line of credit from the U.S. Federal Reserve in order to prevent bankruptcy.n

 By March 

2009, the U.S. government had provided capital totaling approximately $170 billion to AIG.o

a

Standard & Poor’s, Insurance: Property-Casualty; January 29, 2009, 1. b

Ibid. 

c

Standard & Poor’s, Insurance: Property-Casualty; January 29, 2009, 2. d

Ibid. 

e

Ibid. 

f

IBISWorld, Global Direct General Insurance Carriers, January 21, 2009, 32. g

Ibid. A credit default swap (CDS) is a type of derivate security that is akin to credit insurance in that it provides 

protection against default on assets tied to debt and mortgage securities. However, since CDS products were traded “over 

the counter” and, as such, were largely unregulated, issuers were not required to meet capital adequacy requirements. h

IBISWorld, Global Direct General Insurance Carriers, January 21, 2009, 32. i

Sender, “AIG Saga Shows How Dangerous Credit Default Swaps Can Be,” March 9, 2007; IBISWorld, Global Direct 

General Insurance Carriers, January 21, 2009, 32. j

Sender, “AIG Saga Shows How Dangerous Credit Default Swaps Can Be,” March 9, 2007. 

k

IBISWorld, Global Direct General Insurance Carriers, January 21, 2009, 32. l

Standard & Poor’s, Insurance: Property-Casualty; January 29, 2009, 4. mIBISWorld, Global Direct General Insurance Carriers, January 21, 2009, 32. n

Barr, “Congress Wants AIG Answer,” March 4, 2009; Standard & Poor’s, Insurance: Property-Casualty; 

January 29, 2009, 4; and IBISWorld, Global Direct General Insurance Carriers, January 21, 2009, 32. o

Economist, “Sound and Fury Over AIG,” March 17, 2009. 
2-3

BOX 2.1 Effects of the 2008 Financial Crisis on the Insurance Industry—Continued

P&C Monoline Insurance Companies 

Monoline insurers are companies that provide insurance for only one type of risk, such as the risk of a bond 

or other security defaulting.p

 Monoline insurers focused on asset-backed securities (ABS) account for the 

greatest share of losses due to their activities in mortgage and financial guaranty insurance.q

 The two 

largest monoline insurers in this area, AMBAC and MBIA, collectively account for approximately 50 percent 

of the $2.5 trillion industry.r Both AMBAC and MBIA announced multi-billion dollar losses in 2008 principally 

due to their ABS portfolios.s

Wider Effects on the P&C Insurance Industry 

Unlike banks, most P&C insurance companies were not involved in originating mortgage loans and investing 

in the mortgage-related derivatives that impacted the financial system.t

 Moreover, those insurers that did 

invest in mortgage-related securities only placed a small portion of total assets in such instruments. As a 

result, most P&C insurance companies are expected to escape the worst effects of the global financial crisis. 

One exception may be P&C insurance companies with banking subsidiaries, such as Swiss Re and Allianz. 

p

Oxford Analytica, “International: Monoline “Solutions” Bring New Risks,” March 6, 2008; and Oxro4d Analytica, 

“International: Monoline Downgrades Put System at Risk,” January 31, 2008. q

Insurance Journal, “P/C Insurers’ Net Income, Profitability Fall Sharply in First-Half 2008,” October 1, 2008; Oxford

Analytica, “International: Monoline ‘Solutions’ Brings New Risks,” March 6, 2008; Oxford Analytica, “International: 

Monoline Dowgrades Put System at Risk,” January 31, 2008. r

Oxford Analytica, “International: Monoline ‘Solutions’ Bring New Risks,” March 6, 2008; Oxford Analytica, 

“International: Monoline Downgrades Put System at Risk,” January 31, 2008. s

Ambac, “Ambac Financial Group,” November 5, 2008; MBIA, “MBIA Inc. Provides Financial Update,” November 5, 

2008. t

Willis, “Impact of the Credit Crisis,” October 20, 2008. In general, insurance companies are not as highly leveraged 

as many other financial services companies; insurance companies also tend to hold smaller proportions of CDSs and 

other types of risky assets. 

.
2-4

In 2007, the P&C insurance markets of most developed countries experienced declining 

trends in both premium volume and rates. In most countries, the contraction occurred 

across all product lines, with the exception of several developed Asian countries that 

experienced buoyant premium growth resulting from strong economic performance.7

 By 

contrast, P&C insurance premiums in developing markets experienced growth across all 

production lines, due largely to strong economic growth, increasing incomes, compulsory 

lines requirements, and a growing awareness of risk mitigation techniques.8

The world’s largest P&C insurance companies, measured by total revenues, tend to be 

located in North America and Europe. At the global level, the P&C insurance industry 

exhibits a low level of industry concentration, although concentration varies by region, 

country, and product line. Overall, the top four P&C insurance firms account for 

14 percent of the global market, with no individual firm estimated to hold more than 

5 percent of the total.9

 In 2006, global employment in the P&C insurance industry totaled 

approximately 1.6 million people, with the United States accounting for approximately 

39 percent of this total (625,000 people).10

Although large corporations tend to possess the financial resources and technical 

expertise necessary to navigate the markets and regulatory regimes of multiple countries, 

only a few such firms maintain extensive international operations. Indeed, international 

trade in insurance services, whether conducted via cross-border trade or through foreign 

subsidiaries, is conducted by a small, often specialized, subset of the global P&C 

insurance industry. Such firms include ACE Limited (Switzerland), AIG (United States), 

Allianz SE (Germany), Assicurazioni Generali (Italy), The AXA Group (France), The 

Chubb Corporation (United States), and Zurich Financial Services (Switzerland). Lloyd’s 

of London (United Kingdom) is also a major provider of P&C insurance worldwide (box 

2.2). Most U.S. P&C insurance companies, including large, well-known firms like 

Allstate, The Hartford Group, and State Farm, either do not sell P&C insurance outside 

the United States, or limit their international exposure to Canada and Mexico. 

 7

 Swiss Re, “World Insurance in 2007,” 2008, 14. 

8

 Ibid., 20. 

9

 IBISWorld, Global Direct General Insurance Carriers, September 30, 2008, 10–11. 10 IBISWorld, Global Direct General Insurance Carriers, January 21, 2009, 5, and IBISWorld, Auto & 

Other Direct Insurance Carriers, November 19, 2008, 5. 
2-5

BOX 2.2 Lloyd’s of London 

Unlike most well-known brands in the insurance business, Lloyd’s of London (Lloyd’s) is not a company. Instead, 

Lloyd’s is a society of members that work together to provide property and casualty insurance and reinsurance 

services. Lloyd’s specializes in underwriting complex, specialized risks that are either very large or hard to price 

including, for example, oil rigs, bridges, wind farms, airlines, space vehicles, and sporting events. Founded in a coffee 

house in London, England, in 1688, Lloyd’s now operates in more than 200 countries and territories worldwide. 

As of May 1, 2008, Lloyd’s comprised 80 syndicates and 51 managing agents. Members, who provide the capital 

behind Lloyd’s policies, comprise both corporations/limited partnerships and individuals. Members typically underwrite 

insurance polices in syndicates, which are managed on a day-to-day basis by managing agents.a

 Under such 

arrangements, members insure a portion of the total underwritten loss, and are not responsible for the losses of other 

syndicate members. Several U.S. firms operate in the Lloyd’s market, including Liberty Syndicates, which is backed 

by U.S.-based Liberty Mutual Group.b

In a typical transaction, Lloyd’s insurance brokers negotiate competitive terms and conditions on behalf of clients with 

several syndicates, hoping to find one that will insure a specific risk. In situations involving very large risks, more than 

one syndicate may be involved. Lloyd’s syndicates, which frequently compete with each other for insurance business, 

employ specialist underwriters to price and assess specialized risks, as well as process claims following loss events. 

Source: Lloyd’s, “The Lloyd’s Market,” undated (accessed January 26, 2009). 

a

A managing agent is a company established for the sole purpose of providing management and other services to a syndicate. 

Managing agents, which may provide services to more than one syndicate, provide the business structure behind a syndicate and 

employ specialist underwriters and support staff. b

Liberty Syndicates Web site. http://www.libertysyndicates.com (accessed March 12, 2009). 

Insurance Market Profiles 

In 2006, premium growth rates for P&C insurance varied widely between developed and 

developing countries.11 Most developed-country markets exhibited mid-to-low singledigit growth rates, or in some cases, negative growth rates, ranging from -6 percent in 

Japan to 7 percent in Spain (table 2.1). The exception in this category was Korea, with a 

growth rate of 23 percent. Overall, the average premium growth rate for the developed 

countries was less than 3 percent in 2006, significantly below the average annual growth 

rate of 10 percent recorded from 2002 through 2006.12 By contrast, total P&C insurance 

premiums grew rapidly in developing countries, ranging from 8 percent in Mexico, 

Poland, and South Africa to 35 percent in Venezuela (table 2.2). The average growth rate 

for premiums in this group was 19 percent in 2006, consistent with the average annual 

growth rate of approximately 19 percent from 2002 through 2006.13

 11 The classification is derived from the World Bank’s “Country Classifications,” undated (accessed 

January 12, 2009). The World Bank classifies countries into low-income, lower-middle-income, uppermiddle-income, and high-income categories. Developed economies in this report refer to the high-income 

category and developing economies consist of low-income, lower-middle-income, and upper-middle-income 

groups. Throughout this section, references to developed countries will include the countries in table 2.1, and 

references to developing countries will include the countries in table 2.2. 12 Average based on 44 observations due to missing growth observations in 2002; growth in Italy 

available from 2004. 13 Average based on 42 observations because only Mexico and Venezuela reported growth rates in 

2002. 
2-6

TABLE 2.1 Insurance market profiles, top developed-country markets for P&C insurance, 2006a

Country 

Total P&C 

premiums 

(millions of $)b

Growth 

over 

previous 

year, total 

P&C 

premiumsc

(%) 

P&C 

insurance 

density d 

($/capita) 

P&C 

insurance 

market 

penetratione 

 (% of GDP) 

Foreign 

market 

sharef 

(% of P&C 

insurance 

market) 

Number of 

firms

Industry 

concentrationg 

Australia 17,890 2 863 2.4 26z 102 67 

Canada h, i 30,431 -1 1,061 2.4 38z 194 56 

Francej

 53,695 0 875 2.4 n/a 1,053 69 

Germany 61,031 0 742 2.1 8z

 227 48 

Italy j 40,024 3 685 2.2 26z

 126 59 

Japan j, k, m 67,962 -6 532 1.6 6z

 42 97 

Koreaix

 29,642 23 614 3.3 3z 97 94 

Spainl

 30,150 7 684 2.4 20z 298 44 

United Kingdom 69,464 -3 1,148 2.9 45z

 788 69 

United States 484,742 3 1,621 3.7 11z

 2,343 45 

Sources: Total premiums and premium growth: AXCO, Inc., “Statistics: Non-Life Market Totals,” undated (accessed 

September 17, 2008). Population and GDP: IMF, World Economic Outlook Database (accessed October 15, 2008). Foreign 

market share: OECD, Insurance Statistics Yearbook 1997–2006, 2008. Number of firms and industry concentration: AXCO, 

Inc., “Market Participants: Summary and Trends,” undated (accessed November 3, 2008); AXCO, Inc., “Market Participants: 

Market Concentration,” undated (accessed November 20, 2008); and AXCO, Inc., “Appendix 2: Company Statistics,” undated 

(accessed October 10, 2008). 

 aSome data are not available for 2006 and will reflect the last year available. Differences are noted where appropriate. bData exclude personal accident and healthcare insurance. cPercent growth of total P&C premiums during 2006. dDensity is defined as P&C premiums per capita. Calculated by Commission staff (P&C premiums in millions of U.S. 

dollars as reported by AXCO; population in millions as reported by the IMF). eMarket penetration is defined as P&C premiums as a share of gross domestic product (GDP). Calculated by 

Commission staff (P&C nominal premiums in millions of U.S. dollars as reported by AXCO; nominal GDP converted from 

billions as reported by the IMF). f Data refer to market share of foreign-controlled companies in the domestic P&C insurance market, OECD Table 23. 

Unavailable data denoted where appropriate. g

Industry concentration defined as market share of written premiums by top 10 insurers (foreign and domestic) for latest 

available year as reported by AXCO, Inc., “Market Participants: Market Concentration.” Data for Australia and Korea 

calculated by Commission staff from AXCO, Inc., “Appendix 2: Company Statistics.” 

 h

The number of firms in Canada exceeds 300 if provincially licensed firms are included. See AXCO, Inc., “Market 

Participants: Market Concentration.” iUnclear to which year data on number of firms correspond in Canada and Korea. jFigures for number of firms refer to 2007 in France, Italy, and Japan. 

 k With respect to the number of firms in Japan, AXCO also reports “there were also 59 co-operative insurance carriers 

operating under sector-specific laws and 389 unregulated co-operatives.” See AXCO, Inc., “Market Participants: Market 

Concentration”. lFigures for the number of firms in Spain refer to life and nonlife market combined. mData on industry concentration in Japan refer to 2005. 
2-7

TABLE 2.2 Insurance market profiles, top developing-country markets for P&C insurance, 2006a

Country 

Total P&C 

premiumsb

(millions of $) 

Growth over 

previous 

year, total 

P&C 

premiumsc

 

(%) 

P&C 

insurance 

densityd

($/capita) 

P&C 

insurance 

market 

penetratione

(% of GDP) 

Foreign 

market 

sharef

(% of P&C 

insurance 

market) 

Number of 

firms

Industry 

concentrationg 

Argentina i,j 3376 20 87 1.6 n/a 103 47 

Brazil k 11,626 26 62 1.1 n/a 70 63 

China j 18,941 26 14 0.7 n/a 39 90 

India l 4,494 13 4 0.5 n/a 12 95 

Mexico j, m 6,435 8 62 0.7 n/a 94 78 

Poland h, n 4,807 8 126 1.4 40 33 87 

Russia m 11,331 25 79 1.1 n/a 918 38 

South Africa o 5,333 8 113 2.1 n/a 359 80 

Turkey n 4,792 23 70 0.9 17 29 77 

Venezuela m 2,539 35 94 1.4 n/a 49 71 

Sources: Total premiums and premium growth: AXCO, Inc., “Statistics: Non-Life Market Totals,” undated (accessed 

October 15, 2008). Population and GDP: IMF, World Economic Outlook Database (accessed October 15, 2008). 

Foreign market share: OECD, Insurance Statistics Yearbook 1997–2006, 2008. Number of firms and industry 

concentration: AXCO, Inc., “Market Participants: Summary and Trends,” undated (accessed December 10, 2008); 

AXCO, Inc., “Market Participants: Market Concentration,” undated (accessed November 20, 2008); and “Appendix 2: 

Company Statistics," undated (accessed November 20, 2008). 

a

Some data are not available for 2006 and will reflect the last year available. Differences are noted where 

appropriate. b

Data exclude personal accident and healthcare insurance. 

c

Percent growth of total nonlife premiums during 2006. 

d

Density is defined as P&C premiums per capita. Calculated by Commission staff (P&C premiums in millions of 

U.S. dollars as reported by AXCO; population in millions as reported by the IMF). e

Market penetration is defined as P&C premiums as a share of gross domestic product (GDP). Calculated by 

Commission staff (P&C nominal premiums in millions of U.S. dollars as reported by AXCO; nominal GDP converted 

from billions as reported by the IMF). f Data refer to the market share of foreign companies in the domestic P&C insurance market reported in OECD 

Table 23. Only data for Poland and Turkey are available. 

g

Industry concentration defined as market share of written premiums by top 10 insurers (foreign and domestic) as 

reported by AXCO, Inc., “Market Participants: Summary and Trends.” Data for China, South Africa, and Venezuela 

calculated by Commission staff from AXCO, Inc., “Appendix 2: Company Statistics.” h

Figure for foreign market share in Poland refers to 2004.

i

Figure for the number of firms in Argentina includes companies that write life and workers' compensation. j

Figures for the number of firms in Argentina, China, and Mexico refer to 2007. k

According to AXCO, taking into account multiple holdings, there were about 70 active insurance companies in 

Brazil at the end of 2006. l

Unclear to which year data on number of firms in India refer. As of 2008, there were “an estimated 20 non-life 

insurers, both public sector and private, that are registered to do business in India.” AXCO, Inc., “Market Participants: 

Summary and Trends,” undated (accessed December 10, 2008) mUnclear if data on number of firms in Mexico, Russia, and Venezuela refer to nonlife and life combined. n

Figures for the number of firms in Poland and Turkey refer to 2008. 

o

Data on number of firms represent 102 short-term insurance companies registered in South Africa in December 

2005, 7 major financial conglomerates that include short- and long-term insurers, and 250 underwriting managers 

(figure estimated by AXCO) that have agreements with short-term insurers or Lloyd's underwriters to underwrite a 

particular line of business. These underwriting managers are often partially or fully owned by the insurer, but work as 

independent organizations. 
2-8

For the most part, there was a high degree of similarity in the type of insurance products 

sold in all insurance markets. Across developed and developing countries, the most 

commonly purchased type of P&C insurance in 2006 was automobile insurance, 

reflecting the influence of compulsory insurance regulations.14 Despite considerable 

variability in the share of total P&C insurance accounted for by automobile insurance in 

2006,15 it constituted the largest share of the P&C insurance market in all countries, with 

the exception of Russia.16 Property insurance of some type represented the second-largest 

share of the P&C insurance market in most countries, accounting for approximately 

25 percent of the market.17 The third-largest line of insurance in developed countries was 

liability insurance, with an average share of 10 percent in 2006. By contrast, the thirdlargest line in developing countries varied widely, and included not only liability 

insurance, but also marine, aviation, and transport insurance; surety, bonds, and credit 

insurance; construction and engineering insurance; and workers’ compensation and 

employers’ liability insurance. In general, liability insurance usage reflects the nature of a 

country’s legal system, with demand for such insurance increasing with enforcement of 

legal rights and the general level of litigiousness.18

The share of the P&C insurance market accounted for by foreign firms varies widely 

among countries. In developed countries, foreign market share19 in 2006 ranged from 

6 percent in Japan to 45 percent in the United Kingdom; in developing countries data 

were available only for Turkey (17 percent) and Poland20 (40 percent). In general, foreign 

market share estimates above 60 percent are characteristic of small transition economies, 

such as the Czech Republic, Slovakia, and Hungary.21 Although there is no clear 

explanation for foreign market share variation, one industry representative indicates that 

foreign market share is affected in large part by the restrictiveness of local regulations.22

In most of the countries analyzed, P&C insurance services were supplied by a relatively 

large number of firms,23 typically ranging from several dozen to several hundred.24 By 

contrast, 2,300 P&C insurance companies maintained operations in the United States. 

Industry concentration, measured as the market share of the 10 largest firms, varied 

across country markets; it ranged from 44 percent in Spain to 97 percent in Japan (2005) 

in our sample of developed countries, and from 38 percent in Russia to 95 percent in 

India25 in our sample of developing countries.

Insurance density, defined as total premiums per capita, measures the breadth of the 

insurance market. In 2006, the average insurance density for developed countries was 

 14 AXCO, Inc. “Compulsory Insurances,” undated (accessed October 28, 2008). 15 AXCO, Inc. “Statistics: Non-Life Market Totals,” undated (accessed September 17, 2008, and 

October 28, 2008). 16 Automobile insurance represented 21 percent of Russia’s total P&C insurance market; property 

accounted for 74 percent. 17 In our sample of developed countries, Korea was the outlier with property accounting for only 

4 percent of total P&C insurance. In our sample of developing countries, Russia was the outlier, with 

property constituting the largest share of total P&C insurance. 18 Industry official, interview by Commission staff, December 2, 2008. 19 Data refer to market share of foreign companies in the domestic market (nonlife). OECD, Insurance 

Statistics Yearbook 1997–2006, 2008. 20 Polish figure refers to 2004. 

21 OECD, Insurance Statistics Yearbook 1997–2006, 2008. 22 Industry official, interview by Commission staff, Philadelphia, PA, December 5, 2008. 23 Hartwig, Insurance Information Institute, Written submission to the USITC, October 2, 2008, 3. 24 Most data on the number of firms are 2006 data. For some countries, data were only available for 

2005, 2007, or 2008. See tables 2.1 and 2.2 for more detail. 25 Until recently, the insurance industry in India was a government-owned monopoly. 
2-9

$882, compared with $71 for developing countries.26 Insurance penetration, or total P&C 

insurance premiums as a percentage of national gross domestic product (GDP), measures 

the growth potential of insurance markets.27 Insurance penetration in developed countries 

averaged 3 percent, compared to an average of 1 percent in developing countries.28 Given 

that the level of wealth likely stimulates demand for insurance services, it is not 

surprising that the developed countries exhibit higher insurance density and market 

penetration. In general, too, the development of the P&C insurance market promotes 

economic growth. For a sample of 78 countries, the level of per capita income was 

positively related to both insurance penetration and insurance density from 2002 through 

2007 (figures 2.1 and 2.2), indicating that, as income rises, individual consumers and 

business customers devote additional resources to mitigating risk through the purchase of 

insurance products.29

0

500

1000

1500

2000

2500

Density: P&C premiums per capita

0 20000 40000 60000 80000 100000

GDP per capita ($)

Source: AXCO, Inc., Insurance Market Reports Database (accessed November 26,

2008); IMF, World Economic Outlook Database (accessed October 15, 2008).

2002-07

FIGURE 2.1 P&C insurance density and GDP per capita, 78 countries,

 26 For the same year, mean density was $367 per capita for a sample of 78 countries (refer to app. D for 

a list of countries). 27 Hartwig, Insurance Information Institute, Written submission to the USITC, October 2, 2008, 7. 28 For the same year, mean penetration was 1.6 for the expanded 78-country sample. 29 The scatter plots displayed in figures 2.1 and 2.2 contain data pertaining to income per capita, 

insurance density, and insurance penetration for 78 countries from 2002 through 2007 (a total of 388 

observations in each figure). A regression line through each scatter plot shows a positive relationship, with 

regression coefficients significant at all levels of confidence. The shaded area around the line indicates the 

confidence interval. See app. D for more details. 
2-10

0

1

2

3

4

5

Penetration: P&C premiums as a share of GDP

0 20000 40000 60000 80000 100000

GDP per capita ($)

Source: AXCO, Inc., Insurance Market Reports Database (accessed November 26,

2008); IMF, World Economic Outlook Database (accessed October 15, 2008).

2002-07

FIGURE 2.2 P&C insurance penetration and GDP per capita, 78 countries,

The Property and Casualty Insurance Industry 

How Property and Casualty Insurance Firms Operate 

The P&C insurance industry operates in essentially the same way worldwide, although 

differences do exist between countries and regions. In essence, insurance enables 

individuals and entities to share the burden of unexpected losses associated with damage 

or destruction to property or incurred liability. Specifically, P&C insurance companies 

collect payments, known as premiums, from insurance policyholders that face similar 

risks, including, for example, automobile accidents and house fires. Such premiums are 

pooled together by the insurance company, with payments made from the pool to 

individuals and entities that experience losses. Although some participants do not suffer 

losses or receive payments from the pool associated with such losses, they still benefit 

from this risk-sharing arrangement by avoiding the risk of large-scale financial loss.30

Following underwriting and policy issuance, P&C insurance companies collect premium 

payments from customers (figure 2.3). Upon receipt, premium payments are placed in an 

unearned premium reserve. Such funds are then “earned,” or recognized as revenue, over 

the policy’s term, typically on a monthly basis.31 Like all companies, P&C insurers use 

 30 Standard & Poor’s, Insurance: Property-Casualty; Europe, September 2007, 18. 31 For example, an upfront premium payment of $1,200 on a one-year insurance policy would typically 

be placed into an unearned premium reserve, with revenue recognition occurring at a rate of $100 per month 

for the 12-month term. Standard & Poor’s, Insurance: Property-Casualty, July 10, 2008, 11; Standard & 

Poor’s, Insurance: Property-Casualty; Asia, February 2007, 19; and Standard & Poor’s, Insurance: PropertyCasualty; Europe, September 2007, 16.
2-11

Premiums

Expenses

• Agents' commissions

• Taxes, licenses, and fees

• General operating expenses

Loss reserves Unearned premium 

reserves

Policyholders' surplus

Invested until needed

Investment gain or loss Claims payments

(underwriting gain or loss)

Net operating income

or loss

FIGURE 2.3 Flow of funds through P&C insurance firms

Source : Compiled by Commission staff using sources from Standard & Poor's and the American 

Insurance Association.

revenues to pay a wide variety of expenses, with the single largest expense being losses, 

otherwise known as policyholder claims. Other expenses include agent/broker 

commissions, workforce salaries, claims-related expenses such as litigation fees and 

insurance adjusters’ fees, and general overhead expenses. P&C insurance companies are 

also required to set aside funds to cover claims, referred to as loss reserves. Overall, the 

underwriting portion of a company’s profit (or loss) is determined by subtracting such 

expenses from total premiums.32 Due to highly competitive conditions in many countries, 

which restrict insurers’ ability to raise prices, P&C insurance companies tend to set 

premium prices at levels that closely match premium revenues with expected loss 

payouts. Due to the complexity of accurately estimating loss payouts, however, the 

underwriting operations of many insurance companies often experience losses. In the 

United States, for example, P&C insurance companies recorded an underwriting profit in 

only two years during the period 1980–2006.33 

 32 Standard & Poor’s, Insurance: Property-Casualty, July 10, 1008, 11. 33 AIA, “Insurance 201: Property-Casualty Finance,” September 7, 2006, 3. 
2-12

The total profitability of P&C insurers, however, comprises not only the performance of 

the underwriting segment of the business, but also gains/losses34 on invested loss 

reserves, unearned premium reserves, and policyholders’ surplus.35 In general, P&C 

insurance companies around the world invest their reserves in low-risk, high-quality 

investment vehicles, particularly government and high-grade corporate bonds, with the 

intention of deriving investment income/gains, although the share of reserves invested in 

such assets varies by country.36 In the United States, for example, bonds accounted for 

nearly 67 percent of insurance companies’ reserve investments in 2006.37 By contrast, 

European insurance companies tend to place a larger share of their reserves in equities, a 

practice that exposes them to greater losses than their U.S. counterparts during falling 

stock markets.38 In Asia, some governments have established rigid regulations specifying 

how P&C insurance companies are allowed to invest reserves. In general, Asia’s more 

developed economies, including Japan, Hong Kong, and Korea, are characterized by 

more liberal investment regimes that give insurers wide latitude to set investment 

strategy. By contrast, the investment regimes of developing economies like China, India, 

Indonesia, Malaysia, Thailand, and Vietnam tend to restrict insurers’ investment 

choices.39

P&C insurance firms expend a great deal of resources on calculating premium prices and 

reserve holdings. Both activities have an important bearing not only on a firm’s 

profitability, but also its competitive position within the industry. Unlike most products 

and services, premium prices must be established before the actual cost of providing loss 

coverage is known. As a result, premium prices are largely determined by complex, 

actuarial calculations that attempt to estimate the frequency and severity of future losses, 

with premium rates rising and falling in response to the anticipated cost of such losses.40

Competitive conditions and anticipated investment returns also may play a role in the 

process of setting premium rates. During periods of high investment returns, for example, 

insurers may choose to lower premium prices in an effort to gain market share, relying on 

investment income for overall profitability. Conversely, in periods of low or declining 

 34 Investment gains or losses on an insurance company’s investment portfolio include interest income 

on bonds held in the portfolio, dividends on stocks held in the portfolio, and capital gains/losses derived from 

the sale of securities held in the portfolio. AIA, “Insurance 201: Property-Casualty Finance,” September 7, 

2006, 3; Standard & Poor’s, Insurance: Property-Casualty, July 10, 2008, 11. 35 Policyholder surplus is the excess of an insurance company’s assets over its liabilities, defined as its 

legal obligations to meet the benefits payable to its policy holders. Rubin, Dictionary of Insurance Terms, 

2008, 384. Policyholder surplus tends to vary with a firm’s overall profitability. During profitable years, 

management may place additional funds in the policyholders’ surplus, while in loss-making years, 

management may use funds from the policyholders’ surplus to pay claims and/or other expenses. AIA, 

“Insurance 201: Property-Casualty Finance,” September 7, 2006, 3; Standard & Poor’s, Insurance: PropertyCasualty, July 10, 2008, 13, 16. 36 Since many property losses are often settled in a relatively short timeframe, P&C insurance 

companies tend to invest the majority of their reserves in highly liquid securities that can be quickly 

converted to cash. Standard & Poor’s, Insurance: Property-Casualty, July 10, 2008, 11; and AIA, “Insurance 

201: Property-Casualty Finance,” September 7, 2006, 2. 37 Insurance Information Institute, The III Insurance Factbook 2008, 2008, 37. In 2006, U.S. insurance 

companies placed the remainder of such reserves in common stock (18 percent), cash and short-term 

investments (8 percent), and other investments (7 percent). 38 Standard & Poor’s, Insurance: Property-Casualty; Europe, September 2007, 18. 39 Standard & Poor’s, Insurance: Property-Casualty; Asia, February 2007, 22. 40 Actuarial calculations are based on historic loss data and statistics, such as demographic data that 

pertain to a particular group of policyholders. When underwriting automobile insurance policies, for example, 

insurers use historic data on automobile accident rates, repair costs, and many other factors to calculate 

premium rates for individual customers. AIA, “Insurance 201: Property-Casualty Finance,” September 7, 

2006, 1. 
2-13

investment returns, insurance companies may be unable to lower premium prices, or may 

even raise prices, to avoid the possibility of net losses.41 

The P&C insurance market is subject to cycles that fluctuate between “soft” and “hard” 

market conditions. Soft market conditions are characterized by high levels of 

competition, decreasing prices, and declining underwriting standards as companies 

compete for market share. Such conditions, however, typically lead to reduced 

profitability and increased claims, which, in turn, lead to underwriting losses and 

declining underwriting capacity. As a result, insurance companies typically react by 

introducing stricter underwriting standards, setting the stage for hard market conditions. 

In hard markets, insurance companies limit the supply of insurance and raise prices, 

leading to high levels of profitability. However, high profits attract capital into the 

industry, raising underwriting capacity and leading to increased competition, with such 

competition setting the stage for a return to soft market conditions.42 Although such 

underwriting cycles tend to affect the global P&C insurance industry, conditions vary by 

individual country and/or product line segments. Overall, the global P&C insurance 

market experienced hard market conditions from 2003 through 2007, transitioning to soft 

market conditions in 2008.43

P&C insurance firms also use actuarial methods to calculate the size of their loss 

reserves, with miscalculation posing serious risks to a firm’s profitability and 

competitiveness. For example, a firm that sets reserves higher than necessary runs the 

risk of reducing its profitability, forcing it to raise premium rates. By contrast, setting 

reserves too low may inflate profits, leading the firm to inappropriately lower its rates. 

Setting reserves lower than necessary may also create a situation in which an insurance 

company does not have sufficient loss reserves to cover higher than expected claims. 

However, establishing an optimal level of reserves is extremely difficult due to the 

uncertainty surrounding estimations of future losses. In addition to the unpredictability of 

natural disasters, forecasts are subject to many other variables, including real economic 

growth, inflation, interest rates, and sociopolitical trends.44

Globally, insurance is distributed to customers via several methods. In many parts of the 

world, particularly in North America and Europe, personal lines are distributed to 

customers through insurance agents. Such agents either work for a particular company, 

usually as part of a network, or independently, selling policies for multiple firms. In some 

countries, personal lines are distributed to customers via bank and/or postal centers, a 

method of distributing insurance products known as bancassurance. Although 

bancassurance methods are used in Europe, such methods are particularly prevalent in 

Asian countries. P&C insurance companies also increasingly use direct sales techniques 

to distribute personal lines, including Internet, telephone, and direct mail methods. By 

contrast, commercial lines tend to be sold through brokers, that are employed by 

businesses and other organized entities to identify insurance policies that meet the 

specific needs of each organization. Brokered deals are particularly common in the 

United States, United Kingdom, Australia, and Canada, accounting for as much as 

 41 Standard & Poor’s, Insurance: Property-Casualty; Asia, February 2007, 20. 42 Rubin, Dictionary of Insurance Terms, 2008, 536; Hartwig, Insurance Information Institute, Written 

submission to the USITC, October 2, 2008, 6. 43 Industry official, interview by Commission staff, Philadelphia, PA, December 5, 2008; Fitch Ratings, 

“The Property/Casualty Underwriting Cycle,” April 14, 2008, 1–3. 44 Standard & Poor’s, Insurance: Property-Casualty, July 10, 2008, 14; Standard & Poor’s, Insurance: 

Property-Casualty; Europe, September 2007, 16–17. 
2-14

80 percent of commercial lines sales in these countries. In Asia, however, brokered deals 

are less common.45

Supply and Demand Factors 

A wide range of factors affect P&C insurance companies’ willingness to supply insurance 

in global markets as well as consumers’ decisions to purchase insurance. Supply factors 

include NTMs, input costs, and government regulations requiring the approval of new 

types of insurance. Demand factors include economic and demographic factors, 

mandatory government requirements for coverage, and the likelihood of catastrophic 

events. Some factors may affect both supply and demand decisions, such as the number 

of insurers operating in a given market, institutional and business climate factors, and 

price regulation. 

Supply Factors 

According to industry representatives, country-level trade policies are one of the most 

important factors that affect U.S. firms’ abilities to access foreign P&C insurance 

markets. The presence of NTMs can affect the ability of multinational insurance firms to 

enter foreign markets which, in turn, decreases competition and raises the price of 

insurance services. For example, provisions restricting the amount of foreign equity in 

domestic insurance firms may limit such firms’ control over their overseas operations, a 

factor which may discourage foreign market entry. A summary and analysis of the nature 

and potential effect of NTMs on the P&C insurance industry are provided in chapter 4 of 

this report. 

As one of the P&C insurance industry’s primary operating expenses, the cost and 

availability of labor can also affect the supply of P&C insurance. Insurance firms prefer 

to fill most positions with college graduates, and often provide additional specialized 

training to their employees. This explains, in part, the relatively high wages earned by 

insurance industry employees. For example, U.S. insurance employees in nonsupervisory 

positions earned an average of $798 per week, which is higher than the U.S. private 

industry average of $568 per week.46 Moreover, the U.S. insurance industry has been 

slow to adopt labor-saving technological innovations, lagging behind other segments of 

the financial services sector. This may be due to the complex nature of insurance 

products, security concerns, the difficulty and high cost of developing and maintaining 

online systems, or insurers’ reluctance to encourage increased competition by facilitating 

online policy and price comparisons, among other factors.47 Further, certain tasks cannot 

be accomplished electronically, such as face-to-face client-agent consultations (especially 

when they relate to complicated policies) and damage assessment.48

According to industry representatives, government regulations requiring the approval of 

new types of insurance also can affect the supply of insurance services. Regulation of this 

type, referred to as policy form regulation, has the potential to affect the amount of time 

 45 Standard & Poor’s, Insurance: Property-Casualty; Asia, February 2007, 17; Standard & Poor’s, 

Insurance: Property-Casualty, July 10, 2008, 17; and Standard & Poor’s, Insurance: Property-Casualty; 

Europe, September 2007, 17. 

46 USDOL, BLS, “Career Guide to Industries: Insurance,” March 12, 2008. 47 Lewin, “Insurance Industry Lags Behind in Technology,” June 5, 2006. 

48 USDOL, BLS, “Career Guide to Industries: Insurance,” March 12, 2008. 
2-15

required to introduce new insurance products. In the United States, the median time from 

registration with regulatory authorities to product release in states maintaining policy 

form regulations was 72 days, as compared to 43 days in states lacking such 

regulations.49 In general, the insurance industry believes that policy form regulation raises 

compliance costs and increases the time to market for new insurance products, potentially 

impairing market innovation and first-mover advantages.50

Demand Factors 

Economic factors such as economic growth, cost of living, and unemployment levels 

affect the consumption of insurance products, with demand usually rising as prosperity 

increases. Industry representatives report that economic growth is one of the most 

important factors explaining differences in demand across countries.51 In some 

developing countries, economic development has led to the emergence of a middle class. 

These households tend to acquire valuable property such as homes and automobiles, all 

of which typically require insurance. In addition, empirical studies on the factors 

affecting demand for P&C insurance confirm that real GDP per capita is highly positively 

correlated to insurance consumption.52 Similarly, quantitative work conducted by 

Commission staff also demonstrates a clear, positive relationship between per capita 

income growth and P&C insurance premium growth across a large sample of countries 

(figure 2.4).53 Relatedly, consumers tend to purchase more insurance in countries 

exhibiting a high cost of living, largely because property in such locations tends to be 

more highly valued. Not surprisingly, unemployment levels also tend to affect demand 

for insurance services, with lower levels of unemployment spurring increased insurance 

purchases. By contrast, demand for insurance tends to fall during periods of high 

unemployment, as some consumers are unwilling or unable to assume the cost of 

maintaining insurance policies. 

Demand for P&C insurance also tends to be greater in areas characterized by high 

population density, due to higher property values as well as higher per capita levels of 

crime and other loss-incurring events than in more sparsely populated areas. Among the 

top 10 developed countries, for example, three of the five largest P&C insurance markets 

in 2006—Japan, Germany, and the United Kingdom—were also the most densely 

populated. Exceptions occur in countries like Australia, Canada, and the United States, 

where demand for insurance is high, but population density is relatively low due to the 

abundance of land. 

 49 Cummins, “Deregulating Property-Liability Insurance,” 2002, 16. 50 Ibid., 18. Since regulators typically require higher levels of scrutiny for insurance sold to individuals, 

the arguments against policy form regulation are typically restricted to commercial lines. 51 Industry official, telephone interview by Commission staff, December 2, 2008. 52 Esho, et al., “Law and the Determinants of Property-Casualty Insurance,” June 2001, 11. The 

correlation coefficient is 0.85. 53 The scatter plot displayed in figure 2.4 contains data on income and premium growth for 78 countries 

from 2002 through 2007, for a total of 388 observations. A regression line through the scatter plot displays a 

positive relationship, with a regression coefficient significant at all levels of confidence. The shaded area 

around the regression line indicates the confidence interval. See appendix D for more details. 
2-16

-40

-20

0

20

40

60

Growth of P&C premiums

-20 0 20 40 60

Growth of GDP per capita

Source: AXCO, Inc., Insurance Market Reports Database (accessed November 26,

2008); IMF, World Economic Outlook Database (accessed October 15, 2008).

78 countries, 2002-07

FIGURE 2.4 Growth of P&C premiums and growth of GDP per capita,

Government regulation can also affect demand for P&C insurance products. Indeed, 

government-required insurance coverage, referred to as compulsory lines, tends to 

increase demand for insurance products. For example, most countries require that 

consumers and businesses purchase some type of automobile insurance, a factor which 

likely boosts demand beyond the level that would exist in the absence of such 

regulations. 

Finally, the actual and perceived threat of catastrophic events such as hurricanes, 

earthquakes, and even terrorist attacks also stimulates demand for P&C insurance 

services. Indeed, demand for terrorism insurance has reportedly increased since the 

September 11, 2001, terrorist attacks. In the period immediately following the attacks, 

demand for terrorism insurance spiked, just as insurance firms were scaling back their 

P&C insurance offerings and raising premium prices. In some cases, insurance firms 

stopped issuing terrorism-related insurance policies altogether.54 Over time, however, 

demand for terrorism insurance decreased, even as insurers began to offer policies at 

more favorable prices. Although demand for terrorism insurance has declined since the 

2001 terrorist attacks, and prices have consistently fallen, terrorism insurance represents a 

potentially important segment of the overall P&C insurance market. The perception that 

climate change may be driving increasingly frequent and damaging weather-related 

events, such as hurricanes, fires, floods, and droughts, is also reportedly leading to higher 

demand for both P&C insurance and reinsurance services (box 2.3). Due to high levels of 

uncertainty surrounding climate change threats, however, many P&C insurance 

companies are grappling with the difficulties associated with the development and pricing 

of such policies, largely because miscalculation raises the potential for catastrophic 

losses.55

 54 O’Connor, “Recent Trends in the Catastrophic Risk Insurance/Reinsurance Market,” 2005, 47. 55 Ibid., 44. 
2-17

BOX 2.3 Reinsurance 

Reinsurance, commonly referred to as insurance for insurance companies, is an insurance transaction in which one 

company (the assuming insurer, or reinsurer) indemnifies, for a premium, a primary insurance company (the ceding 

insurer) against all or part of the loss that it may sustain from its insurance policies. A reinsurer, in turn, may purchase 

reinsurance from another reinsurer, a transaction known as retrocession.a

 One of the most important functions of 

reinsurance is to protect P&C insurers against unforeseen, catastrophic events that threaten to overwhelm loss 

reserves, including events like large-scale hurricanes and earthquakes. Insurance companies also use reinsurance to 

increase insurance capacity, limit liability exposures, and stabilize operating results.b

 

An insurance company’s reinsurance requirements are determined by company-specific factors, including its book of 

insurance business, its underwriting strategy, and its financial position. As a result, reinsurance contracts, and 

premiums, must be customized to take into account each insurer’s unique circumstances. Reinsurance transactions 

are typically structured as either facultative contracts or treaty contracts. Facultative contracts provide coverage for a 

specific individual risk (like, for example, a high-risk building), usually because the primary insurance company 

considers the risk too large to absorb on its own. By contrast, treaty contracts cover a portion of an entire class or 

classes of business, like homeowners’ insurance. An insurance company may purchase a single reinsurance contract 

or may purchase several treaties to achieve the desired level of coverage, a process known as aslaying. Under such 

arrangements, reinsurers pay claims, as necessary, in a predetermined sequence in response to loss events.c 

The leading suppliers of reinsurance services tend to be large multinational insurance companies that specialize in 

such services, mainly Swiss Re (Switzerland), Munich Re (Germany), Berkshire Hathaway (United States), and 

Hannover Re (Germany). Reinsurance can also be purchased from the reinsurance departments of primary insurers. 

In 2007, the global reinsurance market was valued at approximately $168 billion,d

 exhibiting a compound annual 

growth rate of approximately 6 percent from 2003 through 2007. Of this total, Munich Re accounted for approximately 

18 percent of the global market, followed by Swiss Re (16 percent), Berkshire Hathaway (7 percent), and Hannover Re 

(3 percent). All other sources of reinsurance services accounted for approximately 57 percent of the global market.e

 In 

2007, the largest regional market was the Americas, which represented 56 percent of the global market, followed by 

Europe (35 percent), and the Asia-Pacific region (10 percent).f Primary P&C insurance companies based in the United 

States ceded approximately $58 billion to reinsurers in 2007, largely to firms based in Bermuda (52 percent), 

Switzerland (17 percent), and the United Kingdom (9 percent). Overall, foreign reinsurers represented approximately 

83 percent of the U.S. reinsurance market in 2007.g

In general, the reinsurance industry faces similar market conditions to that of primary insurers, particularly the ups and 

downs of the underwriting cycle, wherein premium pricing conditions exhibit “soft” market conditions (i.e., the cycle is 

characterized by excess capital and underwriting capacity) and “hard” market conditions following large-scale 

catastrophes that drain capital from the market. During 2008, for example, the global reinsurance industry, like the 

P&C insurance industry, faced highly competitive market conditions characterized by soft market conditions, excess 

underwriting capacity, and turbulent financial markets, a situation which may lead to underperformance and/or losses 

on reinsurers’ investment portfolios. In response to such conditions, the reinsurance industry reportedly maintained 

underwriting discipline in 2008, largely to preserve capital in uncertain times.h

 

a

RAA, “RAA Fundamentals of Property Casualty Reinsurance,” 2008; Datamonitor, “Global Reinsurance,” April 2008, 12; and 

Standard & Poor’s, Insurance: Property-Casualty, July 10, 2008, 9. b

RAA, “RAA Fundamentals of Property Casualty Reinsurance,” 2008. 

c

Ibid. 

d

The global reinsurance market is measured as the amount of gross written premiums ceded to reinsurers. Datamonitor, “Global 

Reinsurance,” April 2008, 7. e

Datamonitor, “Global Reinsurance,” April 2008, 12; Standard & Poor’s, Insurance: Property-Casualty, July 10, 2008, 8, 11. f

Datamonitor, “Global Reinsurance,” April 2008, 10. 

g

Insurance Information Institute, “Facts and Statistics: International,” undated (accessed January 21, 2009). h

Standard & Poor’s, Insurance: Property-Casualty, July 10, 2008, 9; Fitch Ratings, 2008–2009 Global Reinsurance Review & 

Outlook, September 2008, 1, 3–4. 
2-18

Factors Affecting Both Supply and Demand 

The number of insurers in a country market can affect both the supply and demand for 

P&C insurance services. In general, the supply of insurance is greater in countries with a 

relatively high number of insurance companies, as companies compete with each other on 

not only the basis of price but also by offering new (or improved) insurance products.56 

Such competition, in turn, tends to increase demand for such services. For example, 

Liberty Mutual’s experience in Colombia illustrates how the entrance of a foreign 

insurance company into a previously protected market can boost both the supply and 

demand of P&C insurance services. After entering the Colombian P&C market, Liberty 

Mutual addressed a previously underserved market by supplying taxicab insurance.57

Such insurance proved to be extremely popular with taxicab drivers, resulting in 

increased demand and rapidly growing sales for Liberty Mutual. By the end of 2007, 

Liberty Mutual controlled approximately 40 percent of Colombia’s market for taxicab 

insurance.58

A country’s institutional and business climate can affect the supply and demand for 

insurance services. For instance, a country’s financial regime can affect supply. The 

insurance industry relies fairly heavily on investment income, and thus insurers tend to 

offer a greater supply of insurance in countries with sophisticated financial markets as 

they can invest their reserves in a wide variety of equity, fixed-income, and other 

investments.59 Access to global capital markets can increase investment opportunities, 

however government regulations often restrict cross-border capital flows and dictate the 

types of investments in which insurance companies are permitted to invest loss and 

unearned premium reserves and policyholders’ equity. 

The development of a country’s legal and property rights regimes also likely influences 

the decisions of insurance companies to supply insurance as well as the purchasing 

decisions of insurance customers. On the supply side, the development of a country’s 

legal system, and the enforcement of contracts, has an important bearing on companylevel decisions to enter foreign markets.60 On the demand side, the existence and 

enforcement of property rights, which protect consumers from loss or damage to an asset, 

provides an economic incentive to acquire and insure property. Quantitative research 

indicates a strong relationship between property rights and P&C insurance consumption 

per capita.61 

The enforcement of creditor rights also may increase demand for P&C insurance 

products. For example, consumers of both personal and commercial lines are more likely 

to purchase insurance if they believe that their policies will be honored under all 

circumstances, even in situations involving the insolvency of an insurance company.62

Indeed, several developed countries require insurance companies to participate in staterun insurance guaranty funds wherein financially stable companies assume responsibility 

 56 Hartwig, Insurance Information Institute, Written submission to the USITC, October 2, 2008, 7. 57 Taxicab insurance protects taxicab drivers from damage, to or theft of, their taxicabs. To facilitate the 

recovery of vehicles and ensure that taxicab drivers are able to continue to operate after a theft incident, 

Liberty Mutual installs Lo-Jack on all insured taxicabs and offers loaner cars. 58 Industry official, interview by Commission staff, December 17, 2008. 59 Esho, et al., “Law and the Determinants of Property-Casualty Insurance,” June 2001, 11. 60 Industry representative, telephone interview by Commission staff, December 2, 2008. 

61 Esho, et al., “Law and the Determinants of Property-Casualty Insurance,” June 2001, 16, 20. 62 Ibid., 5. 
2-19

for claims made by insolvent insurers’ customers, thereby removing a significant 

financial risk to consumers.63 

Last, the regulation of P&C insurance premium prices by national governments has the 

potential to affect both the quantity of insurance supplied and demanded.64 In general, 

premium price regulation is designed to avoid two situations: excessive price competition 

among insurers and price collusion among firms that could artificially inflate premiums.65

The insurance industry, however, argues that price regulation often leads to rate 

suppression66 and the cross-subsidization67 of high-risk consumers,68 factors which may 

encourage insurers to limit the quantity of insurance supplied in regulated markets, or opt 

out of such markets altogether. Government-mandated prices, which are typically lower 

than free market prices, also tend to increase the quantity of insurance products 

demanded,69 a factor which may lead to a shortage of insurance services for regulated 

insurance products. 

 63 AIA, “Insurance 201: Property-Casualty Finance,” September 7, 2006, 2. 64 Price regulation is typically restricted to personal lines and workers’ compensation. 65 Cummins, “Deregulating Property-Liability Insurance,” 2002, 6. 66 Rate suppression occurs when government-mandated premiums provide insufficient revenue to cover 

loss payouts. 67 Cross-subsidization occurs when government pricing caps prevent insurers from charging higher 

rates to high-risk customers, potentially increasing insurers’ overall risk and requiring price increases on 

lower-risk customers. 68 Cummins, “Deregulating Property-Liability Insurance,” 2002, 12. 69 Hartwig, Insurance Information Institute, Written submission to the USITC, October 2, 2008, 7. 

3-1 

CHAPTER 3 

International Trade in Property and Casualty 

Insurance 

Nature of Trade: Cross-Border Trade vs. Affiliate Sales 

Insurance companies compete in the global market in two distinct ways—through crossborder exports and imports, and through sales by affiliates located in host markets. Crossborder trade is more analogous to exports and imports of merchandise. In this case, an 

insurance company in one country sells an insurance policy to a customer in another 

country. When the insurer is located in the United States and the customer is located 

elsewhere, the sale is classified as a U.S. export. When the insurer is located outside of 

the United States and the customer is a U.S. resident, or a U.S.-based firm, the transaction 

is classified as a U.S. import of insurance services. 

However, cross-border trade in insurance services is often restricted, largely because 

insurance regulators in many countries prohibit cross-border sales of personal lines, as it 

is often difficult to ensure the solvency of foreign insurance companies, and thus, their 

ability to pay claims. For this reason, most cross-border trade in insurance services 

involves so-called “sophisticated consumers,” primarily large corporations operating in 

global markets and insurance companies purchasing reinsurance contracts from 

specialized reinsurance firms. 

Insurers also compete internationally by 

establishing and operating subsidiary companies 

abroad, commonly referred to as foreign 

affiliates. A foreign affiliate is typically licensed 

locally and subject to the full supervision of 

local insurance regulators. As a result, once 

established in a new market, foreign affiliates 

typically face few restrictions on the sale of 

insurance. Many global insurers also try to 

leverage their international brand names by 

hiring local insurance agents, or working 

through other distribution channels in the host 

market, such as banks or postal centers. Other 

global insurers enter into joint venture 

arrangements with local insurers, bringing 

capital, managerial expertise, and product 

knowledge to foreign markets. Even though the sale of insurance through foreign 

affiliates takes place entirely in a foreign country (both the seller and the buyer are 

located in a foreign market), it is considered a form of services trade, identified as 

“affiliate transactions” (box 3.1). 

 

BOX 3.1 The GATS and Trade in Insurance 

Services 

The General Agreement on Trade in Services 

(GATS), one of the founding agreements of 

the WTO, defines trade in services through 

four “modes.” Those most relevant to trade in 

insurance services are mode 1 (cross-border 

supply), equivalent to cross-border trade, and 

mode 3 (commercial presence), equivalent to 

sales through affiliates. In mode 1 trade, 

services are provided across borders. By 

contrast, in mode 3 trade, service providers 

establish a commercial presence, through 

which they offer their services directly in the 

host market. 
3-2 

Trade in insurance services can provide benefits for market participants in both exporting 

and importing countries. An early, influential paper on trade in insurance services cited 

three expected benefits to importing countries, particularly developing-country markets, 

from engaging in cross-border insurance trade: 

• Increased competition should bring greater diversity of insurance products and lower 

prices to consumers 

• Increased domestic market capacity should reduce the concentration of risk in a 

single market, decreasing the likelihood of market disruptions 

• Increased competition should reduce the ability of anticompetitive practices, such as 

cartels, to distort markets1

 

More recently, other observers have cited additional benefits to developing countries of 

opening their financial services markets to foreign companies, including insurance firms. 

For instance, the entry of foreign firms can bring jobs to the local market and increase 

competition for domestic firms, forcing those firms to improve their existing operations.2

 

By contrast, exporters of insurance services profit by expanding their sales in foreign 

markets, particularly in many fast-growing developing-country markets, and by 

diversifying their risk geographically. Insurance companies also benefit from their ability 

to sell insurance to multinational customers around the world. 

As discussed in chapter 2, the P&C insurance industry is split into two market segments, 

commercial lines and personal lines. International trade in each segment is driven by 

different factors. International trade in commercial lines insurance is usually conducted 

via cross-border trade and is driven by the needs of large multinational firms, many of 

which have offices and facilities in multiple countries requiring some form of insurance. 

Moreover, the practice of insuring multinational companies with master insurance 

policies designed to cover a single company’s entire global insurance needs under a 

single contract encourages cross-border commercial insurance transactions. Examples of 

master policies include property insurance for business facilities worldwide and/or 

directors’ and officers’ liability and errors and omissions insurance for executives in 

multiple locations. Although master policy arrangements are often preferred by both P&C 

insurance companies and their multinational clients, local country regulations sometimes 

limit such arrangements, requiring global insurers to establish affiliates in multiple 

countries.3

 The distribution system for commercial insurance, which revolves around 

insurance brokers, also tends to promote international trade in insurance services. 

Insurance brokers, including firms like Marsh & McLennan and Aon, typically operate 

on a global basis, and frequently develop packages for their multinational clients.4

The practice of insuring very large risks using syndicated arrangements also promotes 

cross-border trade in commercial lines. Under such arrangements, which are often 

coordinated through insurance brokers, insurance coverage for very large risks is split 

among several insurance companies, some that may be located in different countries. 

 1

 Skipper, “Foreign Insurers in Emerging Markets,” 1997, 2–3. 2

 Coalition of Service Industries, “Making the Most of the Doha Opportunity,” 2006, 10–12. 

3

 USITC, Hearing transcript, September 23, 2008, 140–46 (testimony of Michael Moran on behalf of 

Council of Insurance Agents and Brokers; David Snyder on behalf of American Insurance Association; and 

Robert Gordon on behalf of Property Casualty Insurers Association of America); Moran, Written testimony 

to the USITC, September 23, 2008, 6–7. 4

 For example, see CIAB, “Opening Markets for Insurance Agents & Brokers,” May 3, 1999, Written 

submission to the USITC, October 9, 2008, 1–2. 
3-3 

Examples of large risks include nuclear power plants, commercial satellites, and 

particularly well-known or high-value real estate.5

 Last, some commercial insurance 

products, particularly marine, aviation, and transport (MAT) insurance, which provides 

insurance for international transport vehicles like ships and airplanes, as well as goods in 

transit, are often sold on a cross-border basis. 

Unlike commercial lines, which tend to be traded across borders, personal lines insurance 

is typically sold through insurers’ affiliate companies located in foreign markets because 

of individual preferences and regulatory requirements. Consumers, most of whom do not 

have expertise and familiarity with foreign insurance companies, markets, and 

regulations, often prefer to purchase insurance from locally recognized companies, 

usually through insurance agents and/or bancassurance methods. Such consumers are 

unlikely to buy insurance from companies based abroad, although such purchases have 

become somewhat more feasible given the rise of Internet distribution channels. Since 

individual consumers are considered to be less sophisticated than multinational firms, 

they generally receive the highest level of protection from national insurance regulators. 

As a result, personal lines are more likely to be sold through foreign affiliates due to 

regulatory requirements for a local commercial presence, subject to full regulatory 

supervision. Despite such scrutiny, insurance firms are actively seeking to sell personal 

lines through affiliate companies. For example, Liberty Mutual, a U.S.-based firm that 

offers both personal and commercial insurance, has established an affiliate in China that 

concentrates on personal lines insurance, particularly automobile insurance. Liberty 

Mutual’s affiliate in China is one of 14 such affiliates around the world that focuses on 

personal lines insurance in foreign markets. The company has also announced plans to 

open an affiliate in India, with tentative plans to offer both personal and commercial 

insurance.6

Factors Driving International Competition in P&C Insurance 

An important motivation for international trade in insurance services is simply insurers’ 

desire to access growing markets. In general, the P&C insurance markets of most 

developed countries have moved into the mature stage of the industry life cycle, 

characterized by high levels of insurance penetration7

 and slow growth rates, providing 

strong incentives for companies based in those markets to expand abroad, particularly to 

the high-growth markets of many developing countries. In our sample of developed 

countries, for example, insurance penetration averaged 9 percent in 2007, compared with 

an average of 3 percent in our sample of developing countries.8

 As noted in chapter 2, 

demand for insurance services tends to grow with a country’s overall level of 

development, largely because increasing numbers of individuals and businesses both feel 

the need for and can afford insurance coverage. In addition, as automobile ownership 

increases along with economic development, national regulators typically require some 

form of mandatory automobile insurance, an important factor driving demand for P&C 

insurance in many developing countries. A growing awareness of risk mitigation 

techniques in many developing countries, particularly among business customers, also 

 5

 Examples include the World Trade Center in New York before the attacks of September 11, 2001, or 

international landmarks such as the Eiffel Tower in Paris. 6

 Liberty Mutual, “International Operations,” undated (accessed November 14, 2008); industry official, 

interview by Commission staff, Chongqing, China, September 6, 2007. 7

 Insurance penetration is calculated as insurance premiums as a percentage of national GDP. 

8

 Country groups as defined by Swiss Re Corporation. Data from Swiss Re, “World Insurance in 2007,” 

table 1, 2008, 33. 
3-4 

tends to drive demand for insurance services. Taken together, these factors suggest that 

developing-country insurance markets are likely to grow rapidly for many years to come. 

Many U.S. firms are interested in entering and/or operating in the P&C insurance markets 

of developing countries. In addition to AIG, which sells insurance in dozens of 

developing countries, Liberty Mutual also has established operations in many developing 

countries. Liberty Mutual typically enters such markets by purchasing a local insurance 

company, and then expands market share by identifying underserved product segments.9

Factors Driving Firms to Compete Internationally 

The size of an insurance company’s national market also may provide an incentive to 

engage in international trade. For example, many of the world’s leading P&C insurance 

companies are based in Europe, often in countries characterized by relatively small 

insurance markets; this may be a factor that encourages EU firms to search for revenue 

growth outside their respective home-country markets. By contrast, most U.S. insurance 

companies have not historically operated outside the United States, largely because 

business opportunities in the large, diverse U.S. insurance market have likely reduced the 

incentive for U.S. firms to venture abroad. Indeed, of the 2,343 licensed insurance 

companies in the United States, fewer than 25 can be identified as being actively 

involved in foreign markets. In addition, the U.S. state-based system of insurance 

regulation likely encourages this focus on the domestic market, largely because many 

U.S. P&C insurers only operate within a single U.S. state. Domestic insurers that did 

move into foreign markets likely responded to a particular set of circumstances, i.e., a 

corporate culture predisposed to international ventures and/or the particular interests of a 

company’s management team.10 For example, the U.S. insurance firm with the broadest 

international operations, AIG, evolved from a company founded in Shanghai, China, in 

1919. Since that time, AIG’s corporate leadership has remained active in international 

markets, expanding into dozens of countries over the past 90 years.11

Cross-Border Trade as a Share of the Global Insurance 

Market 

Although the insurance industry calculates revenues and market size in terms of gross 

premiums written, government statistics for most countries tend to follow guidelines 

established in the IMF’s Balance of Payments Manual. As a result, many governments 

and international organizations report cross-border trade in insurance services as 

premiums collected from nonresidents, net of claims paid to nonresidents.12 Although 

comprehensive statistics pertaining to total global cross-border trade in insurance services 

 9

 Industry official, interview by Commission staff, December 17, 2008. 10 Harold Skipper and Robert Klein (professors, Georgia State University), interview by Commission 

staff, Atlanta, GA, November 10, 2008; industry representative, interview by Commission staff, New York, 

NY, November 19, 2008. 11 AIG, “History,” undated (accessed November 14, 2008). 

12 In principle, the ratio of premiums to claims should reflect payments within a single year. However, 

to account for variations in claims payments due to unforeseen events in a particular year, the IMF advises 

country statistical agencies to base the ratio on a “medium- to long-term period.” IMF, Balance of Payments 

Manual, 1993, 66–67. The Bureau of Economic Analysis follows this system for reporting U.S. cross-border 

insurance trade statistics, reporting “normal” claims payments derived from actual claims averaged over 

several years. USDOC, BEA, “U.S. International Services: Cross-Border Trade in 2007,” table 6.1, October 

2008, 52. 
3-5 

do not exist, premiums collected through cross-border sales likely account for a very 

small share of overall global insurance premiums. As an illustration, the Commission 

developed a ratio measuring cross-border exports of P&C insurance as a share of net 

premiums. The ratio was developed using P&C insurance export data for 14 available 

OECD countries, and then dividing such export data by net premium data for each 

country (table 3.1).13 Overall, the average for the reporting OECD countries indicates that 

cross-border exports of P&C insurance likely represent less than 3 percent of global net 

premiums. 

For most countries, the ratio of exports to net premiums is significantly smaller than the 

overall OECD average, which is skewed by significantly larger ratios for several 

countries, particularly Ireland and Luxembourg, both of which are countries with small 

domestic insurance markets and many offshore foreign insurance companies. 

 13 According to Swiss Re, OECD countries account for 90 percent of global insurance premiums. Swiss 

Re, “World Insurance in 2007,” 2008, 35 and 39. Moreover, due to a variety of factors, OECD countries most 

likely account for an even larger share of global cross-border P&C insurance exports, largely because 

developed economies are more likely to engage in cross-border trade than emerging markets. Such factors 

include highly sophisticated primary insurance companies that purchase reinsurance services from global 

reinsurance firms, as well as a larger number of multinational corporations that are likely to buy insurance on 

a cross-border basis. 

TABLE 3.1 Cross-border exports as a share of total P&C insurance, 2006 

OECD 

Country Exports 

Gross 

premiums 

Gross 

claims 

Net premiums 

(premiumsclaims) 

Exports/net 

premiums 

 Millions of $ % 

Australia 24 21,723 13,819 7,904 (a) 

Czech Republic 9 3,316 1,678 1,638 1 

Germany 307 184,678 96,763 87,915 (a

) 

Hungary 5 1,928 1,003 925 1 

Ireland 5,838 9,104 4,310 4,794 122 

Italy 597 51,030 31,142 19,888 3 

Korea 164 35,349 13,418 21,931 1 

Luxembourg 364 1,272 705 567 64 

Norway 320 7,701 4,679 3,022 11 

Poland 26 5,292 2,697 2,595 1 

Slovak Republic 6 953 399 554 1 

Sweden 433 13,728 8,149 5,579 8 

United Kingdom 378 127,676 43,958 83,718 1 

United States 3,046 469,035 261,055 207,980 2 

 OECD average 3 

Sources: OECD, OECD Stat Extracts, Trade in Services by Partner Country Database; AXCO, 

Inc., Insurance Market Reports Database (accessed October 2, 2008). 

Notes: Data for the United States and the United Kingdom are for 2005. Data for all countries are 

from OECD, except for U.S. data from AXCO, which excludes personal accident and health care 

insurance. OECD data include “other direct” and freight insurance, but do not include 

reinsurance. Although the OECD reports such data exclusive of reinsurance services, Ireland’s 

exports likely include reinsurance services. 

a

Less than 0.5 percent. 
3-6 

U.S. Cross-Border Insurance Trade14

U.S. cross-border exports of primary insurance services reached $4.0 billion in 2007, 

compared with U.S. imports of $5.9 billion (figure 3.1).15 From 2000 through 2007, both 

imports and exports recorded strong growth, with compound annual growth rates of 

11 percent and 21 percent, respectively. Although U.S. government statistics combine 

cross-border trade data for life insurance and P&C insurance, many industry observers 

believe that P&C insurance accounts for the vast majority of such trade.16

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2000 2001 2002 2003 2004 2005 2006 2007

Exports Imports

Source : USDOC, BEA, “U.S. International Services: Cross-Border Trade 1986–2007," table 5: 

Insurance, undated (accessed July 21, 2008, and January 7, 2009).

Millions of $

FIGURE 3.1 Total U.S. cross-border exports and imports of primary insurance services, 

2000–2007

Historically, U.S. imports of insurance services have exceeded U.S. exports, largely 

because the majority of cross-border imports consist of reinsurance rather than primary 

(direct) insurance, and most of the world’s largest reinsurance firms are located outside 

the United States. In recent years, however, U.S. cross-border exports of insurance 

services have increased relative to imports, with exports equaling or exceeding imports in 

2005 and 2006. In 2007, imports increased sharply, partly as a result of rising premiums 

in the U.S. market resulting from the difficult 2005 hurricane season.17 

The top seven markets for U.S. cross-border insurance exports account for 77 percent of 

the total (figure 3.2). In 2007, the largest market for U.S. insurance exports was Canada, 

which accounted for 38 percent of the total, followed by Switzerland (12 percent) and 

Ireland (9 percent). 

 14 BEA data for cross-border trade in insurance do not separate life from P&C insurance. These data 

also include trade in agents, brokers, and auxiliary insurance services, which are believed to be relatively 

small. 15 For additional discussion of international trade trends in insurance, see USITC, Recent Trends in U.S. 

Services Trade, 2008. 16 Industry officials, interview by Commission staff, November 10, 2008. 17 USDOC, BEA, “U.S. International Services: Cross-Border Trade in 2007,” October 2008, 27. 
3-7 

United Kingdom

8%

Ireland

9%

Canada

38%

Switzerland

12%

All other 

countries

22%

Brazil

1% Germany

2%

Hong Kong

2%

Bermuda

6%

Source: USDOC, BEA, “U.S. International Services: Cross-Border Trade in 2007,” table 

6.2, October 2008.

Total: $4.0 billion

FIGURE 3.2 U.S. insurance exports by major country, 2007

U.S. insurance imports are even more highly concentrated than exports (figure 3.3). Fully 

one-half of U.S. imports originate in the United Kingdom, reflecting the prominence of 

that market in specialty insurance lines, particularly MAT insurance and insurance for 

large risks. Bermuda accounts for another 26 percent of U.S. imports, reflecting not only 

MAT insurance written in that country, but also the presence of many U.S. captive 

insurers located in Bermuda for tax purposes (box 3.2). Switzerland also accounts for a 

significant share of U.S. imports of insurance services. As a prominent international 

insurance center, Switzerland is home to several of the world’s largest insurance 

companies, including Swiss Re, Winterthur, and Zurich Financial Services. Due to the 

small size of the Swiss domestic insurance market, Swiss insurers write more than 

75 percent of their direct P&C premiums abroad.18 

 18 IMF, Switzerland Factual Update, June 2007. 
3-8 

FIGURE 3.3 U.S. insurance imports by major country, 2007

Bermuda

26%

United Kingdom

50%

Canada

7%

Germany

Switzerland 1%

2%

All other 

countries

14%

Source: USDOC, BEA, “U.S. International Services: Cross-Border Trade in 2007,” 

 table 6.2, October 2008.

Total: $5.9 billion

BOX 3.2 Captive Insurers 

A captive insurer is a company that is created and funded by one or more noninsurance companies for the 

purpose of providing insurance coverage to its owner(s). As an alternative to traditional insurance, captives 

first emerged in the 1980s during a period in which many businesses experienced difficulty obtaining 

certain types of commercial insurance coverage. From 1989 through 2007, the worldwide number of 

captives more than doubled to 5,119 firms. The number of captives based in the United States grew 

dramatically in 2006, with Arizona, Nevada, and Utah posting growth that approached or topped 

50 percent. With 1,251 licensed captives, the United States was the largest captive domicile in 2006, 

followed by Bermuda with 989 firms. Although several U.S. states have legislation that permits the 

establishment of captive insurance firms, Vermont has become a particularly prominent host to captives, 

with 563 captive insurance entities established in the state by the end of 2006. Overall, Vermont ranked 

third among captive locations worldwide in 2006, following Bermuda and the Cayman Islands. 

Sources: Insurance Information Institute, “Glossary of Insurance Terms,” undated (accessed February 12, 2008); 

Insurance Information Institute, “Captives and Other Risk-Financing Options,” August 2008; Moody, “Vermont: The Gold 

Standard,” August 5, 2005; Geisel, “25 Years After Law,” August 7, 2006; and Lenckus, “Onshore Domiciles Continue to 

See Growth in Captives,” March 3, 2008. 
3-9 

The fastest-growing insurance markets for U.S. cross-border trade are identified in 

table 3.2. U.S. exports of primary insurance services increased at a compound annual 

growth rate (CAGR) of 31 percent from 2000 through 2007, with imports increasing at a 

rate of 20 percent. Among developed countries, U.S. exports increased fastest to 

Switzerland, Bermuda, and Belgium-Luxembourg.19 Exports to Europe increased at a 

CAGR of 42 percent. Among developing countries, export growth rates were fastest to 

TABLE 3.2 Fastest-growing markets for cross-border insurance trade, 2000 and 2007

2000 2007 CAGR 2000 2007 CAGRa

% %

All countries 4,012 592 31 All countries 5,878 1,685 20 

Switzerland 462 1 158 Netherlands 1 14 46 

Bermuda 249 4 83 Australia 3 26 37 

Belgium-Luxembourg 16 1 60 Switzerland 22 137 30 

New Zealand 12 1 53 Japan 4 22 28 

Canada 1,477 78 52 Italy 1 5 26 

Germany 99 5 51 Canada 82 391 25 

Spain 10 1 49 Bermuda 340 1,555 24 

Israel 13 1 40 Belgium-Luxembourg 5 21 23 

Italy 9 1 33 France 12 49 23 

France 26 4 32 United Kingdom 1,140 2,931 14 

Philippines 12 1 53 Brazil (

b

) 309 19 

Malaysia 9 1 47 Indonesia (

b

) 305 18 

Brazil 47 5 38 Venezuela (

b

) 261 8 

China 23 4 30 Argentina (

b

) 238 5 

India 2 1 19 Chile (

b

) 227 4 

Venezuela 12 4 16 Mexico 2 11 27 

Chile 10 6 7 

Mexico 37 31 3 

 b

Less than $500,000.

Selected developed countries

Selected developing countries Selected developing countries

U.S. Exports U.S. Imports

 aCompound annual growth rate. This calculation is based on unrounded, cross-border trade data supplied by the BEA.

Note : BEA data used here include exports of primary insurance services only, for both life and P&C insurance. BEA included separate data 

Millions of $ Millions of $

Source: USDOC, BEA, “U.S. International Services: Cross-Border Trade 1986–2007,” table 5: Insurance, undated (accessed July 21, 2008, 

Selected developed countries

 19 Even though Ireland is a significant destination for U.S. exports and source of U.S. imports of 

insurance services, BEA began to report separate data for Ireland only in 2007, so it is not possible to 

calculate the growth rate of trade with Ireland. It is likely that growth has been significant in recent years, 

inducing BEA to present the data breakout for Ireland. 
3-10 

the Philippines, Malaysia, and Brazil. For all countries except Canada, U.S. exports grew 

from a very small base. Due to Canada’s close economic relationship with the United 

States, many U.S. insurance companies that operate primarily in the U.S. market also 

operate in Canada. The increase in U.S. exports of insurance services to a growing 

number of countries reflects the large number of cross-border mergers and acquisitions in 

the insurance industry over the past decade,20 the global spread of multinational 

companies, and, increasingly, the distribution of insurance over the Internet. U.S. imports 

of primary insurance grew fastest from the Netherlands, Australia, and Switzerland, 

among developed countries. Imports from Europe increased at a CAGR of 15 percent 

from 2000 through 2007.21 In terms of developing countries, U.S. imports increased 

fastest from Brazil and Indonesia, albeit from a very small base.22

Global Cross-Border Insurance Trade 

OECD data pertaining to cross-border trade in P&C insurance services cover most OECD 

member countries as well as several important nonmember countries.23 Table 3.3 presents 

available data, for selected markets, for cross-border exports and imports of P&C 

insurance services from 2000 through 2006.24 Such data are presented for the purpose of 

comparing trends in cross-border trade among countries.25 

In 2006, the largest single exporter of P&C insurance was Ireland, which reported total 

exports of $5.8 billion. Ireland has become an important center of cross-border insurance 

trade in recent years, largely due to the creation of its International Financial Services 

Center in 1987, and to tax law changes in 2003 (box 3.3). The United States ranked 

second, with $3.0 billion in exports of insurance services.26 For all reporting countries, 

direct P&C insurance (including freight and other direct insurance) accounted for 

 20 During the 2003–08 period, the Zephyr M&A database recorded an average of 94 cross-border M&A 

deals per year involving a U.S. company as the target or the acquirer. During the 1997–2002 period, the 

average was 25 cross-border M&A deals per year. 21 For additional discussion of international trade trends in insurance, see USITC, Recent Trends in U.S. 

Services Trade, 2008. 22 BEA reported zero imports from most developing countries in 2000, which makes it impossible to 

calculate a CAGR for those countries. To compensate, the Commission calculated the growth rates for 

Argentina, Brazil, Chile, Indonesia, Israel, and Venezuela using a 2000 U.S. import figure of $1,000 

($0.001 million). 23 Not all OECD member countries report cross-border insurance trade data. Data for non-OECD 

member countries are available for Brazil, China, India, Indonesia, the Russian Federation, and South Africa. 

OECD, “Source OECD Services Statistics,” undated (accessed October 8, 2008). 24 The most recent year for which OECD data are available is 2006. The OECD does not report a single 

figure for P&C insurance. Instead, it reports separate data for life, freight, and “other direct” insurance, as 

well as reinsurance and auxiliary insurance services. For the purpose of this report, which focuses on primary 

insurance, P&C insurance is defined as the sum of the OECD data for freight insurance and other direct 

insurance. That number is presented where available, but not all countries report data for both the freight and 

other direct insurance categories. It is likely, but unconfirmed, that countries that do not report a separate 

figure for freight insurance include that category within other direct insurance, or simply do not report trade 

in freight insurance. 25 The OECD does not report data for Bermuda, France, Switzerland, and the United Kingdom. 26 However, U.S. data reported as “other direct” insurance by the OECD actually reflect both life and 

P&C insurance, so the United States may actually rank lower among reported countries. The United States 

does not break out life and P&C insurance exports. USDOC, BEA official, telephone interview by 

Commission staff, July 22, 2008. 
3-11 

Country 2000 2001 2002 2003 2004 2005 2006 CAGRa

%

Australia

Exports 19 17 17 21 24 24 24 4

Imports 144 129 136 163 188 199 199 6

Brazil

Exports 4 7 8 17 9 19 300 108

Imports 248 355 498 474 590 628 672 18

Germany

Exports 192 169 239 262 325 327 307 8

Imports 341 341 414 562 792 806 928 18

Greece

Exports (

b

) (b) 112 130 146 177 198 15

Imports (

b

) (b) 243 321 397 548 713 31

India

Exports 247 253 290 354 748 585 828 22

Imports (

b

) 589 604 756 1,372 1,642 523 -2

Irelandc

Exports 823 (

b

) 2,587 5,798 6,078 4,579 5,838 39

Imports 1,016 (

b

) 2,001 2,266 2,218 2,512 2,624 17

Italy

Exports 375 518 624 488 601 535 597 8

Imports 319 404 473 393 498 578 788 16

Luxembourg

Exports (

b

) (b) 112 173 240 351 364 34

Imports (

b

) (b) 72 59 59 51 79 2

Norway

Exports 151 126 290 372 325 340 320 13

Imports 342 358 469 520 561 413 (

b

) 4

Russian Federation

Exports (

b

) 27 58 85 112 186 240 44

Imports (

b

) 22 38 66 24 60 59 18

South Africa

Exports 451 (

b

) (b) (b) (b) (b) (b) (b)

Imports 380 204 225 297 391 479 587 8

Sweden

Exports 238 222 234 367 361 405 433 11

Imports 53 83 99 49 47 53 33 -8

United Statesd

Exports 592 574 877 1,153 1,759 2,743 3,046 31

Imports 1,685 2,016 3,771 3,634 3,162 2,978 2,739 8

Average growth rate

11

28

Source: OECD, OECD Stat Extracts, Trade in Services by Partner Country Database.

 b

Not available.

 cSee box 3.3 for additional information on the growth of Ireland's trade in insurance services.

 dU.S. cross-border trade data included in this table differs from that contained in Figure 3.1 because the BEA data reported to the OECD does not include 

auxillary insurance services.

TABLE 3.3 Global cross-border trade in P&C insurance services, selected markets, 2000–2006

Notes : Countries are selected based on available data reported by OECD. Data reflect the sum of OECD data for "other direct" and "freight" insurance for each 

country, which together reflect total P&C insurance. U.S. data include both life and P&C, but the overwhelming majority of trade data are believed to reflect P&C 

insurance.

 a

Compound annual growth rate. The CAGR reflects available annual data starting with 2000; the calculation is based on unrounded data supplied by the OECD.

Imports for all reporting countries

Millions of $

Exports for all reporting countries

 
3-12 

49 percent of total insurance exports in 2006, with reinsurance, primarily P&C 

reinsurance, accounting for 35 percent. The remaining 16 percent was life 

insurance. However, such averages mask significant variations among countries, with 

several small markets, including Brazil and Norway, exporting primary insurance almost 

exclusively. By contrast, Germany, which is home to several large, active reinsurance 

companies, reported that 90 percent of insurance exports constituted reinsurance. The 

United States and the United Kingdom also exported larger shares of reinsurance in 2006. 

Total reported cross-border imports of insurance services were $18.4 billion in 2006, with 

the United States and Ireland reporting $2.7 billion and $2.6 billion, respectively. 

Ireland’s insurance imports consisted entirely of other direct insurance. As noted, crossborder trade statistics for the United States include both life insurance and P&C insurance 

services, and do not separately break out freight insurance. 

Affiliate Transactions 

Although the U.S. government and the OECD both produce limited data on foreign 

firms’ involvement in the domestic insurance markets of countries around the world, the 

two sources of data are not directly comparable. The following section uses U.S. 

government data to survey the role of U.S.-owned firms in foreign insurance markets, and 

the role of foreign-owned insurance companies in the U.S. market. The subsequent 

BOX 3.3 The Growth of Ireland’s Insurance Industry 

Ireland created its International Financial Services Center (IFSC) in 1987. The IFSC is a special tax district in 

Dublin, created specifically to encourage the establishment of foreign financial services in Ireland. For foreign 

investors, important benefits of the IFSC include a 12.5 percent corporate tax rate, minimal reinsurance 

regulation, Ireland’s network of 41 double taxation agreements, and the lack of restrictions on profit 

repatriation to treaty-partner countries. Benefits pertaining to profit repatriation include no withholding taxes 

on dividends or capital gains paid out to the parent company. These regulations make profit repatriation from 

Ireland significantly easier than from many other countries, an important consideration for global insurers and 

other financial firms. 

Insurers operating in Ireland also benefit from attributes that have attracted many other foreign investors to 

the country. Ireland is in the same time zone as London’s global insurance market, and investors benefit from 

access to the entire EU market through the EU Single Market Directive. Ireland also boasts a young, Englishspeaking, well-educated workforce with a large number of experienced insurance industry workers. In 2003, 

the 12.5 percent tax rate was extended to all of Ireland, attracting additional foreign financial firms. 

Ireland’s efforts to attract global financial firms have been quite successful. In the insurance sector, most 

such firms are captive insurers and reinsurance companies. More than one-half of the world's top 20 

insurance companies maintain operations in Dublin, carrying out international activities including underwriting 

of direct insurance and reinsurance, as well as back office operations. Captive management is also an 

important activity, with approximately 220 captive insurers registered in the IFSC at the end of 2006. 

These changes have encouraged many U.S. companies to locate their captive insurers in Ireland. In 2008, 

large U.S. firms with captives operating in Ireland included Hertz Corp., McDonald’s, Delphi, Motorola, IBM, 

and Heinz Co. 

Sources: International Financial Services Centre Online (accessed November 26, 2008); Willis Management (Dublin), Ltd., 

“Captive Insurance Company Management in Dublin, Ireland,” undated (accessed November 26, 2008); KPMG, 

“International Financial Services in Ireland,” 2007; and Bureau van Dijk, Orbis Companies Database (accessed 

December 1, 2008). 
3-13 

section presents OECD data comparing foreign-owned insurance firms’ involvement in 

the domestic insurance markets of reporting OECD countries. 

U.S. Insurance Trade Through Affiliate Sales27

Foreign affiliates of U.S.-based insurance companies recorded P&C insurance sales of 

$94.4 billion in 2005, with such sales growing at a compund annual rate of almost 

8 percent from 2000 through 2005 (figure 3.4).28 By contrast, sales in the United States 

by the affiliates of foreign P&C insurance companies grew at the slightly slower rate of 

6 percent during the same period, totaling $49.4 billion. 

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

2000 2001 2002 2003 2004 2005

P&C insurance, life insurance, and related activities P&C insurance

Source: USDOC, BEA, “Sales of Services to Foreign Persons by U.S. MNCs Through Their Nonbank MOFAs,”

table 10, undated (accessed July 21, 2008).

Millions of $

FIGURE 3.4 Insurance sales by the foreign affiliates of U.S.-based firms, 2000–2005

As of November 2008, U.S. parent companies owned equity shares in at least 294 active 

P&C affiliates around the world (figure 3.5), with the number of affiliates owned by each 

 27 Includes sales of P&C insurance; excludes sales of life insurance and sales by agents, brokers, and 

auxiliary insurance service providers. BEA data for affiliate sales do not separate sales of primary insurance 

from reinsurance. Although it is likely that affiliate sales predominately reflect primary insurance, there are 

active foreign-owned reinsurance P&C affiliates operating in the United States, and U.S.-owned reinsurance 

P&C affiliates operating in foreign countries. In addition, some insurance carriers sell both primary insurance 

and reinsurance, making it difficult to separate sales of primary insurance from reinsurance by company. 28 BEA released updated 2005 and 2006 data in October 2008, but changed its methodology, so the 

updated data are not comparable to data for 2005 and previous years. The older affiliate trade data presented 

sales by affiliates, equivalent to premiums. The new data present premiums net of claims, leading to a 

substantial decrease in the estimates of overall sales of insurance services by affiliates, and making the 

affiliate sales data comparable to the cross-border services data for the first time. In the new estimates, total 

sales of P&C insurance by U.S.-owned, foreign affiliates were $19.5 billion in 2006, compared with 

$17.1 billion in 2005. USDOC, BEA, “U.S. International Services: Cross-Border Trade in 2007,” October 

2008, 35. 
3-14 

FIGURE 3.5 Foreign affiliates of U.S. P&C insurers

0

50

100

150

200

United Kingdom

Ireland

Canada

Mexico

Brazil

Bermuda

Germany

Spain

Argentina

South Africa

Number of affiliates

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

Millions of $

Number of Affiliates Operating Revenue

Source: Bureau van Dijk, Orbis Companies Database (accessed October 2, 2008). 

parent and their geographic distribution varying widely.29 Of the total, 163 such affiliates 

were located in the United Kingdom, a clear illustration of the United Kingdom’s leading 

role in the global P&C insurance market. These companies collectively reported 

$13.2 billion in operating revenue, or 38 percent of the total operating revenue reported 

by all affiliates. Ireland and Canada ranked second and third, with 25 and 19 affiliates, 

respectively.30 

U.S.-based AIG has, by far, the most extensive international operations of all U.S. P&C 

insurance firms operating in foreign markets. Of the 294 U.S. affiliates currently active in 

the P&C business, 47 are owned by AIG. Overall, AIG maintains operations in 130 

countries, although it is not clear how many of these affiliates/offices are engaged in the 

P&C insurance business.31 By contrast, Travelers Insurance has 14 affiliates, all of which 

are in the United Kingdom or Canada, and Liberty Mutual reports 11 affiliates. 

Europe accounted for the largest share—approximately one-third—of P&C insurance 

sales by foreign affiliates of U.S.-based firms in 2005 (table 3.4). In Latin America and 

the other Western Hemisphere countries, U.S. firms recorded significant sales in 

Bermuda, Mexico, and Brazil. U.S. affiliates of foreign insurance firms recorded sales of 

P&C insurance services of $46.9 billion in 2005.32

 29 As reported by Bureau van Dijk, Orbis Companies Database (accessed November 25, 2008). P&C 

affiliates are those that are identified by the primary NAICS code 52412, defined as “direct insurance (except 

life, health, and medical) carriers,” and that are owned by a U.S. parent with an equity share of at least 

25.01 percent. By comparison, the database identifies 90 such companies that are majority owned 

(50.01 percent equity share) by U.S. parents. 30 Not all affiliates report operating revenue, so the actual total is likely to be higher. None of the five 

U.S.-owned affiliates in South Africa reported operating revenue. 31 AIG Web site. http://www.aig.com (accessed January 14, 2009). 32 As previously noted, BEA has changed its methodology for calculating affiliate sales. As a result, 

updated data for 2006 are not comparable with the 2000–2005 data presented here. Using the new 

methodology, sales of P&C insurance by U.S. affiliates of foreign firms were $20.0 billion in 2006 and 

$17.4 billion in 2005. 
3-15 

TABLE 3.4 Share of global sales of P&C insurance by U.S.-owned foreign affiliates, by country, 

2000–2005 (%)

 Country 2000 2001 2002 2003 2004 2005 

Canada 8 9 10 11 12 10 

Europe 41 40 41 40 37 34 

 France 1 1 1 2 2 (a

) 

 Germany 16 12 11 (a) 7 7 

 United Kingdom 20 23 25 23 21 19 

Other Western Hemisphere countries 28 27 25 24 27 28 

Other Eastern Hemisphere countries 23 24 24 25 25 27 

 Australia 1 1 2 2 3 (a

) 

Source: USDOC, BEA, “Sales of Services to Foreign Persons by U.S. MNCs Through Their Nonbank 

MOFAs,” table 10, undated (accessed July 21, 2008). 

Note: Affiliate sales data exclude life insurance, but include sales of reinsurance. 

 a

Not available. 

Figure 3.6 illustrates sales of both life and P&C insurance by U.S. affiliates from 2000 

through 2005. P&C insurance sales vary as a share of the total because such sales change 

in response to market conditions following major catastrophes, such as severe hurricanes 

or terrorist attacks. By contrast, sales of life insurance are relatively stable. 

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

2000 2001 2002 2003 2004 2005

P&C insurance P&C insurance, life insurance, and related activities

Source : USDOC, BEA, “Sales of Services to U.S. Persons by Foreign MNCs Through Their 

Nonbank MOUSAs,” table 11, undated (accessed July 21, 2008). 

FIGURE 3.6 Sales by U.S. affiliates of foreign firms, 2000–2005

Millions of $

Data pertaining to the sales of foreign companies’ U.S. affiliates are limited, largely 

because most data are suppressed to avoid disclosing company-specific financial data. On 

a regional basis, however, such data reveal that the majority of P&C affiliate sales in the 

United States originate from affiliates whose parents are based in Europe. Since 2000, 

however, the European share of U.S. sales has slipped in favor of sales by companies 

based in Latin American and other Western Hemisphere countries, primarily Bermuda 

(table 3.5). The Bermuda insurance market began to grow rapidly following the 

September 11, 2001, terrorist attacks, due largely to surging demand for reinsurance 

services and captive insurance activity. The Bermuda insurance market has also benefited 

from several tax advantages (box 3.4). 
3-16 

TABLE 3.5 Regional shares of sales of P&C insurance services by U.S. affiliates of foreign companies, 2000–2005 (%) 

Region 2000 2001 2002 2003 2004 2005 

Europe 85 89 78 74 61 61 

Other Western Hemisphere countries 6 5 (a) 13 25 24 

Source: USDOC, BEA, “Sales of Services to U.S. Persons by Foreign MNCs Through Their Nonbank MOUSAs,” 

table 11, undated (accessed July 21, 2008). 

Note: Affiliate sales data exclude life insurance, but include sales of reinsurance. 

 aNot available. 

BOX 3.4 Bermuda’s International Insurance Industry 

Bermuda is the world’s fourth-largest domicile for reinsurance and a leading domicile for captives, with 1,305 international reinsurers 

and 840 captive insurers. In 2006, Bermudian insurers wrote premiums valued at $115.8 billion. The largest lines were excess 

property, excess casualty, and property catastrophe reinsurance. Although known as a center of reinsurance, Bermuda’s insurance

market was actually comprised of 55 percent primary insurance and 45 percent reinsurance, measured by total premiums, at the 

end of 2006, with 66 percent of its exposure in North America. There are 22 Bermuda-based companies that are publicly traded, 

and many of the world’s largest reinsurers and direct insurers also have Bermuda affiliates. 

Two of Bermuda’s largest insurers, ACE and XL Capital, were founded in the mid-1980s, in response to a shortage of liability 

insurance capacity in the United States. Capital shortages following three major U.S. catastrophes (Hurricane Andrew in 1992, the 

September 11th terrorist attacks, and the hurricane season of 2005, which included Hurricanes Katrina, Rita, and Wilma) each led to 

the formation of several new Bermudian insurers. 

Several factors have led to Bermuda’s growth as a center of international insurance activity: a favorable regulatory regime; a highly 

favorable tax environment; a convenient location for doing business in the United States; a local currency pegged to the U.S. dollar; 

and the existence of distinct operating advantages, including skilled personnel, and advanced communications systems. Bermuda 

also benefits from its reputation as a secure and diverse marketplace. 

 

Specific tax advantages include Bermuda’s lack of income, withholding, capital gains, premium, or profit taxes for corporations

licensed in Bermuda, although insurers do pay a payroll tax and certain fees. However, U.S.-owned captives and other U.S.-owned

insurers are taxed in the United States on their worldwide earnings. Some Bermudian-based insurers choose to be taxed in the 

United States as U.S. corporations, which allow them to avoid a U.S. federal excise tax on premiums paid to foreign insurers by U.S. 

customers. According to one estimate, effective tax rates on Bermudian insurers averaged approximately 15 percentage points 

lower than those on U.S. insurers in 2003–07. This difference has generated calls in the United States to change its tax policy as a 

way to level the playing field for U.S. firms, but so far the U.S. government has not taken action. 

Regulatory advantages are also important to Bermudian insurers. Bermuda permits investors to establish new companies very 

quickly, which facilitates the quick injection of new capital into the global market in times of crisis, a role Bermuda has played vis-àvis the United States following major catastrophe years since 1992. The Bermuda market has also encouraged alternative forms of

risk management that substitute for traditional reinsurance, including the use of hedge funds to inject capital into the reinsurance 

sector, and the use of new products such as catastrophe bonds and catastrophe swaps. 

According to one estimate, Bermudian insurers provide 40 percent of U.S. hurricane and earthquake reinsurance, account for 26 

percent of the total U.S. reinsurance market, and directly support 9,600 jobs in the United States. The study, commissioned by the 

Association of Bermuda Insurers and Reinsurers, also asserts that Bermudian insurers indirectly support an additional 14,000 U.S. 

jobs. 

Sources: AXCO, Inc., “Bermuda: International Market,” undated (accessed November 14, 2008); Fitch, “Bermuda Market Overview,” 

March 3, 2008; and GSP Consulting Corp., “Analysis of the U.S. Economic Impact,” November 2007. 

Note: Excess property and excess casualty insurance lines represent coverage not available from an insurer licensed within a local

market (an admitted carrier), so that coverage must be purchased from an insurer outside of the local jurisdiction (a nonadmitted 

carrier). Insurance Information Institute, “Glossary of Insurance Terms,” undated (accessed February 12, 2008). 
3-17 

Global Insurance Trade Through Affiliate Sales 

For 2006, OECD data cover foreign companies’ share of the domestic insurance market 

in 18 OECD countries (table 3.6). For these countries, foreign companies’ share of total 

written premiums ranges from 94 percent in Slovakia to 3 percent in Korea.33 As a 

general rule, countries with small insurance markets (as measured by gross premiums) 

are likely to have higher levels of foreign market penetration due to the lack of globally 

competitive domestic insurers. In the United States, which is the world’s largest 

insurance market, foreign companies account for a relatively small 9 percent of total 

premiums. One exception is the United Kingdom, where foreign firms accounted for 44 

percent of the United Kingdom’s gross premiums in 2006, likely due to London’s role as 

a global center of underwriting activity for large and unusual risks. Most international 

insurance firms maintain operations in London, boosting foreign firms’ overall share of 

the British market. By contrast, Korea ranks last in terms of foreign underwriting activity, 

reflecting the difficulties that foreign firms face in gaining entry to the Korean market.34

 33 OECD, Insurance Statistics Yearbook 1997–2006, table 23, 2008, 53. 34 USTR, “Korea,” 2008. The pending bilateral free trade agreement (FTA) between the United States 

and Korea addresses insurance in the FTA’s financial services chapter. If the FTA enters into force, it is 

expected to generate a substantial increase in U.S. exports of insurance services to Korea. See USITC, U.S.-

Korea Free Trade Agreement, 2007, 4–8. 

TABLE 3.6 Market share of foreign companies in the domestic P&C market for direct insurance, 2006

Country 

Market share of 

foreign companies Gross premiums 

 % millions of $ 

Slovakia 94 951 

Czech Republic 92 3,289 

Sweden 48 11,934 

Luxembourg 48 1,270 

United Kingdom 44 30,886 

Norway 42 7,680 

Austria 35 9,877 

Canada 34 57,716 

Portugal 33 5,192 

Australia 24 17,870 

Italy 24 48,266 

Spain 21 25,035 

Netherlands 20 37,184 

Turkey 17 4,944 

United States 9 809,054 

Germanya

 8 108,531 

Japan 6 69,878 

Koreaa

 3 30,987 

Average market share for foreign companies 34 

Source: OECD, Insurance Statistics Yearbook 1997–2006, table 23, 2008, 53. 

 a

Market share includes reinsurance. Separate data for direct insurance only are not available. 
3-18 

Historically, foreign firms have also faced difficulties accessing Japan’s domestic 

insurance market.35

Trends in Reinsurance Trade 

The reinsurance industry is integrated into a single worldwide market, with many of the 

largest reinsurance firms based in Bermuda, Germany, and Switzerland. Given the global 

nature of the reinsurance market, international trade in such services is in most cases a 

requirement to access customers around the world. Indeed, insurance companies 

worldwide rely heavily on access to a large capital pool controlled by foreign-based 

reinsurers.36 Overall, the reinsurance business is not as closely regulated as other 

segments of the P&C insurance market, largely because insurance companies are 

assumed to be sophisticated consumers less in need of regulatory protection than 

individual consumers, or even business consumers, of primary insurance. For this reason, 

many of the regulatory restrictions that act as barriers to trade in P&C insurance services, 

both personal and commercial lines, do not affect reinsurance services to a large degree.37

Trade in reinsurance is principally visible in cross-border trade statistics, largely because 

U.S. government and OECD affiliate trade data do not separate reinsurance from primary 

insurance. 

U.S. Cross-border Trade in Reinsurance Services 

Table 3.7 illustrates the share of reinsurance in overall U.S. imports and exports of crossborder insurance services, compared with trade in primary insurance. U.S. exports of 

reinsurance services reached $6.3 billion in 2007, compared with imports of $36.9 billion 

(table 3.7). Reinsurance accounted for 61 percent of total U.S. cross-border insurance 

exports in 2007, and 86 percent of total imports. 

From 2000 through 2007, U.S. cross-border exports of reinsurance grew at a compound 

annual growth rate of approximately 11 percent, compared with import growth of 

21 percent. Such rapid growth of U.S. imports of insurance services is due in large part to 

U.S. companies’ increasing reliance on reinsurance services provided by companies 

based in Bermuda.38 Overall, U.S. imports of reinsurance services exceeded U.S. exports 

by a wide margin from 2000 through 2007, mainly because most of the world’s largest 

reinsurance firms are located outside the United States. 

 35 USTR, “Japan” 2008. 

36 One of the few economic studies to directly address trade in insurance services bolsters this 

argument. Li, Moshirian, and Sim (2003) present evidence that increased foreign direct investment by U.S. 

firms in insurance is correlated with increased intra-industry trade in insurance services. The authors do not 

address whether such intra-industry trade involves direct insurance or reinsurance, since the largest share of 

cross-border insurance trade is reinsurance. However, it appears that firms that establish foreign affiliates in 

small markets turn to global reinsurance markets to reinsure their risks. Li, Moshirian, and Sim, “The 

Determinants of Intra-Industry Trade,” 2003. 37 USITC, Hearing transcript, September 23, 2008, 138–39 (testimony of George M. Brady on behalf of 

National Association of Insurance Commissioners). 38 Industry representative, interview by Commission staff, New York, NY, November 19, 2008. 
3-19 

TABLE 3.7 U.S. cross-border trade in insurance services, 2000–2007 

Trade 2000 2001 2002 2003 2004 2005 2006 2007 

CAGRa

(%) 

U.S. exports 

Total (Millions of $) 3,631 3,423 4,415 5,974 7,314 7,787 9,276 10,286 16 

Reinsurance (Millions of $) 3,039 2,727 3,339 4,381 4,742 4,275 5,541 6,275 11 

Primary (Millions of $) 592 697 1,077 1,593 2,571 3,511 3,735 4,012 31 

Reinsurance/total (%) 84 80 76 73 65 55 60 61 (b

) 

Primary/total (%) 16 20 24 27 35 45 40 39 (b) 

 

U.S. imports 

Total (Millions of $) 11,284 16,706 21,926 25,234 29,090 28,540 33,582 42,761 21 

Reinsurance (Millions of $) 9,599 14,513 17,729 21,076 25,280 25,133 30,388 36,883 21 

Primary (Millions of $) 1,685 2,193 4,199 4,158 3,808 3,406 3,193 5,878 20 

Reinsurance/total (%) 85 87 81 84 87 88 90 86 (b

) 

Primary/total (%) 15 13 19 16 13 12 10 14 (b

) 

Source: USDOC, BEA, “U.S. International Services: Cross-Border Trade 1986–2007,” table 5: Insurance, undated (accessed July 21, 

2008, and January 1, 2009). 

 a

Compound annual growth rate. 

 bNot applicable. 

In 2007, 76 percent of U.S. cross-border exports of reinsurance services were 

concentrated in only eight countries. Overall, the largest market for U.S. reinsurance 

exports was Japan, which accounted for 24 percent of the total in 2007, followed by the 

United Kingdom (15 percent) and Bermuda (11 percent) (figure 3.7). In 2007, U.S. 

reinsurance imports were even more highly concentrated than exports, reflecting the 

dominance of reinsurance companies based in Bermuda, Ireland, and Switzerland, which 

together accounted for 75 percent of total cross-border imports of reinsurance services 

(figure 3.8). From 2000 through 2007, Bermuda was by far the largest source of U.S. 

reinsurance imports. During this period, Ireland and Switzerland both moved ahead of the 

United Kingdom as the second- and third-largest sources of U.S. reinsurance imports, 

respectively. Ireland’s growth as a reinsurance center is a result of the Irish government’s 

efforts to attract financial services firms to Dublin (box 3.3), while companies based in 

Switzerland have been major players in global reinsurance markets for decades. 
3-20 

FIGURE 3.7 Destinations for U.S. cross-border exports of 

reinsurance services, 2007

Japan

24%

All other

24%

Korea

3% Mexico

4%

Germany

6%

Canada

8%

Bermuda

11%

France

5%

United Kingdom

15%

Source: USDOC, BEA, “U.S. International Services: Cross-Border Trade in 

2007,” table 6.2, October 2008.

FIGURE 3.8 Sources of U.S. cross-border imports of 

reinsurance services, 2007

All other

9%

France

1%

Germany

7%

Canada

2%

Ireland

20%

Switzerland

20%

United Kingdom

6%

Bermuda

35%

Source: USDOC, BEA, “U.S. International Services: Cross-Border Trade in 

2007,” table 6.2, October 2008.
4-1 

CHAPTER 4 

Market Access and Competitive 

Conditions 

Identification of Measures Affecting Trade in Insurance 

Services 

The focus of this chapter is on policies and practices that affect market access and 

competition (hereafter nontariff measures, or NTMs). While there may be examples of 

policies and practices that have a positive or neutral effect on market access and 

competition, the focus here is on those that adversely affect market access and 

competition. As demonstrated by the quantitative work presented later in this chapter, 

NTMs have a substantial effect on profits and trade. 

In identifying NTMs, the Commission drew from literature developed by academics and 

industry representatives, in particular the Financial Leaders Working Group. The FLWG 

represents companies and industry associations across the financial services industry, 

including banking, insurance, insurance intermediation, asset management, securities, 

and pensions. The group’s membership is drawn from companies and associations 

located in Australia, Canada, Hong Kong, Japan, Switzerland, and the United States, as 

well as EU member countries.1 2

 As such, the FLWG does not represent the views of any 

one firm or country. Drawing principally from this group’s model schedule and list of 

best practices, the Commission identified 11 NTMs that P&C insurance firms may 

encounter as they attempt to trade with, or invest in, foreign markets. 

The FLWG does not include representatives from all developed countries or any 

developing countries, and therefore, it may not fully represent the perspectives of these 

countries regarding NTMs. More specifically, some countries may not agree as to 

whether the measures identified by the FLWG are intended principally to limit trade or to 

ensure the safety and soundness of the insurance market. There are divergent opinions 

regarding what constitutes so-called prudential regulations, intended to ensure stability 

and protect consumers.3

 Consequently, the discussion that follows principally addresses 

the trade limiting aspects of the 11 NTMs identified by the FLWG, but recognizes that 

there are different ways to define prudential measures. 

Studies examining services NTMs employ various methods of identifying countries 

which maintain impediments to trade. Several analyses have used WTO members’ GATS 

commitments as a sole or key source of information on services barriers. For example, 

both the Pacific Economic Cooperation Council (1995) and Hoekman (1995, 1996) built 

frequency ratios based on the number of GATS commitments scheduled by individual 

WTO member countries in order to assess the relative level of liberalization offered in 

 1 FLWG, “Financial Leaders Group Calls Further Financial Services Liberalization Essential,” 

February 10, 2006. 2

 EU countries typically apply insurance regulation on a country-by-country basis. 3

 USITC, Hearing transcript, September 23, 2008, 143 (testimony of George M. Brady, NAIC). 
4-2 

these commitments.4 Similarly, McGuire and Schuele (2000) used GATS commitments 

and other information to assess the restrictiveness of measures affecting the financial 

services sector in various countries. GATS commitments are frequently used as a source 

of information on services barriers because they are available for a large number of 

countries; offer largely standardized language regarding NTMs, facilitating cross-country 

comparisons; and represent legally binding levels of openness, enabling analyses of trade 

agreements. However, GATS commitments may misrepresent the relative restrictiveness 

of some countries’ services measures, as most commitments are more than 10 years old 

and often represent an upper bound, meaning that actual policies are often more liberal 

than a country’s commitments might suggest. A recent survey estimates that, on average, 

the measures identified in WTO member countries’ GATS commitments are 84 percent 

more limiting than these countries’ current practices.5

The Commission conducted extensive primary and secondary research6

 to assess the 

degree to which the insurance regulations of 72 countries are in line with best practices 

set forth in the model insurance schedule developed by the FLWG.7

 The model schedule 

includes nine policies that foster competition by permitting foreign access to P&C 

insurance markets, and two types of provisions that accord national treatment in those 

markets. Derogations from the model schedule are interpreted as NTMs.8

 

Market access provisions specified in the model schedule include 

• the ability to supply MAT insurance on a cross-border basis (cross-border 

supply) (box 3.1); 

• the ability of consumers to purchase MAT insurance from overseas vendors that 

have not registered in the consumers’ home market (consumption abroad); 

• the ability of foreign firms to determine their form of establishment in overseas 

markets; 

• the ability of foreign firms to determine the extent of their equity participation in 

an overseas insurance entity; 

• the gradual elimination of restrictions on foreign equity participation; 

 4

 Mattoo, Stern, and Zanini, eds., A Handbook of International Trade in Services, 2008, 186. 5

 Gootiiz and Mattoo, “Services in Doha?” August 5, 2008. 6

 Primary research includes interviews with representatives from P&C insurance firms and industry 

associations, academics noted in this area of research, and the Commission’s public hearing on this 

investigation. In addition, the Commission conducted e-mail communications with foreign regulatory 

authorities, often in concert with U.S. Chambers of Commerce abroad, the U.S. State Department, the U.S. 

Foreign Commercial Service, foreign industry associations, and foreign missions in the United States. 

Prominent sources of secondary research include AXCO country reports, Standard & Poor’s, the Economist 

Intelligence Unit, the OECD Product Market Regulation Database, reports published by the Financial 

Leaders Working Group, U.S. Foreign Commercial Service country commercial guides, the U.S. Trade 

Representative’s National Trade Estimate report, foreign legislation, and journal articles accessed through 

JSTOR and the Social Sciences Research Network. Country and industry association Web sites were also 

used in the Commission’s secondary research efforts. 7

 This model schedule was adopted by the Financial Leaders Group and its Working Group in 2001 for 

the purpose of guiding the development of individual countries’ GATS commitments on insurance services. 

The Financial Leaders Group, which was established in 1996 and represents several of the world’s largest 

financial services associations and firms, promotes efforts to achieve financial services liberalization through 

the WTO. CSI, Written submission to the USITC, October 7, 2008, 3; FLWG, “Financial Leaders Group 

Calls Further Financial Services Liberalization Essential,” February 10, 2006. 8

 NTMs identified by the Commission are very similar to those identified by other researchers. See, for 

instance, Deihl and Sheppard, “Modal Estimates of Services Barriers: Annex 1,” November 8, 2005; and 

Dee, “A Compendium of Barriers to Trade in Services,” November 2005. 
4-3 

• the absence of restrictions or discriminatory measures affecting foreign provision 

of compulsory insurance; 

• the elimination of monopolies and other exclusive suppliers of insurance 

services; 

• the ability of foreign firms to choose the individual(s) that serve as their overseas 

representative(s); 

• the availability of visas and work permits for service suppliers that enter a 

foreign market on a temporary basis. 

The schedule’s national treatment provisions include 

• foreign firms’ ability to supply insurance services to entities that are owned by, or 

affiliated with, the government; 

• the application of identical capital solvency requirements for both foreign and 

domestic insurance enterprises. 

An inventory of NTMs based on the insurance industry’s model schedule offers several 

benefits when conducting assessments of such NTMs. First, unlike the measures 

scheduled by WTO member countries when they acceded to the GATS, the measures 

identified in the model schedule are currently in force. The use of the model schedule 

also allows a focus on measures that industry representatives believe have the greatest 

effect on insurance firms’ ability to export and operate in foreign markets. The value of 

industry input in developing trade restrictiveness indices is stressed by Deardorff and 

Stern, who argue that industry expertise is necessary to identify measures that impact the 

provision of a particular service, and to distinguish measures with a valid regulatory 

purpose from measures that primarily restrict trade.9

 Further, the model schedule was the 

basis of an industry effort to create an inventory of NTMs in foreign countries. As a 

result, a relatively significant amount of information has been collected on the measures 

identified in the model schedule. In creating the inventory used in the following analyses, 

the Commission updated, verified, and added new information to the industry’s database, 

creating an inventory with more complete information on individual countries, and 

extending the inventory’s coverage from 46 to 72 countries (table 4.1).10 This inventory is 

the basis of the analyses below, and of the insurance trade restrictiveness index, ITRI, 

presented later in this chapter. 

 9

 Deardorff and Stern, “Empirical Analysis of Barriers to International Services Transactions,” 2008, 

185. 10 The Commission collected NTM-related information on 72 countries: Argentina, Australia, Austria, 

Bangladesh, Barbados, Belgium, Bolivia, Brazil, Bulgaria, Canada, Chile, China, Colombia, Croatia, Czech 

Republic, Denmark, Ecuador, Egypt, Estonia, Finland, France, Germany, Greece, Guatemala, Hong Kong, 

Hungary, Iceland, India, Indonesia, Ireland, Israel, Italy, Japan, Jordan, Kenya, Korea, Latvia, Lithuania, 

Luxembourg, Malaysia, Malta, Mexico, Morocco, the Netherlands, New Zealand, Norway, Pakistan, 

Panama, Peru, the Philippines, Poland, Portugal, Romania, Russia, Saudi Arabia, Singapore, Slovakia, 

Slovenia, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Thailand, Tunisia, Turkey, Ukraine, United 

Arab Emirates, United Kingdom, United States, Venezuela, and Vietnam. 
4-4 

TABLE 4.1 Countries with derogations from the model schedule

Market Access Provisions 

Country

MAT insurance 

permitted on a 

cross-border 

basis

Access to MAT 

insurance on a 

cross-border 

basis is permitted 

without regard to 

registration

Freedom 

to 

establish 

in the form 

of firm's 

choice

Freedom from 

equity 

limitations and 

staged 

elimination 

where they 

exist

Absence of 

restrictions or 

discriminatory 

measures affecting foreign provision of 

compulsory lines

Elimination of 

monopolies and 

other exclusive 

suppliers of 

insurance services

Ability of 

insurance firms 

to select their 

own 

representatives 

in the host 

country

Provisio

visas a

work 

permits 

short 

periods 

stay

Argentina X X X X Australia X X X X

Austria X X X

Bangladesh X X X X X X X X 

Barbados X X X X 

BelgiumBolivia X X X

Brazil X X X X X 

Bulgaria X X

Canada X X X 

Chile X X X 

China X X X X X Colombia X X X

Croatia X X X X X X

Czech RepublicDenmark X

Ecuador

Egypt X X X X

Estonia X X

Finland X X

France X

Germany X X X

GreeceGuatemala X X X X

Hong Kong X X

Hungary X X

Iceland X X X

India X X X X 

Indonesia X X X X X X X 

Ireland X X X X 

Israel X X X
4-5 

TABLE 4.1 Countries with derogations from the model schedule–Continued

Market Access Provisions 

Country

MAT insurance 

permitted on a 

cross-border 

basis

Access to MAT 

insurance on a 

cross-border 

basis is permitted 

without regard to 

registration

Freedom 

to 

establish 

in the form 

of firm's 

choice

Freedom from 

equity 

limitations and 

staged 

elimination 

where they 

exist

Absence of 

restrictions or 

discriminatory 

measures affecting foreign provision of 

compulsory lines

Elimination of 

monopolies and 

other exclusive 

suppliers of 

insurance services

Ability of 

insurance firms 

to select their 

own 

representatives 

in the host 

country

Provisio

visas a

work 

permits 

short 

periods 

stay

Italy X X X X X X Japan X X Jordan X X

Kenya X X X X X

Korea X X X X X X X 

Latvia X 

Lithuania X X

Luxembourg X X X 

Malaysia X X X X X X X 

Malta X X X

Mexico X X X X 

Morocco X X X X X 

Netherlands X X X X 

New Zealand X

Norway X X X X X 

Pakistan X X X X X 

Panama X X

Peru X X X X 

Philippines X X X Poland X X X X X X 

Portugal X X X 

Romania X X X 

Russia X X X X X X X X 

Saudi Arabia X X X X X 

Singapore X X X X X 

Slovakia X X

Slovenia X X X

South Africa X X X X X X 

SpainSri Lanka X X X X 

Sweden X X X X 
4-6 

TABLE 4.1 Countries with derogations from the model schedule–Continued

Market Access Provisions 

Country

MAT insurance 

permitted on a 

cross-border 

basis

Access to MAT 

insurance on a 

cross-border 

basis is permitted 

without regard to 

registration

Freedom 

to 

establish 

in the form 

of firm's 

choice

Freedom from 

equity 

limitations and 

staged 

elimination 

where they 

exist

Absence of 

restrictions or 

discriminatory 

measures affecting foreign provision of 

compulsory lines

Elimination of 

monopolies and 

other exclusive 

suppliers of 

insurance services

Ability of 

insurance firms 

to select their 

own 

representatives 

in the host 

country

Provisi

visas 

wor

permit

sho

period

sta

Switzerland X X XThailand X X X X X X X X 

Tunisia X X X X X

Turkey X X X X X

Ukraine X X X 

United Arab Emirates X X X X X X X 

United KingdomVenezuela X X X X X 

Vietnam X X X X X X X 

Source: Compiled by Commission staff from industry interviews, country and industry reports, and electronic databases. Note: As noted, this inventory of derogation from the model schedule is the result of intensive research using primary and secondary sources. As in all research of thmake inferences from the best available information. 
4-7 

Summary of Market Access and National Treatment 

NTMs 

Limitations on the cross-border provision of MAT insurance: Commission 

staff analyzed insurance-related NTMs for 65 countries. This research indicates 

that limitations on the cross-border provision of MAT insurance are relatively 

common. Approximately three-quarters of the focus countries maintain some 

restriction on cross-border MAT insurance, with such provisions found in both 

developed and developing markets. For example, countries such as Brazil, 

Bulgaria, Colombia, Indonesia, Russia, and Switzerland appear to prohibit all 

forms of cross-border trade in MAT insurance. Some focus countries limit the 

cross-border supply of MAT insurance to certain lines (such as marine export 

insurance in Bangladesh) or certain providers (such as EU-based providers in 

Hungary). In Germany, Norway, Singapore, and South Africa, the cross-border 

provision of insurance coverage may be permitted in buyer-initiated transactions. 

Other countries subject the cross-border supply of MAT insurance to an 

economic needs test, or do not guarantee or commit to an open market for crossborder MAT insurance. 

 

Restrictions on the purchase of MAT insurance abroad: Similarly, 

approximately 80 percent of the focus countries effectively restrict their 

residents’ ability to purchase MAT insurance abroad, either though an outright 

ban on some or all such transactions, or by imposing measures such as 

registration, approval, or commercial presence requirements on foreign insurance 

suppliers. For example, Argentina, Bolivia, Colombia, Hong Kong, Italy, Korea, 

Malaysia, Pakistan, the Philippines, Singapore, Turkey, and Venezuela require 

that insurance firms establish a presence in their countries, register, and/or obtain 

some type of approval in order to provide insurance coverage to customers. Chile 

imposes a 22 percent tax on MAT insurance coverage that is purchased abroad. 

Much like cross-border MAT insurance transactions, consumers’ ability to 

purchase MAT insurance abroad also is limited by economic needs tests and a 

lack of bilateral or multilateral trade commitments in several countries. 

Limitations of form of establishment: To remain competitive in varying 

cultural and regulatory environments, insurance firms often provide insurance 

services to overseas clients though local affiliates.11 The ability to establish 

branch offices can be particularly critical, as branches have access to both local 

and home-office capital.12 Measures affecting the manner in which a foreign firm 

may set up operations in an overseas market are particularly common; 60 percent 

of the focus countries maintain provisions that limit a firm’s ability to determine 

its form of establishment. For example, a number of countries—namely 

Argentina, Brazil, Chile, China, Colombia, Egypt, Guatemala, Indonesia, India, 

Mexico, Malaysia, Saudi Arabia, Singapore, South Africa, Sri Lanka, Thailand, 

Venezuela, and Vietnam—prohibit or restrict the establishment of branch offices. 

Further, the establishment or operation of a commercial presence by a foreign 

 11 Ma and Pope, “Determinants of International Insurers’ Participation,” 2003, 235–48. 12 CSI, written submission to the USITC, October 7, 2008, 2. 
4-8 

insurer may be subject to approval in several countries, including Brazil, 

Germany, Italy, Russia, Singapore, Thailand, Turkey, and Venezuela. 

Limitations on foreign shareholding in an insurance firm: Commission 

research also indicates that at least half of the focus countries maintain 

limitations on the share of foreign equity in an insurance entity. Several 

countries, including China, India, Mexico, Malaysia, Russia, and Vietnam, have 

established specific percentage limits for foreign shareholding in insurance 

entities. Similarly, Egypt, Indonesia, Ireland, South Africa, Thailand, and Turkey 

require a foreign investor to secure approval when its equity stake in an insurance 

enterprise exceeds a certain threshold. Among this report’s focus countries, only 

Korea has liberalized provisions regarding foreign equity holdings in recent 

years. One industry representative reports that a firm’s ability to determine its 

equity holding in a foreign enterprise is critical; investors may be less willing to 

contribute capital or expertise to an enterprise in which they hold a minority 

interest, as it may be unclear who will benefit from those investments.13

Restrictions on the provision of compulsory insurance: Over one-quarter of 

the focus countries maintain measures affecting foreign firms’ ability to provide 

compulsory insurance coverage, which may include, for example, third-party 

motor vehicle insurance. Many U.S. P&C insurance companies note, in 

particular, that non-Chinese insurance companies are not allowed to offer thirdparty automobile liability insurance in China.14 In Australia and Canada, the 

provision of third-party auto insurance is reserved for a monopoly provider in 

certain states or provinces. In Italy, auto insurers must offer all categories of 

insurance, Japan requires that firms providing such insurance receive approval, 

Lithuania requires providers of compulsory auto insurance to secure membership 

in the Motor Bureau, and Vietnam completely bar foreign firms from providing 

third-party auto liability insurance. Other compulsory insurance markets that are 

not open to foreign participation include Vietnam’s construction insurance 

market and Norway’s fire insurance pool. 

Presence of monopoly providers: No less than 30 percent of the focus countries 

retain measures regarding the monopoly provision of all, or certain types, of P&C 

insurance. Types of insurance coverage that are reserved for monopoly 

providers—either completely or in certain jurisdictions or industries—include 

third-party auto insurance (Australia and Canada), workers’ compensation 

insurance (Australia, Brazil, and Switzerland), and natural damage and fire 

insurance (Switzerland), among others. In certain countries, the postal system 

acts as a public insurance monopoly and may benefit from less stringent 

regulatory requirements than those applied to its competitors.15 Recent 

developments have had some effect on postal firms’ participation in insurance 

markets. Under the provisions of the U.S.-Korea Free Trade Agreement, for 

 13 USITC, Hearing transcript, September 23, 2008, 147 (testimony of Michael Moran on 

behalf of Council of Insurance Agents and Brokers); Moran, on behalf of the Council of Insurance 

Agents and Brokers, Written testimony to the USITC, September 23, 2008. 14 USITC, Hearing transcript, September 23, 2008, 13 (testimony of David Synder, American 

Insurance Association; industry officials, interviews by Commission staff, August 14, 2008 and 

December 17, 2008. 15 USITC, Hearing transcript, September 23, 2008, 110–14 (testimony of David Snyder, 

American Insurance Association); Snyder, Written testimony to the USITC, September 23, 2008. 
4-9 

example, Korea Post will be subject to the same rules as private suppliers of 

insurance services.16 Further, Japan has begun the process of privatizing Japan 

Post, whose insurance activities largely are limited to the life insurance 

segment.17 At the same time, however, one industry representative reports 

concerns that Japan Post may use its growing private ownership as a rationale for 

entering the P&C insurance market while continuing to benefit from preferential 

treatment.18

Restrictions on the selection of key personnel and the entry of foreign 

workers: The availability of skilled and knowledgeable employees reportedly is 

critical to the success of insurance companies in overseas markets.19 Moreover, 

the transfer of key personnel also may benefit developing countries by 

facilitating the development of professional workforces to staff those countries’ 

insurance companies.20 At least 40 percent of the focus countries maintain 

measures affecting insurance firms’ ability to select key personnel. For example, 

in both Brazil and Guatemala, firms with three or more employees are required to 

employ nationals to fill at least two-thirds of their positions. Russia, Thailand, 

Turkey, Venezuela, and South Africa have identified certain positions that must 

be filled—or a certain share of which must be filled—by nationals or permanent 

residents of the host country. Further, Saudi Arabia requires that Saudi citizens 

account for 30 percent of a firm’s employees, while Singapore subjects work 

permits to firm-specific quotas, thus limiting the number of foreign personnel in 

a firm’s overall workforce. Although most countries (including the United States) 

regulate the entry of foreign workers, it appears that at least 10 of the overseas 

markets investigated as part of this study maintain measures pertaining to the 

issuance of work permits and visas. For example, work permits are subject to 

quotas in Italy, Malaysia, and South Africa, while Thailand limits the number of 

permits available to individual firms based on firms’ capital. Administrative 

factors act as barriers to the issuance of work permits in Indonesia, where 

obtaining a work permit entails numerous steps, and in Chile, which reportedly 

does not issue work permits and visas in a timely manner. Further, work permits 

cannot be obtained in Poland. 

Restrictions on the foreign provision of insurance to state-owned or state 

affiliated enterprises: In addition to the market access measures summarized 

above, insurance companies also face provisions that may place them at a 

disadvantage relative to domestic insurers. For example, the ability of foreign 

firms to provide insurance coverage to enterprises that are affiliated with, or 

owned by, the state is limited in more than one-third of the focus countries. The 

coverage of all, or some, government entities is reserved for state-affiliated 

insurers in Norway,21 Pakistan, the Philippines, Saudi Arabia, and Thailand. 

Similarly, Argentina specifically prohibits the foreign provision of insurance 

 16 U.S.-Korea Free Trade Agreement, Annex 13-D. 

17 USITC, Hearing transcript, September 23, 2008, 113–14 (testimony of David Snyder, 

American Insurance Association). 18 Ibid. 

19 Hartwig, Insurance Information Institute, Written submission to the USITC, October 2, 

2008, 7. 20 UNCTAD, Trade and Development Aspects of Insurance Services, November 21, 2005, 

26. 21 The state is the monopoly provider of war risk cargo insurance in Norway. 
4-10 

coverage for government-owned or -used goods. “Buy Canada” policies may put 

foreign insurers at a competitive disadvantage in certain Canadian provinces. 

Further, in some countries, foreign insurers face discrimination or are effectively 

barred from selling insurance to state entities despite the absence of a formal 

provision limiting such activities. Markets in which insurers confront these 

informal barriers reportedly include India, Indonesia, Korea, and Malaysia. 

Discriminatory capital solvency requirements: Discriminatory capital 

solvency measures are particularly prevalent, as approximately 50 percent of the 

focus countries appear to apply unequal capital solvency requirements to 

domestic and foreign insurers. For example, Indonesia requires joint ventures to 

maintain Rp. 15 billion (or approximately $1.2 million)22 in paid-up capital, 

while local insurance firms are required to hold only Rp. 3 billion (or 

approximately $250,000). Portugal and Sweden impose different deposit 

requirements on non-EU members and non-European Economic Association 

countries. Some countries also maintain other types of measures that may have a 

discriminatory effect on foreign firms’ capital. These include discriminatory tax 

measures (such as those imposed in China, Pakistan, Peru, and Venezuela), and 

measures affecting capital remittances (such as those maintained by Brazil, Peru, 

Sri Lanka, and Thailand). 

The Insurance Trade Restrictiveness Index 

The Commission used its inventory of NTMs to develop an Insurance Trade 

Restrictiveness Index, or ITRI, which provides a numeric score for NTMs 

identified in 62 countries.23 In particular, the Commission assigned one of three 

scores to each of the 11 practices found in the model schedule. For each practice, 

a score of 0 is applied if it is completely open (or permitted), whereas a score of 1 

is assigned if it is completely closed (or prohibited). In many cases, practices are 

neither completely open nor prohibited. Such cases are classified as “other” and 

assigned a score of 0.5. The index was calculated as the average of these scores, 

with no weights applied to specific practices (figure 4.1). The Commission 

employs the ITRI in several econometric models designed to estimate the effect 

of NTMs. 

Effects of Liberalization 

Commission research and academic literature offer some insight into the likely 

effects of removing NTMs on trade, economic development, profits, and 

employment. The trade, profit, and employment effects of liberalization were 

developed by the Commission, whereas the effects on economic growth drew on 

outside research. The immediate effects of liberalization could include market 

entry by foreign insurers, most likely as affiliate companies in the previously 

restricted retail insurance sector. Under such circumstances, the threat of 

 22 Based on a December 8, 2008, interbank exchange rate of $1 to Rp. 12,121.2. 

http://www.oanda.com/. 23 The term trade restrictiveness index (TRI) is used by some economists in a different 

context. See Anderson and Neary, “A New Approach,” January 1996, 107–25; Irwin, “Trade 

Restrictiveness,” September 2007. 
4-11 

Bangladesh

Malaysia

Russia

Indonesia

Thailand

Vietnam

Venezuela

China

Korea

Pakistan

Barbados

Saudi Arabia

South Africa

Argentina

Brazil

India

Mexico

Morocco

Poland

Italy

Tunisia

Croatia

Sri Lanka

Peru

Philippines

Singapore

Australia

Chile

Guatemala

Ireland

Norway

Canada

Colombia

Netherlands

Sweden

Egypt

Bolivia

Iceland

Japan

Luxembourg

Portugal

Romania

Switzerland

Austria

Bulgaria

Hong Kong

Hungary

Jordan Germany

Latvia

Slovenia

Finland

Lithuania

Panama

Denmark

France

New Zealand

United Kingdom

Spain

Ecuador

Czech Republic

Belgium

0 0.125 0.25 0.375 0.5 0.625 0.75 0.875 1

Least restrictive Most restrictive

Source: Compiled by Commission staff.

Note: The ITRI value for Belgium, Czech Republic, Ecuador, Spain, and the United Kingdom is zero.

FIGURE 4.1 Insurance Trade Restrictiveness Index (ITRI), selected countries
4-12 

increased competition from foreign insurance companies would likely motivate 

domestic insurance firms to improve operations. In general, as there would be 

more firms in the market and/or fewer trade restrictions, consumer prices and 

profit margins tend to fall to more competitive levels. Overall, the operation of 

foreign P&C insurance firms in open markets encourages the development of 

those markets by extending insurance to a larger share of the population. 

Trade Effects 

Commission research suggests that liberalizing foreign markets would result in a 

considerable increase in U.S. insurance exports. Econometric models developed 

by the Commission suggest that a 10 percent reduction in a country’s 

restrictiveness would increase U.S. insurance exports by 9.9 percent (appendix 

E). For example, a 10 percent reduction in Mexico’s restrictiveness in 2005 

would have increased U.S. insurance exports to Mexico from $27 million to 

approximately $29.7 million.24 If all countries in the Commission’s sample were 

completely open, U.S. exports of insurance services could potentially increase by 

48 percent, or $870 million.25

Commission models estimate that liberalization would produce a greater effect 

on the sales of foreign insurance affiliates owned by U.S. companies, the 

predominant form of trade in P&C insurance. Under these models, a 10 percent 

reduction in the ITRI would yield an estimated 14.5 percent increase in U.S.-

owned insurance affiliates’ sales. Again, in the case of Mexico, a 10 percent 

reduction in trade restrictiveness would have increased U.S.-owned affiliates’ 

sales from $4.8 billion26 to approximately $5.4 billion in 2005. Full liberalization 

by all countries in the Commission’s sample could result in an estimated 

28 percent increase in total U.S.-owned affiliates’ sales, or $39.1 billion.27

Economic Development Effects 

Industry experts have asserted that the development of the P&C insurance 

industry promotes economic growth and development through the economic 

functions the industry performs.28 Such functions include risk pooling, thereby 

promoting long-term savings; signalling markets by electing to cover certain 

risks and not others; broadening and deepening financial and capital markets by 

investing reserves; reducing the financial uncertainty and volatility associated 

with noninsured losses; managing the liability exposure of individuals and firms 

when undertaking commercial activities; and using premium rates to encourage 

greater caution in individuals’ and firms’ assumption of risk. 

These arguments find support, in varying degrees, in theoretic and empirical 

work. Holsboer (1999), for instance, attributes the connection between P&C 

 24 USDOC, BEA, “U.S. International Services: Cross-Border Trade in 2007,” October 2008, 

131. This figure includes life insurance as well as P&C, but excludes reinsurance. 25 The export model includes data for 31 countries over the 2001–05 period. For more 

information regarding the model, see app. E. 26 USDOC, BEA, “Financial and Operating Data (Nonbank) Interactive Tables,” (accessed 

February 11, 2009). 27 The affiliate sales model includes data for 34 countries over the 1999–2005 period. 28 Skipper, Starr, and Robinson, “Liberalization of Insurance Markets,” 2000, 10–13. 
4-13 

insurance penetration and economic growth to the effect of the insurance market 

on long-term savings and capital market development.29 Catalan, Imparido, and 

Musalem (2000) find the same connection, attributing it to the intermediary 

function of P&C insurers, as well as their effect on capital market development.30

Empirical econometric work that confirms the relationship between P&C 

insurance and economic growth includes Beenstock, Dickinson, and Khajuria 

(1988); Outreville (1990); Park, Borde, and Choi (2002);31 Arena (2006);32 and 

Vadlamannati (2007).33

Profit Effects 

The Commission measured the impact of NTMs on the adjusted profit margins of 

P&C insurance carriers, calculated as pretax profits per dollar of net premiums 

written. For the purposes of this report, the impacts of NTMs are called profit 

effects. The estimated profit effects are defined as the amount by which P&C 

insurers’ adjusted profit margins34 are inflated due to trade restrictions. Following 

existing literature in the area,35 the Commission developed the profit effects by 

employing a two-stage econometric model (appendix F). In the first stage, profits 

per dollar premium, using data reported by more than 2,700 firms in over 60 

countries, are regressed on independent variables representing firms’ investment 

acumen, cost management skills, risk assessment skills, and risk exposure. 

Investment acumen is measured as the ratio of investment returns, including net 

interest income and other gains and losses reflecting capital gains, to funds 

invested, including net technical reserves and policyholders’ surplus. Cost 

management skills are reflected in the expense ratio, which divides fees, 

commissions, and other operating expenses by net premiums written. Risk 

assessment is reflected in the loss ratio, which divides claims paid by net 

premiums earned. Risk exposure is calculated by dividing net premiums written 

by the surplus. Risk exposure is subject to prudential regulation intended to 

ensure that potential losses can be covered by firms’ capital. Typically, regulators 

limit net premiums to three times the value of firms’ capital, though self-

 29 Holsober, “Repositioning of the Insurance Industry,” 1999, 

30 Catalan, Imparido, and Musalem, “Contractual Savings or Stock Markets Development,” 

2000. 31 Beenstock, Dickson, and Khajuria, “The Relationship Between Property-Liability 

Insurance Penetration,” 1998; Outreville, “The Economic Significant of Insurance Markets,” 1990; 

and Park, Borde, and Choi, “Determinants of Insurance Pervasiveness,” 2002. 32 Arena, “Does Insurance Market Activity Promote Economic Growth?” December 2006, 

15–16. 33 Vadlamannati, “Does Insurance Sector Growth and Reforms Effect Economic 

Development?” 2007, 52–53. There are other studies that do not find that insurance development 

promotes economic development, either generally or in specific countries, and still others that find 

evidence of the opposite dynamic, wherein economic growth promotes development of the P&C 

insurance industry. Throughout the literature, however, there is acknowledgement that both 

processes might occur simultaneously. It is for this reason, in part, that profits effects are estimated 

in two stages. 34 Adjusted profit margins are “adjusted” for the effects on profit margins of firm-level 

variables such as loss ratios, expense ratios, risk exposure, and investment acument. It is necessary 

to adjust the total profit margin for these firm-level effects in order to isolate the effects of countrylevel variables, including the ITRI. 35 See, for instance, Kalirajan, et al., “The Price Impact of Restrictions in Banking Services,” 

2000, 215–30; McGuire, and Schuele, “Restrictiveness of International Trade in Banking 

Services,” 2000; and Diehl and Shepard, “Modal Estimates of Services Barriers: Annex,” 

October 27, 2005. 
4-14 

regulation by firms often reduces this multiple. Regression results for the first 

stage indicate that all independent variables are statistically significant at the 1 

percent level and jointly explain about 51 percent of variation in the profit 

margin. The end result of this regression is an adjusted profit margin corrected 

for firm-level characteristics. 

In the second stage, the adjusted profit margin is regressed on country-level 

institutional, market, and macroeconomic variables. The country-level 

institutional variables include the corruption perception index (CPI) and property 

rights index (PRI) developed by Transparency International and the Heritage 

Foundation, respectively. Due to correlation issues, these two variables appear in 

different model specifications. Market variables include the share of GDP 

exposed to risk, developed by the World Bank, and the combined market share of 

the top five P&C insurers in each market. Macroeconomic variables include the 

real interest rate, unemployment rate, and the ITRI, developed by the 

Commission and discussed previously. Regression results indicate that the ITRI, 

CPI, PRI, and GDP share exposed to risk variables are statistically significant, 

with the model explaining about 26 percent of variation in the adjusted profit 

margin. Algebraic manipulation of the ITRI and its coefficient yields the profit 

effects appearing in table 4.2. 

Large profit effects suggest firms are able to extract higher profits than the 

amount they would command in an open trade environment. Many of the 

economies with larger profit effects are emerging markets, some of which have 

recently liberalized their insurance markets (e.g., India and Vietnam), but 

nonetheless retain significant restrictions. Countries with smaller profit effects 

are generally, but not exclusively, the developed economies of the OECD, many 

of which have few, if any, policy restrictions on foreign firms’ market access and 

operations. 

TABLE 4.2 Estimated profit effects in the P&C insurance industry 

0 to 10 percent 11 to 20 percent 21 to 35 percent 

Greater than 

35 percent 

Austria Japan Canada Argentina Bangladesh 

Belgium Jordan Chile Barbados Indonesia 

Bolivia Latvia Colombia Brazil Malaysia 

Bulgaria Lithuania Croatia China Russia 

Czech Republic Luxembourg Guatemala India Thailand 

Denmark New Zealand Ireland Italy Venezuela 

Ecuador Panama Netherlands Korea Vietnam 

Egypt Portugal Norway Mexico 

Finland Romania Peru Morocco 

France Slovenia Philippines Pakistan 

Germany Spain Singapore Poland 

Hong Kong Switzerland Sri Lanka Saudi Arabia 

Hungary United Kingdom Sweden South Africa 

Iceland Tunisia 

Source: Compiled by Commission staff. 

Notes: The estimated profit effects are the amount by which P&C insurers’ adjusted profit margins are 

inflated due to trade restrictions. Adjusted profit margins are “adjusted” for the effects on total profit 

margins of firm-level variables, such as loss ratios, expense ratios, risk exposure, and investment 

acumen. It is necessary to adjust the total profit margin for the effects of firm-level variables in the first 

stage so that the effects of country-level variables, including the ITRI, can be isolated in the second 

stage. 
4-15 

Employment Effects 

Commission analysis also suggests that full liberalization of foreign P&C 

insurance markets would increase employment among firms in the U.S. insurance 

industry. Building upon traditional gravity models used to estimate the trade 

effects of liberalization, the Commission developed a partial equilibrium model. 

The partial equilibrium model focused on three geographic markets and the effect 

of liberalization on labor, capital, and other inputs. The Commission’s model 

suggests that foreign liberalization would result in increased cross-border 

exports; the establishment of more foreign affiliates, which would require more 

support services from their U.S. headquarters; and growth among the U.S. 

affiliates of foreign firms as they exit markets newly occupied by U.S.-owned 

affiliates. In combination, these effects would ultimately increase P&C insurance 

employment in the United States by an estimated 0.72 percent. This would mean 

that, on average, an insurance firm with 10,00036 employees would increase 

employment by approximately 72 workers.37 These effects are consistent with 

information obtained in industry interviews. For example, one representative 

stated that if affiliate profits were returned to the home office, and the home 

office used those profits as capital with which to write new policies, additional 

employment could likely result.38 Another industry representative indicated that, 

although many functions performed by foreign insurance affiliates need to take 

place in the host-country market, insurance firms typically prefer to centralize 

certain operations at U.S.-based headquarters. Such operations include corporate 

investment and certain data-processing operations, as well as tasks associated 

with the coordination of affiliates located in multiple countries.39

 36 This example is provided for illustrative purposes only. 

37 Brady, et al., Property and Casualty Insurance Services: Foreign Market Liberalization 

Effects on Labor, forthcoming. 38 Industry representative, telephone interview by Commission staff, December 2, 2008. 39 J. David Cummins, interview by Commission staff, Philadelphia, PA, December 5, 2008. 

Biblio-1

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APPENDIX A 

REQUEST LETTER 

EXECUTIVE OFFICE OF THE PRESIDENT 

THE UNITED STATES TRADE REPRESENTATIVE 

WASHINGTON, D.C. 20508 

t DOiUil ’ 

The Honorable Daniel R. Pearson 

Chairman 

U.S. International Trade Commission 

500 E Street, SW 

Washington DC, 20436 

Dear Chairman Pearson: 

Office af the 

Secretary 

Int’l Trade Commlsston 

JUN 0 9 2008 

As you are aware, the United States actively encourages the global liberalization of services 

markets. The liberalization of financial service markets, in particular, is among our highest 

priorities as it has been shown that financial liberalization promotes more efficient and effective 

capital allocation, intermediation, and risk management, which in turn promote economic growth 

and prosperity in both developed and developing countries. A report on property-casualty 

insurance markets would be helpful as background information for discussions taking place in 

the WTO and other trade fora. 

Therefore, I request, pursuant to authority delegated by the President under section 332(g) of the 

Tariff Act of 1930, that the U.S. International Trade Commission conduct an investigation and 

prepare a report that, to the extent possible; (1) provides an overview of global and selected 

foreign markets for property/casualty insurance services, including factors affecting supply and 

demand in these markets; (2) examines the nature and extent of cross-border trade and affiliate 

sales in the global market for property/casualty insurance services; and (3) identifies and 

examines policies and practices that affect U.S. firms’ access to, and competitiveness in, foreign 

markets for such services. With regard to the geographic coverage of this report, the 

Commission should include examples from both developed- and developing-country markets. 

The Commission is requested to deliver its report no later than nine months from the receipt of 

this request. After review and discussion, we intend to make the Commission’s report available 

to the general public in its entirety. Therefore, the report should not contain any confidential 

business or national security classified information. 

The Commission’s assistance in this matter is greatly appreciated. 

Sincerely, 

Susan C. Schwab 

A-3

APPENDIX B 

FEDERAL REGISTER NOTICE 

UNITED STATES INTERNATIONAL TRADE COMMISSION

Washington, D.C. 20436

Investigation No. 332-499

Property and Casualty Insurance Services: Competitive Conditions In Foreign Markets

AGENCY: United States International Trade Commission.

ACTION: Institution of investigation and scheduling of hearing. 

SUMMARY: Following receipt of a request on June 18, 2008 from the Office of the United States

Trade Representative (USTR), the U.S. International Trade Commission (Commission) instituted

investigation No. 332-499, Property and Casualty Insurance Services: Competitive Conditions in Foreign

Markets, under section 332(g) of the Tariff Act of 1930 (19 U.S.C. 1332(g)).

IMPORTANT DATES:

September 2, 2008 Deadline for filing requests to appear at the public hearing.

September 5, 2008 Deadline for filing pre-hearing briefs and statements.

September 23, 2008 Public hearing.

September 30, 2008 Deadline for filing post-hearing briefs and submissions.

October 7, 2008 Deadline for filing all other written statements.

March 18, 2009 Transmittal of final report to the Office of the U.S. Trade Representative

ADDRESSES: All Commission offices, including the Commission=s hearing rooms, are located in the

United States International Trade Commission Building, 500 E Street S.W., Washington, D.C. All written

submissions should be addressed to the Secretary, United States International Trade Commission, 500 E

Street S.W., Washington, D.C. 20436. The public record for this investigation may be viewed on the

Commission=s electronic docket (EDIS) at http://www.usitc.gov/secretary/edis.htm. 

FOR FURTHER INFORMATION CONTACT: Project Leader Eric Forden (202-205-3235 or

eric.forden@usitc.gov), Deputy Project Leader Jeremy Wise (202-205-3190 or jeremy.wise@usitc.gov),

or Chief, Services Division, Richard Brown (202-205-3438 or richard.brown@usitc.gov) for information

specific to this investigation. For information on the legal aspects of this investigation, contact William

Gearhart of the Commission=s Office of the General Counsel (202-205-3091 or

william.gearhart@usitc.gov). The media should contact Margaret O=Laughlin, Office of External

Relations (202-205-1819 or margaret.olaughlin@usitc.gov). Hearing-impaired individuals may obtain

information on this matter by contacting the Commission=s TDD terminal at 202-205-1810. General

information concerning the Commission may also be obtained by accessing its Internet site

(http://www.usitc.gov). Persons with mobility impairments who will need special assistance in gaining

access to the Commission should contact the Office of the Secretary at 202-205-2000. 

BACKGROUND: As requested by the USTR, the Commission will conduct an investigation and

prepare a report on property and casualty (P&C) insurance markets that (1) provides an overview of

global and selected foreign markets for P&C insurance services, including factors affecting supply and

demand in these markets; (2) examines the nature and extent of cross-border trade and affiliate sales in the

global market for P&C insurance services; and (3) identifies and examines policies and practices that

affect U.S. firms’ access to, and competitiveness in, foreign markets for such services. In terms of

geographic coverage, the USTR has requested that the Commission include examples of both developedand developing-country markets. The USTR requested that the Commission deliver its report by March

18, 2009.

B-3
2

PUBLIC HEARING: A public hearing in connection with this investigation will be held at the U.S.

International Trade Commission Building, 500 E Street SW, Washington, DC, beginning at 9:30 a.m. on

September 23, 2008. Requests to appear at the public hearing should be filed with the Secretary, no later

than 5:15 p.m., September 2, 2008, in accordance with the requirements in the ASubmissions@ section

below. All pre-hearing briefs and statements should be filed no later than 5:15 p.m., September 5, 2008;

and all post-hearing briefs and statements should be filed no later than 5:15 p.m., September 30, 2008. In

the event that, as of the close of business on September 2, 2008, no witnesses are scheduled to appear at

the hearing, the hearing will be canceled. Any person interested in attending the hearing as an observer or

nonparticipant may call the Secretary to the Commission (202-205-2000) after September 2, 2008, for

information concerning whether the hearing will be held.

WRITTEN SUBMISSIONS: In lieu of or in addition to participating in the hearing, interested parties

are invited to submit written statements concerning this investigation. All written submissions should be

addressed to the Secretary, and should be received no later than 5:15 p.m., October 7, 2008. All written

submissions must conform with the provisions of section 201.8 of the Commission=s Rules of Practice

and Procedure (19 C.F.R. 201.8). Section 201.8 requires that a signed original (or a copy so designated)

and fourteen (14) copies of each document be filed. In the event that confidential treatment of a document

is requested, at least four (4) additional copies must be filed, in which the confidential information must

be deleted (see the following paragraph for further information regarding confidential business

information). The Commission=s rules authorize filing submissions with the Secretary by facsimile or

electronic means only to the extent permitted by section 201.8 of the rules (see Handbook for Electronic

Filing Procedures,

http://www.usitc.gov/secretary/fed_reg_notices/rules/documents/handbook_on_electronic_filing.pdf). 

Persons with questions regarding electronic filing should contact the Secretary (202-205-2000). 

Any submissions that contain confidential business information must also conform with the requirements

of section 201.6 of the Commission=s Rules of Practice and Procedure (19 C.F.R. 201.6). Section 201.6

of the rules requires that the cover of the document and the individual pages be clearly marked as to

whether they are the Aconfidential@ or Anon-confidential@ version, and that the confidential business

information be clearly identified by means of brackets. All written submissions, except for confidential

business information, will be made available for inspection by interested parties. 

In its request letter, the USTR stated that it intends to make the Commission=s report available to the

public in its entirety. As a result, the Commission will not include any confidential business information

or national security classified information in the report it sends to the USTR. Any confidential business

information received by the Commission during the course of this investigation and used in preparing this

report will not be published in a manner that would reveal the identities of individuals or companies

supplying such information.

By order of the Commission.

 /s/

William R. Bishop

Acting Secretary to the Commission

Issued: August 13, 2008

B-4
APPENDIX C 

HEARING PARTICIPANTS 

C-3

CALENDAR OF PUBLIC HEARING

 Those listed below appeared as witnesses at the United States International Trade 

Commission’s hearing: 

 Subject: Property and Casualty Insurance Services: 

Competitive Conditions in Foreign Markets 

 

 Inv. No.: 332-499 

 Date and Time: September 23, 2008 - 9:30 a.m. 

 

 Sessions were held in connection with this investigation in the Main Hearing 

Room (room 101), 500 E Street, S.W., Washington, D.C. 

ORGANIZATION AND WITNESS:

American Insurance Association 

Washington, D.C. 

 David F. Snyder, Vice President and Assistant 

 General Counsel 

National Association of Insurance Commissioners 

Washington, D.C. 

 George M. Brady, Senior International Policy 

 Analyst and Counsel 

Property Casualty Insurers Association of America 

Des Plaines, IL 

 Robert Gordon, Senior Vice President, Policy 

 Development and Research 

 Stephen W. Broadie, Vice President, Financial 

 Legislation and Regulation 

The Council of Insurance Agents & Brokers 

Washington, D.C. 

 Michael Moran, Executive Vice President, 

 Aon Risk Services 

 Sara G. Andrews, Director, Global Strategy, 

 Aon Risk Services 

APPENDIX D 

BIVARIATE MODEL RESULTS 

D-3

TABLE D.1 Bivariate linear regression results corresponding to figures 2.1, 2.2, and 2.4 

 Figure 2.4 

Figure 2.1 

Insurance Density 

Figure 2.2 

Insurance Penetration 

Growth of P&C 

premiums 

Per capita income 0.023* 

(0.000) 

0.000* 

(0.000) 

Per capita income 

growth 

1.016* 

(0.068) 

Constant -37.212* 

(10.642) 

1.193* 

(0.05) 

0.719 

(1.113) 

Observations 388a

 388a 386a

R-squared 0.877 0.253 0.367 

Note: Standard errors in parentheses. 

* significant at 1 percent 

a Countries include Argentina, Australia, Austria, Bahrain, Bangladesh, Barbados, Belgium, 

Bolivia, Brazil, Bulgaria, Canada, Chile, China, Colombia, Croatia, Czech Republic, Denmark, 

Ecuador, Egypt, El Salvador, Estonia, Finland, France, Germany, Greece, Guatemala, 

Honduras, Hong Kong, Hungary, Iceland, India, Indonesia, Ireland, Israel, Italy, Japan, 

Jordan, Kenya, Korea, Latvia, Lithuania, Luxembourg, Malaysia, Malta, Mexico, Morocco, the 

Netherlands, New Zealand, Nicaragua, Nigeria, Norway, Pakistan, Panama, Peru, the 

Philippines, Poland, Portugal, Romania, Russia, Saudi Arabia, Singapore, Slovakia, Slovenia, 

South Africa, Spain, Sri Lanka, Sweden, Switzerland, Thailand, Tunisia, Turkey, Ukraine, 

United Arab Emirates, United Kingdom, United States, Uruguay, Venezuela, and Vietnam. 

Dates range from 2002 through 2007. P&C insurance data are available from 2003 for most 

countries in the sample. 

 

APPENDIX E 

EXPORTS AND AFFILIATE SALES 

EFFECTS ESTIMATION 

E-3 

Introduction 

The Commission estimated the effects of eliminating trade restrictions on U.S. crossborder exports of insurance and U.S.-owned foreign affiliate sales of insurance. In its 

estimations, the Commission employed two econometric “gravity” models focusing on 

the different modes of trade. Gravity models have long been used to analyze trade in 

commodities. The literature using these models to analyze services trade and investment 

is relatively small, albeit growing. The Commission’s models suggest there is a 

substantial, inverse relationship between the ITRI, developed by the Commission to 

quantify NTMs that limit insurance trade, and both exports and affiliate sales. 

Previous Literature 

 

The gravity model approach to analyze cross-border trade was originally developed by 

Isard.1

 Walsh was the first to use a gravity model to estimate cross-border trade in 

individual services sectors.2

 In his models, Walsh employed explanatory variables 

commonly used to analyze trade in goods, such as distance, adjacency, population, and 

GDP. Stern concentrated similar research on an individual country, South Africa.3

 He 

used the ratio of South Africa’s net exports to world net exports as the dependent 

variable, regressing this on less traditional variables such as domestic patents registered 

per adult and expenditure on research and development. The Commission extended this 

modeling to U.S. trade in insurance. 

Brainard was one of the first to investigate bilateral trade with respect to affiliate sales.4

 

She determined that there is a robust relationship between traditional gravity model 

variables and affiliate sales. Bergstrand and Egger analyzed foreign direct investment and 

foreign affiliate sales between multiple countries using gravity models.5

 The Commission 

extended this research to examine U.S.-owned affiliate sales of insurance. 

Description of Data and Model 

The Commission’s models use panel data, with the export model including data on U.S. 

bilateral exports to 31 countries from 2001 through 2005, and the affiliate sales model 

using data for 34 countries from 1999 to 2005. Export and affiliate data come from the 

Bureau of Economic Analysis. Due to data limitations, the Commission’s models are not 

able to isolate P&C insurance. The export data include all types of primary insurance 

(including life insurance), although P&C is believed to account for the majority of crossborder trade in primary insurance.6

 The affiliate data reflect sales of both insurance and 

other nonbank financial services. In addition to the ITRI, both models include as 

independent variables the importer’s GDP, unemployment, English language, and relative 

distance. The importer’s GDP is measured in constant 2000 U.S. dollars, as reported in 

 1

 Isard, “Location Theory and Trade Theory,” May 1954. 

2

 Walsh, “Trade in Services,” October 2006. 3

 Stern, “Predicting South African Trade in Services,” 2002. 4

 Brainard, “An Empirical Assessment of the Proximity-Concentration Trade-off,” September 1997. 5

 Bergstrand and Egger, “A Knowledge-and-physical-capital Model,” 2007. 6

 Harold Skipper and Robert Klein (professors, Georgia State University), interview by Commission 

staff, Atlanta, GA, November 10, 2008. 
E-4 

the World Bank’s World Development Indicators (WDI). The WDI is also the source of 

the other macroeconomic variable, importer’s unemployment rate. A dummy variable is 

included to capture ease of communication. This variable equals one if English is an 

official language, or if a minimum of 20 percent of the country speaks English.7

 The 

model also includes a measurement of distance from the trading partner’s capital to 

Washington, DC, calculated using the greatest circle formula developed by the Centre 

D'Etudes Prospectives et D'Informations. 

The second model, focusing on affiliate transactions, includes two additional explanatory 

variables: foreign direct investment and so-called tertiary labor. Tertiary labor is the 

percentage of the labor force with at least a bachelor’s degree, and is reported in the 

WDI. Foreign direct investment is measured as a proportion of the country’s GDP and is 

also sourced from the WDI. 

The data are generally well distributed, with good variation (tables E.1 and E.2). The 

ITRI is right skewed, because most countries in the model are not highly restricted. The 

number of observations is restricted slightly in the first model, because of the paucity of 

information on the importer’s unemployment rate, and significantly in the second model 

because of the paucity of information on the percentage of tertiary labor. There is no 

significant correlation between the independent variables in either model (tables E.3 and 

E.4). 

TABLE E.1 Exports—data summary

 

Variable Observations Mean Standard Deviation Minimum Maximum 

Exports 154 37.81 91.17 0.00 606 

ITRI 155 0.43 0.28 0.00 0.93 

Importer's GDP 155 6.39E11 9.13E11 5.46E10 4.98E12 

Distance 155 373.83 336.83 9.56 1188.00 

Importer's unemployment 144 7.52 5.21 1.3 31.2 

English speaking 155 0.29 0.46 0.00 1.00 

Year 155 2003 1.42 2001 2005 

 

 Source: Compiled by the Commission. 

TABLE E.2 Affiliate sales—data summary

 

Variable Observations Mean Standard Deviation Minimum Maximum 

Affiliate sales 303 3.81E3 1.06E4 0 7.58E4 

ITRI 315 0.35 0.27 0.00 0.91 

Importer's GDP 319 4.14E11 7.67E11 22.44E12 4.98E12 

Distance 322 8.91 0.46 8.02 9.70 

Importer's unemployment 308 8.11 4.88 1.3 31.2 

English speaking 322 0.28 0.45 0.00 1.00 

Tertiary labor 214 25.08 9.11 7.20 51.50 

FDI 319 8.85 40.65 -15.13 522.22 

Year 322 2002 2.00 1999 2005 

 

Source: Compiled by the Commission. 

 7

 The 20 percent threshold is intended to recognize that English need not be the official or predominant language of a 

country to significantly affect commerce in that country. Other studies could reasonably establish different thresholds. 
E-5 

TABLE E.3 Exports—correlation matrix

 

 ITRI 

Ln(Importer's 

GDP) Ln(Distance) 

Ln(Importer's 

unemployment) 

English 

speaking Year 

ITRI 1.00 

Ln(Importer's GDP) -0.23 1.00 

Ln(Distance) 0.21 -0.31 1.00 

Ln(Importer's 

 unemployment) -0.09 -0.05 -0.07 1.00 

English speaking -0.17 -0.23 0.15 0.14 1.00 

Year -0.03 0.05 0.05 0.02 0.01 1.00 

 

Source: Compiled by the Commission. 

TABLE E.4 Affiliate sales—correlation matrix

 

 ITRI 

Ln(Importer's 

GDP) Ln(Distance) 

Ln(Importer's 

unemployment) 

English 

speaking 

Tertiary 

labor FDI Year 

ITRI 1.00 

Ln(Importer's 

GDP) 0.18 1.00 

Ln(Distance) 0.07 0.13 1.00 

Ln(Importer's 

 unemployment) -0.16 -0.14 0.03 1.00 

English speaking 0.06 0.01 0.51 -0.19 -0.06 1.00 

Tertiary Labor -0.06 0.11 0.23 -0.13 0.00 0.41 1.00 

FDI -0.04 -0.20 -0.04 -0.16 1.00 

Year 0.07 0.00 0.08 0.00 -0.02 0.09 0.14 1.00 

 

 Source: Compiled by the Commission. 

 

A log-log specification is used for all continuous variables except the ITRI. The year 

variable is a categorical representation of each year to control for an upward linear trend 

of insurance exports and affiliate sales over time. Neither the year nor the English 

dummy variable is logged. The models are as follows: 

ln(exports) = α0 + β1 (ITRI) + β2 ln(GDP) + β3 ln(unemployment) + β4

ln(distance) + β5 (English) + β6 (year) + ε

ln(sales) = α0 + β1 (ITRI) + β2 ln(GDP) + β3 ln(unemployment) + β4 ln(distance) 

+ β5 (English) + β6 (FDI) + β7 (tertiary) + β8 (year) + ε
E-6 

The foreign direct investment and the tertiary labor variables are in the level form 

because the data are reported in percentages. This constructs a constant elasticity model, 

where the percentage increase of an explanatory variable has a direct or inverse effect on 

the percent change of the dependent variable. 

The ITRI variable is expected to have a negative sign because the more restrictive a 

country is, the more difficult it is for U.S. firms to export, enter, and operate. GDP is 

expected to have a positive sign because the larger the economy, the more incentive there 

is for U.S. companies to operate in the market. An increase in GDP also indicates a 

greater need for P&C insurance by the foreign country. The unemployment rate is 

expected to have a negative sign because it is an indication of the overall health of the 

trading partner’s economy. The distance from capital to capital is expected to have a 

negative sign because it is easier to trade with a country that is proximate. Although 

insurance is not physically transported like goods, there is travel involved with setting up 

and overseeing a new company. This variable may also capture cultural similarities and 

general familiarity with the foreign country. Foreign direct investment is expected to be 

positive because it captures both how open a country is to allowing foreign investment, 

and how desirable it is to invest in the country. The tertiary labor ratio is expected to have 

a positive sign because it is an indicator of a country’s level of development. The year 

variable is expected to have a positive sign because insurance trade has been increasing at 

a steady rate over the past decade. 

Using results from both models, the total effect of removing the trade barriers of all 

included countries was estimated by taking the actual value for 2005 and adding what the 

model predicted the increase would be if the country’s ITRI equalled zero. The total 

growth is the summation of each country’s predicted liberalized value less the fitted 

values. 

ΣLib_Exportsi = Σe

FittedExportsi2005 (1+eITRIi+β1exports) 

ΣLib_Salesi = Σe

FittedSalesi2005 (1+eITRIi+β1exports)

Results 

In the U.S. exports model, the variables ITRI, GDP, unemployment, distance, English 

language, and year all have the expected signs and are significant at the 1 percent level 

(table E.5). The adjusted R-squared is 0.65. The ITRI coefficient indicates that a 

10 percentage point decrease in restrictiveness of an importing country would cause a 

9.9 percent increase in U.S. insurance exports. 

The ITRI has a larger effect on the U.S.-owned affiliate sales model. The variables ITRI, 

GDP, unemployment, distance, English language, foreign direct investment, and year all 

have the expected signs and are significant at the 1 percent level (table E.5). The tertiary 

labor ratio is not significant, but is still controlling for the overall development of each 

country. The adjusted R-squared is 0.72. The ITRI coefficient is valued at -1.45, implying 

that a 10 percentage point decrease in restrictiveness of a foreign country yields a 

14.5 percent increase in affiliate sales to that country. 
E-7 

On the whole, the ITRI has a notable effect on both U.S. affiliate sales and U.S. exports 

of insurance (table E.6). If all the countries included in this analysis liberalized, the 

Commission estimates there could be a sizable increase in U.S. insurance sales abroad. 

U.S. exports to sample countries could grow from $1.82 to $2.69 billion, a 48 percent 

increase. Similarly, U.S.-owned affiliate sales in the modeled countries could grow from 

$140.20 to $179.27 billion, a 28 percent increase. Most OECD countries have the least 

restrictive scores, and consequently would likely witness relatively small growth in 

imports. Countries with the most restrictive barriers would likely see the most substantial 

increase in insurance trade with the United States. 

TABLE E.5 Gravity model results 

Variable Ln (Exports) Ln (affiliate sales) 

Intercept 

 

-737.6542*** 

(-6.66) 

-232.4866*** 

(-2.91) 

 

Insurance Trade 

Restrictiveness 

score 

 

-0.9908*** 

(-3.41) 

-1.4463*** 

(-3.97) 

Ln(Importer's GDP) 

 

0.6702*** 

(-8.76) 

1.2232*** 

(-19.38) 

 

Ln(Distance) 

 

-0.6810*** 

(-4.95) 

-0.8554*** 

(-3.49) 

 

Ln(Importer's 

unemployment) 

 

-0.5215*** 

(-3.9) 

-0.6904*** 

(-4.19) 

English speaking 

 

1.2397*** 

(-6.76) 

1.4008*** 

(-6.51) 

 

Tertiary labor --- 

 

-0.0061 

(-0.64) 

FDI --- 

 

0.0076*** 

(4.28) 

Year 

 

0.3642*** 

(6.66) 

0.1079*** 

(2.7) 

0.6621 

0.6471 

0.7358 

0.7239 

R-squared 

Adjusted R-squared 

 

Number of 

observations 141 186 

Source: Estimated by the Commission. 

Note: Estimates have been corrected for heteroskedasticity. 

T-statistics are provided in parentheses below the coefficient 

estimates. 

*** Significant at the 1 percent level 
E-8 

TABLE E.6 Estimated effects of liberalization, 2005 

Models 

Dollar effects 

Insurance exports 

(billion $)

Affiliate sales 

(billion $) 

Current 1.82 140.20 

Liberalized 2.69 179.27 

Absolute increase .87 39.07 

Percent increase 48% 28% 

Source: Estimated by the Commission. 
APPENDIX F 

PROFIT EFFECTS ESTIMATION 

F-3

Introduction 

This appendix supplements the discussion in chapter 4 on calculating the profit effects of 

trade restrictions in P&C insurance markets, and provides information on the previous 

literature, conceptual framework, data, variables, and econometric specification. 

The Commission estimated the effects of trade restrictions on adjusted pretax profit 

earned per dollar of net premiums written (or adjusted profit margins) for P&C insurance. 

Profit-per-dollar premium, rather than a price-cost margin, was chosen for several 

reasons. Premiums vary by customer and are based on a variety of risk factors, while the 

ultimate cost of coverage is not known at the time a policy is written, and may not be 

known for years after the fact. In addition, the integral role that investment plays in the 

insurance industry warrants its inclusion in the model, rather than a variable that reflects 

underwriting activities alone. The use of a variable that includes investment returns is 

also supported by industry experts contacted by Commission staff. The model used by the 

Commission estimates profit effects in two stages.1

 In the first stage, data on more than 

2,700 firms are used to calculate country-level average profit margins adjusted for firmlevel factors, including underwriting expenses (loss ratio and expense ratio) and 

investment returns. In the second stage, data from over 60 countries are used to calculate 

the effects on these adjusted profit margins of institutional, market, and macroeconomic 

variables, including an index (the ITRI) reflecting barriers to trade.2

 Profit effects are 

estimated as the amount by which P&C insurers’ adjusted profit margins are inflated due 

to trade restrictions. 

Previous Literature 

The two-stage econometric model employed to analyze the effect of NTMs on financial 

service industries, in particular the banking industry, was developed by Saunders and 

Schumacher.3

 Adding a trade policy variable to the second stage to calculate the effects 

of NTMs was pioneered by Kalirajan, et al.4

 This method was first applied to P&C 

insurance by the OECD, which developed aggregate and modal tax equivalents of 

NTMs.5

 Analysis performed by the Commission, however, differs in important respects. 

The OECD’s analysis was limited to 26 transition or developing economies, whereas the 

Commission’s sample comprises over 60 countries at different stages of development. 

 1

 See footnote 3 for a discussion of the two-stage econometric model. 2

 From this point forward, adjusted profit margins refer to the dependent variable used in the second 

stage. 3

 It is possible to utilize a single-stage econometric approach in calculating profit effects. Estimation 

using a unified single-stage approach produced results qualitatively similar to those presented here. However, 

the use of firm-level data may skew results in a single-stage estimation, assigning greater weight to countries 

with many reporting companies. Additionally, it is possible that the results of a one-stage model may be 

subject to downward bias in standard errors, resulting in erroneous results. For example, see Saunders and 

Schumacher, “The Determinants of Bank Interest Rate Margins,” 2000; and Moulton, “Random Group 

Effects,” 1986. 4

 Kalirajan, et al., “The Price Impact of Restrictions,” 2000. 5

 Tariff equivalents and tax equivalents are estimates of the price effects of NTMs, with the former 

measuring rents collected by incumbents and the latter measuring rents collected by exporters. Profit effects 

are similar to tariff equivalents in that they measure excess payments collected by incumbents, but they are 

different in that they measure the excess by profit margins rather than price-cost margins. Dihel and 

Shepherd, “Modal Estimates of Services Barriers,” October 25, 2005; Dihel and Shepherd, “Modal Estimates 

of Services Barriers: Annex,” October 27, 2005. 
F-4

The aggregate and modal trade restrictiveness indices (TRIs) compiled by the OECD are 

based on commitments recorded in the GATS and restrictions found in the OECD 

Product Market Regulations Database.6

 By contrast, the Commission’s ITRI was 

developed from measures currently in place, using a framework based on a model 

schedule developed by the insurance industry. Finally, the econometric work performed 

by the Commission and the OECD used largely different independent variables in each 

stage; the Commission’s ITRI variable was found to be statistically significant while the 

OECD’s was not.7

 Similarities between the OECD and Commission approaches include 

similar dependent variables and similar fit in the first- and second-stage equations. 

Conceptual Framework 

Restrictions on the sales of insurance by foreign firms effectively shift the foreign supply 

curve to the left in the domestic insurance market. Domestic supply remains unchanged 

because restrictions are discriminatory toward foreign suppliers. The upward shift in the 

foreign supply curve effectively raises the price of insurance premiums. Higher premiums 

and the larger investment they fund result in a wedge between the observed adjusted 

profit margin and the adjusted profit margin which would occur in the absence of trade 

restrictions under ceteris paribus conditions. In the context of this report, this wedge is 

called a profit effect.8

 The analysis below utilizes an econometric model to estimate the 

size of this profit effect. 

Description of Model and Data 

Modeled after previous empirical work on NTMs, the first stage utilizes a log-log 

specification to determine the effect of four firm-level variables, as well as country 

dummy variables, on the profit margin, calculated as profit before taxes divided by net 

premiums written (see equation 2 below). Summing the constant and the coefficient of 

the country dummy variable yields the average profit margin for insurance carriers in that 

country, adjusted for the effects of firm-level attributes. Although much work of this 

nature calculates price effects on a price-cost margin, profit earned per dollar of premium 

written is a more suitable proxy for the insurance industry. As noted, calculating the 

price-cost margin for the insurance industry is not feasible because of the customization 

of individual policies, the incalculable cost of policies sold, and the paucity of 

information on premiums and market shares of insurance products per firm.9

Additionally, the operational structure of the industry suggests that a profit margin is 

preferable to other performance measures, such as the underwriting ratio, due to the dual 

core activities of policy underwriting and investment.10 The underwriting ratio captures 

commissions to agents and brokers, taxes, employee salaries and benefits, and other 

operating costs, but does not capture investment costs and returns. A substantial portion 

of an insurance firm’s income is typically composed of returns on the investment of 

 6

 The OECD compiled a trade restrictiveness index reflecting the increasing restrictiveness of 

regulation, weighted modally and normalized to range along a scale from zero to one. Dihel and Shepard, 

“Modal Estimates of Services Barriers,” October 25, 2005. 7

 Dihel and Shepherd, “Modal Estimates of Services Barriers,” October 25, 2005; Dihel and Shepherd, 

“Modal Estimates of Services Barriers: Annex,” October 27, 2005. 8

 This discussion is based on Dee, “Trade in Services,” November 5–6, 2001. 9

 Bikker and van Leuvensteijn, “An Exploration into Competition and Efficiency,” July 2005, 20. 10 Calandro and Lane, “The Insurance Performance Measure,” 2002, 9; industry expert, e-mail message 

to Commission staff, December 9, 2008. 
F-5

premiums during the interim between writing the policy and the payment of claims.11

Losses frequently occur in the underwriting business and are typically offset by 

investment returns.12 From 1999 through 2005, for example, P&C insurers in the United 

States recorded underwriting profits in only one year, 2004. 

The second-stage regression (equation 3 below) uses a country-specific adjusted profit 

margin as the dependent variable, and country-level market, macroeconomic, and 

institutional data, including the ITRI, as independent variables.13 The ITRI is based on 

extensive primary and secondary research conducted by Commission staff on 11 specific 

NTMs identified by the P&C insurance industry and captures actual regulations and 

policies in practice, rather than trade commitments or legislation.14 ITRI values are 

calculated based on a scoring method previously used by Hoekman for evaluating GATS 

commitments.15 Hoekman classified trade policies as either completely open, completely 

closed, or other (for any degree in between). Policies are assigned a score of 0 if they are 

completely open (or permitted), and assigned a score of 1 if they are completely closed or 

prohibited. In many cases, policies are neither completely open nor prohibited, with these 

cases classified as “other” and assigned a score of 0.5. Finer scoring distinctions were not 

considered feasible, largely due to the notable absence of standardized language used to 

describe NTMs. By contrast, the largely standardized language used in GATS 

commitments enables detailed country-by-country comparisons, a factor behind their 

frequent use in quantitative policy analysis. Scores were aggregated across the 11 

elements and averaged to create an index ranging between 0 and 1.16 No attempt was 

made to weight elements according to their perceived level of importance, largely to 

avoid additional subjectivity. 

The profit effect is calculated using the ITRI coefficient estimated by the second-stage 

regression and the country-specific ITRI values for each country, in the following 

equation: 

 Profit Effect = 100*(e ITRIcoefficient * ITRIvalue – 1) (1) 

The equation uses the base of the natural logarithm (e) due to the log-log specification 

used in the first stage equation. As noted earlier, the estimated profit effect represents the 

amount by which P&C insurers’ adjusted profit margins are inflated due to trade 

restrictions, effectively capturing the excess profit margins of insurers after correcting for 

the influence of firm-specific factors. 

Data used in the first stage included entries for more than 2,700 P&C insurance firms in 

over 70 different countries (tables F.1 and F.2). Data were gathered from Orbis, a large 

 11 Calandro and Lane, “The Insurance Performance Measure,” 8. 12 Ibid., 9. 

13 Country-specific adjusted profit margins are estimated as the sum of the intercept term and the 

coefficients of the country dummy variables from the first-stage regression results. This essentially measures 

the profit margins controlled for firm-specific variations, or the portion of the profit margin not determined 

by the firm-specific variables. 14 Common criticisms of empirical work in this field based on GATS commitments are that the 

commitments are outdated and do not reflect actual practice in the countries. 15 Hoekman, “Tentative First Steps,” May 31, 1995, 15. 

16 Two of the elements regarding market access are closely related. One pertains to the existence of 

equity limitations, and the other, the staged elimination of such limitations. In the absence of equity 

limitations, the issue of staged elimination of such limits is considered “not applicable.” The ITRI is then 

computed as the aggregate score averaged over the 10 applicable elements. 
F-6

TABLE F.1 Summary statistics of firm-level data

Profit 

margin 

Net premium 

to surplus 

ratio 

Investment 

return Loss ratio 

Expense 

ratio 

Mean value 0.4214 1.4833 0.0444 66.6140 35.0709 

Maximum 238.25 104.6642 1.9695 983.97 888.2350 

Minimum -116.026 -22.7365 -3.3835 -649.37 -451.8020 

Standard deviation 6.1353 3.7004 0.1012 49.4703 45.8690 

Number of observations 2,786 

Source: Compiled by the Commission using Bureau van Dijk, Orbis Companies Database (accessed 

January 13, 2009). 

Notes: Statistics are calculated for the data used to run the regression. The particular log-log specification 

used in calculating profit effects resulted in the omission of any negative values. 

TABLE F.2 Country distribution of firm-level data 

Top 10 countries Regional information 

Country 

Number of 

companies Country 

Number of 

companies 

United States 1,292 North America 1,408 

Germany 218 Europe 860 

United Kingdom 132 South & Central America 286 

France 102 Asia 220 

Spain 95 Rest of World 12 

Argentina 90 

Canada 59 

Mexico 57 

Brazil 48 

Switzerland 46 

Source: Compiled by the Commission from Bureau van Dijk, Orbis Companies database, (accessed 

January 13, 2009). 

Note: Those companies that did not report the variables of interest were automatically omitted from the 

regression. As a result, although Australia had a significant number of observations, it is not included in the 

profit effect calculation because the companies did not report either the expense or the loss ratios. 

database containing financial information for more than 51 million international 

companies.17 

These data were then used in the following estimation in the first stage: 

ln (profit margin) = β0 + β1ln(investment return)+ β2ln(net premium to surplus ratio)+ (2) 

β3ln(expense ratio)+ β4ln(loss ratio) + β5iΣcountry dummyi 

The dependent variable for the first stage is the profit margin, which, as noted above, is 

profit before tax per dollar of net premium written. The measure of investment return was 

calculated by taking a ratio of investment income (the sum of net investment income and 

other gains/losses) to funds invested (the sum of net technical reserves and surplus). 

 17 Bureau van Dijk, Orbis Companies Database (accessed January 13, 2009). 

66

i=1
F-7

Investment return, which is expected to have a positive sign, provides an indicator of 

firms’ investment acumen and serves to control for investment earnings. The ratio of net 

premiums written to surplus measures the degree to which insurance firms are exposed to 

risk. There is generally a maximum ratio set by regulatory agencies as a way to ensure 

firms’ solvency.18 The variable is expected to have a negative sign since higher exposure to 

risk results in more claims payments and lower profits.19 The expense ratio measures a 

firm’s operating cost and management skills, and is defined as operating expenses, such as 

overhead, as a percentage of premiums written.20 Similar to the expense ratio, the loss ratio 

is an indicator of the insurer’s underwriting performance, including risk assessment and 

pricing, measuring losses and related loss adjustment expenses as a percentage of 

premiums earned.21 Both the expense and loss ratios are expected to have negative signs, as 

high costs decrease profitability. 

In the second stage, market, macroeconomic, and institutional variables are used to account 

for variance in country-specific adjusted profit margins, the dependent variable. Countryspecific adjusted profit margins are estimated as the sum of the country dummy coefficient 

and the intercept in the first-stage regression.22 This report considers two different 

specifications of the second-stage equation, each of which are run twice.23 The first 

regresses adjusted profit margins on the ITRI, perception of corruption index, lagged real 

interest rate, an index of the percentage of GDP at risk from natural disasters, the 

unemployment rate, and the combined market share of the top five companies. The second 

specification is very similar, but replaces the index of corruption with an index of property 

rights. The second-stage equation is:24

Adjusted Profit Margin = β0 + β1 (insurance trade restrictiveness index)+ β2(property (3) 

rights or corruption index) + β3 (real interest rate from previous year) + β4 (percentage of 

GDP at risk) + β5 (unemployment rate) + β6 (market share of top 5 companies) 

The ITRI variable, described above, is expected to have a positive sign, because the 

existence of policy restrictions is theorized to allow incumbent firms to extract profits 

higher than they would otherwise command in an open trading market. The first model 

specification includes an index measuring the perception of corruption in a country, which 

ranges in value from 0 to 10. Low values indicate a highly corrupt environment, while a 

value of 10 indicates the absence of corruption, which is defined as the misuse of public 

 18 Although regulatory agencies set a maximum ratio permitted for volume of premiums written, relative 

to surplus, firms generally self-regulate and remain below this level. 19 It is possible to witness a positive relationship between profit ratio and risk exposure, if investors 

require higher returns to compensate for greater degrees of exposure. 20 Standard & Poor’s, Industry Surveys, Insurance: Property-Casualty, January 25, 2007, 29. 21 Ibid. 

22 The sum of the country dummy coefficient and the intercept in the first-stage regression captures the 

country-specific variation in the log of the profit margin not explained by the firm-level variables. OLS moves 

errors to the constant in order to satisfy the assumption that errors have a zero population mean. 23 The U.S. P&C market is subject to regulation that varies by state. To account for this, the Commission 

postulated two ITRI scores for the United States: one score of 0, assuming a completely open market, and one 

score of 0.5, assuming a market that is neither completely open nor completely closed. Regressions were 

performed with both these scores, separately, to gauge their separate effects. Regression results were virtually 

identical, demonstrating the robustness of the Commission’s model. In both instances, the ITRI was significant 

at the 10 percent level. 24 Resulting regression estimates are corrected for heteroskedasticity. Alternative estimations using other 

measures of risk, demand, and other macroeconomic factors, yielded results qualitatively similar to those 

reported. 
F-8

power for private benefit, such as bribery of public officials or kickbacks in public 

procurement.25 The corruption index is expected to have a positive sign, because high 

levels of public corruption increase the cost of doing business and decrease profitability. 

The second specification substitutes a property rights index for the corruption index. The 

property rights index is an assessment of the degree to which the personal property of 

individuals is protected by legal enforcement of the state, which ranges in value between 0 

and 100.26 Higher index values indicate greater property rights. The property rights index is 

expected to have a positive sign, because greater property rights are integral to the ability 

to provide insurance. The real interest rate is a lag variable. It is based on quarterly data 

from 2004, and is calculated as the nominal interest rate corrected for inflation.27 It 

provides an overview of the investment environment, and is lagged on the theory that 

previous performance will influence the investment decisions made in 2005. The variable 

is expected to have a positive sign, as high interest rates increase profitability, and 

insurance firms generally place reserves in short-term investments. The index of 

percentage of GDP at risk measures a country’s economic risk exposure from two or more 

natural disasters. The variable is expected to have a negative sign, as a higher percentage 

indicates a higher exposure to risk.28 The unemployment rate is another demand factor 

expected to have a negative relationship with the adjusted profit margin. As unemployment 

rises, demand for insurance decreases, resulting in a lower adjusted profit margin. Finally, 

the combined market share of the top five firms indicates the degree of concentration in the 

market. The expected relationship with the adjusted profit margin is ambiguous. It may be 

positive if firms are achieving economies of scale, or it may be negative if the market has 

few firms exercising market power. 

Results 

In the first stage, the net premiums to surplus ratio, loss and expense ratios, and investment 

return variable are of the expected sign and statistically significant at the 1 percent level 

(table F.3). The R-squared in the first stage is 0.51, indicating that firm-level variables 

explain approximately 51 percent of variation in firms’ profit margins. 

 25 Transparency International, “Corruptions Perception Index, 2006: FAQ,” undated (accessed November 

5, 2008). 26 Holmes, et al., 2008 Index of Economic Freedom, 2008, 41. 27 Data were collected for money market rates where possible, and supplemented with the T-bill and 

government bond rates. IMF, International Financial Statistics Database. 28 It may also be argued that the variable measuring percentage of GDP at risk should have a positive 

relationship with the corrected profit ratio. It is possible increased exposure to risk may lead investors to 

demand higher average returns, resulting in higher profits. Data collected from World Bank, “Natural Disaster 

Hotspots,” 2005. 
F-9

TABLE F.3 Stage 1 results, dependent variable: In (profit margin) 

Variable Coefficient 

Intercept 3.156 

(7.63) 

Ln(Investment return) 0.412*** 

(12.12) 

Ln(Net premium to surplus ratio) -0.611*** 

(-21.46) 

Ln(Expense ratio) -0.337*** 

(-8.01) 

Ln(Loss ratio) -0.673*** 

(-9.35) 

R-squared 0.5081 

Adjusted R-squared 0.4923 

Number of Observations 2257 

Source: Estimated by the Commission. 

***Significant at 1 percent level 

Notes: Estimates are corrected for heteroskedasticity. Coefficients for country dummies are not reported. 

T-statistics are provided in the parentheses below coefficient estimates. 

Results for the two specifications described in the previous section are presented for the 

second stage (table F.4).29 The R-squared values are similar, irrespective of the 

specification used, ranging around 0.25. In the second stage, the ITRI exhibits the largest 

coefficient value, is of the expected sign (positive), and is significant at the 10 percent 

level, indicating that measures restricting trade contribute significantly to higher adjusted 

profit margins. The corruption perception index (specification 1) and property rights 

index (specification 2) are also both positive (the expected sign), and generally 

significant at the 1 percent level.30 The index of percentage of GDP at risk from natural 

disasters is significant at the 5 percent level and of the expected negative sign, consistent 

with the theory that higher costs result from increased exposure to risk. The remaining 

variables, the real interest rate, unemployment rate, and market share of the top 5 firms, 

were not statistically significant in any of the specifications. 

 29 Sensitivity analysis was performed to verify the model’s robustness. Specifications included one that 

assigned dummy variables to the components of the ITRI based on mode of provision. This specification 

found significant results from the commercial establishment elements, which would be expected to have the 

largest impact on protected profits. 30In specification 2, using the least restrictive U.S. ITRI value, the coefficient for the property rights 

index was marginally less significant, at the 5 percent level. 
F-10

TABLE F.4 Stage 2 results, dependent variable: Adjusted profit margin 

Specification 1 Specification 2 

Variable 

U.S. 

(ITRI = 0) 

U.S. 

(ITRI = 0.5) 

U.S. 

(ITRI = 0) 

U.S. 

(ITRI = 0.5) 

Intercept 2.6341 

(7.72) 

2.606 

(7.612) 

2.6008 

(7.297) 

2.5879 

(7.309) 

Insurance Trade Restrictiveness Index 0.402* 

(1.846) 

0.4359* 

(1.931) 

0.3549* 

(1.687) 

0.3749* 

(1.728) 

Corruption perception index 0.072*** 

(2.601) 

0.0718*** 

(2.667) 

--- --- 

Property rights index --- --- 0.0071** 

(2.519) 

0.007*** 

(2.569) 

Real interest rate (2004) 0.0014 

(0.118) 

0.002 

(0.166) 

0.001 

(0.078) 

0.0015 

(0.119) 

Percentage of GDP at risk index -0.1081** 

(-2.074) 

-0.1124** 

(-2.162) 

-0.1141** 

(-2.31) 

-0.1178** 

(-2.367) 

Unemployment rate (2005) 0.0171 

(1.261) 

0.0174 

(1.305) 

0.0167 

(1.146) 

0.0169 

(1.165) 

Market share of top 5 insurance firms -0.001 

(-0.472) 

-0.0008 

(0.319) 

-0.0007 

(-0.322) 

0.0005 

(-0.235) 

R-squared 0.2553 0.2597 0.2559 0.2579 

Adjusted R-squared 0.1659 0.1709 0.1666 0.1689 

Number of observations 57 57 57 57 

Source: Estimated by the Commission. 

Notes: Estimates have been corrected for heteroskedasticity. T-statistics are provided in parentheses below the 

coefficient estimates. The U.S. P&C market is subject to regulation that varies by state. To account for this, the 

Commission postulated two ITRI scores for the United States: one score of 0, assuming a completely open market, 

and one score of 0.5, assuming a market that is neither completely open nor completely closed. 

* Significant at the 10 percent level 

** Significant at the 5 percent level 

*** Significant at the 1 percent level 
F-11

From these results, profit effects were estimated using specification 1 (table F.5). As 

previously mentioned, estimated profit effects are defined as the amount by which P&C 

insurers’ adjusted profit margins are inflated due to trade restrictions (equation 1 above). 

Countries are grouped based on the estimated magnitude of their respective profit effect. 

Overall, 20 countries have profit effects greater than 20 percent, due to currently 

restrictive trade policies.31 Twenty-seven countries have profit effects of 10 percent or 

lower. Developed countries, such as the OECD economies, generally have smaller profit 

effects due to lower levels of trade restrictions. By contrast, developing economies such 

as China and India exhibit higher estimated profit effects. Countries with the highest 

profit effects have the most to gain from liberalization as consumers may benefit from 

lower premiums. 

TABLE F.5 Estimated profit effects in the P&C insurance industry 

0 to 10 percent 11 to 20 percent 21 to 35 percent 

Greater than 

35 percent 

Austria Japan Canada Argentina Bangladesh 

Belgium Jordan Chile Barbados Indonesia 

Bolivia Latvia Colombia Brazil Malaysia 

Bulgaria Lithuania Croatia China Russia 

Czech Republic Luxembourg Guatemala India Thailand 

Denmark New Zealand Ireland Italy Vietnam 

Ecuador Panama Netherlands Korea Venezuela 

Egypt Portugal Norway Mexico 

Finland Romania Peru Morocco 

France Slovenia Philippines Pakistan 

Germany Spain Singapore Poland 

Hong Kong Switzerland Sri Lanka Saudi Arabia 

Hungary United Kingdom Sweden South Africa 

Iceland Tunisia 

Source: Compiled by Commission staff. 

Notes: The estimated profit effects are the amount by which P&C insurers’ adjusted profit margins are 

inflated due to trade restrictions. Adjusted profit margins are “adjusted” for the effects on total profit 

margins of firm-level variables, such as loss ratios, expense ratios, risk exposure, and investment 

acumen. It is necessary to adjust the total profit margin for the effects of firm-level variables in the first 

stage so that the effects of country-level variables, including the ITRI, can be isolated in the second 

stage. 

 31 The United States is included in these 20 countries, based on the states with the most restrictive 

policies.