# **1.** INTRODUCTION

The insurance sector can play a very important part in the development of the private sector and the modernization of the securities markets. By covering economic and financial risks, it enables enterprises to better manage their financial affairs and protects households from the financial losses arising from accidents and injuries. In addition, the industry, especially the life insurance sector, mobilizes longterm savings that can facilitate the financing of both enterprises and households with resources that have a much longer maturity than traditional loans from the banking sector.

In orcder to play its economic and financial role, the insurance sector requires a framework of stable and liberal regulation that provides adequate incentives for efficiency and allows individual companies to innovate. Insurance regulation must aim at creating a contestable market that is open to new entry by qLialified companies and facilitates the exit of insolvent firms. It must also aim at safeguarding the stabilitv of the sector and the solvency of individual companies and at protecting the interests of policyholders.

In most developing countries, insurance regulation has traditionally involved some or all of the following': domination by state owned companies; strict controls on new entry; prohibition of majority ownership by foreign companies; fixing of premiums (especially for compulsory lines); prior approval of tariff changes and new products; discouragement of reinsurance with overseas companies through high local retention ratios; use of insurance reserves as a captive source for funding public sector deficits; and weak application of solvency monitoring and prudential controls. In recent years, there has been a growing trend away from direct controls on premiums, products and investments and a greater reliance on solvency monitoring of individual companies, involving a combination of clear prudential controls and effective supervision.

This paper discusses the structure, regulation and prospects of the insurance industry in Tunisia. It complements earlier work on the options for pension refonn in Tunisia (Vittas 1993c) and forms part of ongoing work on the promotion of contractual savings and institutional investors in developing countries anci on their contribution to the development of the capital markets<sup>2</sup> .

# **HI.** THE INSURANCE INDUSTRY IN TUNISIA

Reflecting the relatively low level of income and the restrictive regulation of the market, the development of the Tunisian insurance industry has been rather slow. The sector appears to have suffered from the structural adjustment of the economy that has been under way since the mid 1980s. The growth rate of insurance premiums has decelerated considerably in recent years: the level of premiums in relation to GDP has fallen from 1.75% in 1986 to 1.60% in 1990, but recovered to 1.72% of GDP by 1993.

1 Insuranice policies in developing countries have been analyzed by Skipper (1987), Outreville (1990. 1992 and 1994) and Vittas and Skully (1991), while UNCTAD (1990) and Sigma (1994) have collected statistics on insurance in developing countries.

See Vittas and Skullv (1991), Vittas (1992, 1993a, 1993b and 1993c), Wright (1992), Vittas and Iglesias (1992), Grace and Barth (1993), World Bank (1994), Mclsaac (1995), and Mcisaac and Babbel _(1995)._ I