Academic journal article Journal of Risk and Insurance

The Determinants of Intra-Industry Trade in Insurance Services

Academic journal article Journal of Risk and Insurance

The Determinants of Intra-Industry Trade in Insurance Services

Article excerpt

ABSTRACT

In light of the growing significance of trade in financial services, and the emphasis placed on trade in financial services during the Uruguay round of trade negotiations, this article is the first study of the determinants of intra-industry trade (IIT) in insurance services. The article analyzes and measures the magnitude of IIT in insurance services for the United States. The empirical results of the determinants of IIT indicate that foreign direct investment in insurance services (FDI) is a significant contributor to the volume of trade in insurance services. These empirical findings confirm the new theoretical trade models that, unlike the traditional trade theory that considered trade and foreign direct investment in insurance services as substitutes, trade and FDI complement each other and hence multinational insurance companies are contributing to an increase in the volume of trade in insurance services. Furthermore, this study shows that trade intensity between the United States and its trading partne rs leads to product differentiation in insurance services and hence an increase in consumer welfare.

INTRODUCTION

Due to the importance of the financial services sector and the emphasis placed on trade in financial services during the Uruguay round of trade negotiations, trade in insurance services has grown rapidly in the last 20 years, and a number of researchers have analyzed and examined various issues related to international insurance services. The study by Sapir and Lutz (1981) investigates the sources of comparative advantage in insurance services for developed and developing countries, primarily using the Heckscher-Ohlin-Samuelson (H-O-S) model. A number of studies by Outreville (1990, 1991, 1996, 1999) have shed light on the significance and implications of growth in international insurance services. The comprehensive study by Skipper (1987) analyzes many facets of protectionism in the provision of international trade in insurance services and paves the way for further study in this important area. The recent study by the Organisation for Economic Cooperation and Development (OECD) (1999) identifies and analyze s the obstacles to the establishment of branches of foreign insurers which could affect the volume of trade in insurance services. The OECD (1999) highlights the fact that in many OECD member countries, specific obstacles and requirements are created in order to slow down the process of the establishment of branches or agencies by foreign insurers. Examples include deposits or financial guarantees, business records in the home country, and official certification of the supervisory authority in a home country. Other obstacles reported by the OECD (1999) include the existence of fiscal advantages, normally granted to policyholders but not granted for cross-border insurance contracts, and various legal provisions in contract law, taxation, and work permits. More important, a major obstacle for the OECD countries, which are not part of the European Union (EU), is the absence of Third Directives similar to those implemented by the EU for member countries.

Despite some obstacles in establishing branches of insurance companies, trade in insurance services has grown rapidly in the last ten years. The data from the Survey of Current Business and Insurance Statistics Yearbook show that the U.S. trade in insurance grew from $20 billion in 1992 to $30.5 billion in 1999, showing an average growth of 14 percent over this period. Similarly, trade in insurance services in Europe grew from $9.2 billion in 1990 to $27.5 billion in 1999. The gross premiums from foreign insurance companies in the United States increased from $60 billion to $130 billion over the period 1992 to 1999. Furthermore, the share of foreign insurance companies in the United States has increased from 10 to 14 percent over the period 1992 to 1999, indicating an increase in international competition and growth in trade in insurance services. …

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