Feb 29, 1993


Geneva 29 Jan (Chakravarthi Raghavan) -- Third World countries have made great progress over the last three decades in their insurance service sectors, but the sector "still has many features characteristic of an infant industry," according to the UN Conference on Trade and Development.

The UNCTAD secretariat view is in a report for the meeting of the 'Standing Committee on Developing Services Sectors: Fostering Competitive Service Sectors in Developing Countries'.

The Committee, at its first session 1-5 February, is to draw up a work programme.

Among the areas for priority action, the report suggests, adaptations in insurance regulation and supervision, expansion of domestic insurance markets and providing insurance cover for agricultural production and linked production and consumer services in rural communities.

An expert group convened by UNCTAD is considering issues relating to agriculture insurance and its report is expected to be available for the Standing Committee meeting next week.

By end of the 1970s, UNCTAD notes, almost all Third World countries had created national insurance markets and a great majority of them had set up domestic insurance companies, adopted a legal framework on insurance and had administrative procedures to ensure its implementation.

In many Third World insurance markets foreign and domestic companies, both public and private, compete while in others, while foreign companies have not been allowed, there are several domestic companies functioning on a competitive basis. There are also markets where insurance is a monopoly, with a state enterprise undertaking insurance and reinsurance business.

Most of the countries underwrite most of the common risks on their markets, and the range of insurance cover have been consistently broadened. The larger insurance markets also cover specialized risks. Some of them of a sophisticated and highly technical nature are also placed abroad, directly or by reinsurance.

Mutual cooperation among the developing countries have also been built up -- with a number of functioning regional insurance organizations in Africa, Asia and Latin America. There is also cooperation among supervisory authorities at regional and subregional levels. There are also cooperative mechanisms particularly in reinsurance, and subregional, regional and inter- regional insurance associations meet regularly for contacts, exchange of experiences and discussion of new strategies.

But despite these advances, the insurance sector of the Third World still show many features characteristic of infant industry.

Insurance markets are small, both due to low incomes and lack of public awareness; enterprises are often undercapitalized resulting in the ceding abroad of a great deal of insurance business written in a country. Even when this is given to a domestic reinsurer, dependence on overseas reinsurers is heavy, and the outflow of foreign currency for purchase of reinsurance heavy.

Third World countries have not been able to take on reinsurance business from the industrialized world, and there has even been a decrease in this business in recent years.

The amount of reinsurance exchanged among themselves is also only a small portion of total reinsurance business in Third World countries.

While considerable advances have been made in development of human resources, many markets still lack qualified personnel with technical and specialized skills and this lack is also found by regulatory authorities in respect of supervision and monitoring.

There is also some weakness in adequate risk management.

The recent drive for privatization of insurance enterprises and liberalization of markets is also creating new problems and challenges for the insurance industry and supervisory authorities of the Third World.

The privatization and liberalization, UNCTAD notes, are raising new policy issues. With the shift from monopolistic and oligopolistic to competitive markets, many countries need to adapt their regulatory framework and issues of prudential regulation and consumer protection are acquiring significance.

The regulatory authorities have to improve their monitoring and supervisory tasks, and ensure that with liberalization, the principles and rules for establishment, national treatment, non- discrimination and transparency (all governed by the proposed General Agreement on Trade in Services, if the Uruguay Round is {concluded) are respected and there is no violation of competition.

Increased efficiency requires expansion of the markets. But the domestic insurance markets of the Third World countries are also narrow and insurers lack a broad base of clients for the normal risks linked to the production activities of clients and the vagaries of life.

Hitherto, insurance companies of the Third World have largely concentrated their activities in providing cover for industrial and urban sectors and, in producer services, primarily with risks covering manufacturing, infrastructure investments, modern service industries, export and import trade, road transport and risks affecting the urban population associated with these.

But the majority of Third World countries have large percentage of population in rural areas and engaged in agriculture and connected productive activities which offer a large potential for expansion of insurance.

At present in their rural areas insurance cover is low for both producer and consumer services, and there are few insurance covers, and on affordable terms, for rural producers and consumers. Most of the enterprises are based in capital cities and few have outlets in rural areas or small towns.

Insurance in rural areas need to cover production and marketing of agriculture (staple and cash crops, livestock, poultry and fish farming), agricultural commodities produced mainly for export (tea, coffee, cocoa, sial, jute etc) and the informal production and services sectors linked to agriculture and rural consumers.

One of the priorities for fostering expansion of domestic insurance would be identification of productive potential and specific insurance needs in areas not yet reached by insurance, a more detailed analysis of agricultural insurance potential, livestock insurance and cooperation between agriculture insurance and rural credit schemes and institutions.