CHAPTER 1 INTRODUCTION

The General Agreement on Trade in Services (GATS) is a treaty of the World Trade Organization (WTO) that entered into force in January 1995 as a result of the Uruguay Round negotiations. The treaty was created to extend the multilateral trading system to service sector, in the same way the General Agreement on Tariffs and Trade (GATT) provides such a system for merchandise trade. All members of the WTO are signatories to the GATS. The basic WTO principle of most favoured nation (MFN) applies to GATS as well. However, upon accession, Members may introduce temporary exemptions to this rule.

Historical Background
While the overall goal of GATS is to remove barriers to trade, members are free to choose which sectors are to be progressively "liberalised", i.e. marketised and privatised, which mode of supply would apply to a particular sector, and to what extent liberalisation will occur over a given period of time. Members' commitments are governed by a "ratchet effect", meaning that commitments are one-way and are not to be wound back once entered into. The reason for this rule is to create a stable trading climate. However, Article XXI does allow Members to withdraw commitments, and so far two members have exercised this option (USA and EU). In November 2008, Bolivia notified that it will withdraw its health services commitments. Some activist groups consider that GATS risks undermining the ability and authority of governments to regulate commercial activities within their own boundaries, with the effect of ceding power to business interests ahead of the interests of citizens. In 2003 the GATS watch network published a critical statement which was supported by over 500 organisations in 60 countries. At the same time, countries are not under any obligation to enter international agreements such as GATS. For countries that like to attract trade and investment, GATS adds a measure of transparency and legal predictability. Legal obstacles to services trade can have legitimate policy reasons, but can also be an effective tool for large scale corruption (De Soto, Hernando. The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else.

CHAPTER 2 GATS IN BRIEF

The GATS applies in principle to all service sectors except services supplied in the exercise of governmental authority. These are services that are supplied neither on a commercial basis nor in competition with other banking. Modes of supply The GATS sets out four modes of supplying services: Mode1: Cross-border trade Mode2: Consumption abroad Mode3: Commercial presence Mode4: Presence of natural persons Mode 1 Cross-border trade corresponds with the normal form of trade in goods and maintains a clear geographical separation between seller and buyer. In this case services flow from the suppliers viz social security schemes and central

territory of one member into the territory of another member crossing national frontiers. (E.g. banking or architectural services transmitted via telecommunications or mail). Mode 2 Consumption abroad refers to situations where a service consumer moves into another Member's territory to obtain a service (e.g. consumer treatment, to attend educational establishment). Mode3 Commercial presence is the supply of a service through the commercial presence of the foreign supplier in the territory of another WTO member. In this case a service supplier of one member establishes a territorial presence, including through ownership or lease of premises, in another member's territory to provide a service. (E.g. the establishment of travelling for tourism, medical

branch offices or agencies to deliver such services as communications) Mode4

banking, legal advice or

Presence of natural persons involves the admission of foreign nationals to another country to provide services there. An Annex to the GATS makes it clear, however, that the agreement has nothing to do with individuals looking for employment in another country, or with citizenship, residence or employment requirements. The members still has a right to regulate the entry and stay of the persons concerned, for instance by requiring visas. General Principles These are basic rules that apply to all members and to all services. MFN Treatment Under Article II of the GATS, each Member shall accord immediately and unconditionally to services and service suppliers of any other Member treatment no less favourable than it accords to like services and service suppliers of any other country". However, a member is permitted to maintain a measure inconsistent with the general MFN requirement if it has established an exception. However, all exemptions are subject to review and they should in principle, not last longer than 10 years. Transparency The GATS requires each member to publish promptly "all relevant measures of general application" that affect operation of the agreement. Members must also notify the Council for Trade in Services of new or changed laws, regulations or administrative guidelines that affect trade in services covered by their specific commitments under the agreement. Each member is required to establish an enquiry point, to respond to requests from other members for information. Specific Obligations

Obligations, which apply on the basis of commitments, laid down in individual country schedules concerning market access and national treatment in specifically designated sectors. These requirements apply only to scheduled sectors. Market Access Market access is a negotiated commitment in specified sectors. The GATS also sets out different forms of measure affecting free market access that should not be applied to the foreign service or its supplier unless their use is clearly provided for in the schedule. They are: Limitations on the number of service suppliers Limitations on the total value of services transactions or assets Limitations on the total number of service operations or the total quantity of service output. Limitations on the number of persons that may be employed in a particular sector or by a particular supplier Measures that restrict or require supply of the service through specific types of legal entity or joint venture Percentage limitations on the participation of foreign capital, or limitations on the total value of foreign investment. National Treatment A commitment to national treatment means that in the sectors covered by its schedule, subjected to any conditions and qualifications set out in the schedule, each member shall give treatment to foreign services and service suppliers treatment, in measures affecting supply of services, no less favourable than it gives to its own services and suppliers. Again, the extension of national treatment in any particular sector may be made subject to

conditions and qualifications. Members are free to tailor the sector coverage and substantive content of such commitments as they see fit. The commitments thus tend to reflect national policy objectives and constraints, overall and in individual sectors. While some Members have scheduled less than a handful of services, others have assumed market access and national treatment disciplines in over 120 out of a total of 160- odd services.

Exemptions Members in specified circumstances are allowed to introduce or maintain measures in

contravention of their obligations under the Agreement, including the MFN requirement or specific commitments. These circumstance cover measures necessary to protect public

morals or maintain public order, protect human, animal or plant life or health or secure compliance with laws or regulations not inconsistent with the - Agreement including, among others, measures necessary to prevent deceptive or fraudulent practices. Also, in the event of serious balance-of-payments difficulties, members are allowed to temporarily restrict trade, on a non-discriminatory basis, despite the existence of specific commitments. Current Status of Services Negotiations: The first and second rounds of meetings of all plurilateral groups were held from 28th March to 6th April 2006 and 15th -24th May 2006 respectively. India is the coordinator of Mode-1 (Cross Border Supply) and Mode-4 (Temporary Movement of Natural Persons) plurilateral groups. India has also participated as a requesting member in the Computer and Related Services (CRS) group and Architecture, Engineering and Integrated Engineering Services (AEI) group. As a part of the plurilateral process, India has also received a number of plurilateral requests in all the sectors/areas listed in para 4.2 above except for the Horizontal Request in Mode 3 (Commercial presence), MFN Exemptions (General) and MFN

Exemptions (Financial Services). India has therefore received requests in 14 sectors/areas, excluding those sectors/areas in which India is a requesting member and therefore a deemed recipient. All Members, including India, are expected to respond to the plurilateral requests and bilateral requests placed on them by making improved Offers in the second round. Along with the Mini Ministerial a Services Singnaling Conference was held on 26 July, 2008 at the WTO. In this Conference, India has indicated that it may improve its Revised Offer in some of the services sectors of interest to the member countries subject to the conditions that the Member countries should also respond positively to Indias interest n Modes 4 & 1 and for the disciplining of Domestic Regulations.

Unlike agriculture and NAMA where modalities are yet to be finalized, in Services the modalities have been agreed upon. Members need to finalize their schedule of commitments, which are linked to the outcome of Agriculture and NAMA negotiations. As and when these are finalized, the process of services negotiations would also move for conclusion under the current round

CHAPTER 3 INSURANCE SERVICES AND REGULATORY FRAMEWORKS

Regulation, its importance and elements to consider Broadly speaking, the role of the regulator in the insurance sector is to ensure the viability, integrity and stability of the financial system, as well to ensure that public confidence in the institutional financial structure of the economy as a whole is maintained. Given that the insurance sector is rather heterogenic and increasingly complex, its regulation and supervision are considerably complicatedIn addition, during the last two decades, the rapid development of the insurance sector has made it difficult for regulators to keep up with the changes in the structure of the industry. Finally, the fact that financial conglomerates are frequently subject to multiple regulatory agencies creates coordination problems between regulators, possibly even leading to problems of regulatory arbitrage. In developing countries, regulatory infrastructure is often minimal or inadequate leading to a gap between insurance regulatory frameworks in developing and developed countries. However, even developed countries have been faced with failures. Examples include Australias experience with HiH, the countrys second largest non-life insurer (the companys failure led to the halting of construction projects and bankruptcy of small businesses), or Japans experience with the accelerated financial deregulation after the late 1980s (which led to a collapse of eight mid-sized life insurers during 19972001), as well as the Republic of Koreas experience after the 1997 financial and currency crisis (which resulted in massive nonperforming loans, including both banks and insurance companies). Across countries, the regulation and supervision of the insurance industry is far from consistent. This is despite recent efforts of the International Association of Insurance Supervisors (IAIS). For example, even among developed countries there are great differences with regard to capital adequacy and reinsurance supervision (where supervisory practices vary considerably even within the European Union). Given the high mobility of capital, these inconsistencies create the danger of leaving regulators and supervisors illequipped to monitor the financial strength and risk profiles of insurers and reinsurers. This in turn, can have negative implications for financial stability as such.

A review of several episodes of the failure of life insurance suggests that the main factors placing an important role include: (a) financial deregulation and liberalization, which allowed insurers to assimilate banking-type activities; (b) large macroeconomic fluctuations both in output and price levels; and (c) close business linkages between banks and insurers. A well-functioning and efficient insurance services sector requires legislation which provides for the role, functions and powers of an independent supervisory authority. Developing countries face the added challenge of having to deal with quickly evolving domestic insurance markets that are affected by global trends in the insurance sector. Based on the focus of regulation, insurance regulation can be looked at from different perspectives, including market-impacting regulation and the regulation of market conduct, prudential regulation and transparency/information regulation.

Market-impacting regulation or the regulation of market conduct The first area Governments seek to regulate are entry requirements to ensure that financially weak or non-credible insurance companies are not admitted into the domestic market. These restrictions can take the form of licensing requirements, specified organizational requirements, ownership restrictions, restrictions on operating in areas other than insurance such as banking or securities and separation of activities in different insurance subsectors. Well-functioning financial reporting and monitoring ensures compliance and timely intervention in case of mismanagement/non-compliance thereby minimizing the risk of insolvency. Corporate governance requirements presuppose the existence of efficient internal control by management of procedures and policies followed in the insurance company. It includes the use and supervision of qualified accountants and actuaries, who play an important role in providing an accurate picture to the supervisor, consumer and shareholder of the financial health of the company.

Prudential regulation Prudential regulations are measures the compliance of which allows an insurer to continue its operations within a given market. Prudential laws and regulations cover a broad range of aspects related to the operations of insurers ranging from consumer protection to

establishment of reasonable solvency standards. The objective of prudential regulation is to ensure the security and solvency of the market and protect policyholders even if insurers fail. In that context, the prudential regulation also ensures the integrity and stability of the financial system. Prudential regulations set by the regulator that insurance companies are required to comply with include the following: Adequate entry requirements, capital adequacy and solvency margins, which insurance companies are required to maintain as a hedge against unexpected changes, as well as asset quality, requirements for business operating plans and estimates, and requirements for actuarial and auditing; A system to monitor operations (effective reporting and accounting practices; continuous monitoring of capital adequacy, solvency, reserves and investment); Technical provisions, which serve the purpose of meeting arising liabilities an inaccurate estimation may lead to financial difficulties, insolvency or loss of credibility; Regulations pertaining to the investments of insurance companies, which are generally focused on the investment of premium money and the need to ensure reasonable rates of return on investments made. To complement prudential regulations for consumer protection also other measures, such as public complaints processing, consumer education and information and adequate policyholder protection solutions are worth to be considered. Indicators for the insurers financial soundness can help. The following indicators have been identified, most of which are relevant for both life and non-life insurance: capital adequacy, assets quality, reinsurance and actuarial issues, management soundness, earnings and profitability, liquidity, market-based indicators, group exposures. The extent of government regulation of investment funds is an important question, which, in fact, is further complicated by the changing nature of financial products (e.g. high return/high risk) and their markets. While proponents of liberal investment rules suggest allowing insurers to maximize returns as they deem fit (including by investing in foreign markets), there is also an important role for regulators, in terms of setting out investment regulations to avoid the collapse of insurance companies. An added objective for the regulator has been the reliance on the insurance sectors for investment into the economies infrastructural

development and related sectors often through the purchase of specified instruments such as government bonds, real estate, secured loans, investment in local stock markets, etc. Information-gathering is a valuable tool in the hands of the regulatory authority. Information could be transmitted through reporting requirements or at the behest of the regulators. The regulator could conduct on-the-spot checks, employ constant vigilance to determine unusual behaviour and hold regular meetings with the private sector and insurance associations. While insurance professionals such as agents/brokers and actuaries can play an important role, their role may also be misused leading to fraud and other exploitative practices. Regulation relating to insurance professionals could include registration, requirements regarding years of experience and specific knowledge of insurance products, a code of professional conduct, limits on the commission percentage that can be demanded by intermediaries, and bank guarantee. The insurance supervisors also look into cases of nonconformity, insolvency and anti-competitive practices. In cases of non-conformity with insurance legislation or regulation, the insurance supervisor may provide for a consumer redressal forum. In the case of insolvencies and mergers/acquisition, the question arises as to who would take on the insurance claims of the insolvent/acquired insurance company. Certain countries have set up a safety net in the form of guarantee funds. Finally, the insurance supervisor can play an important role in controlling and preventing abuse of dominant position, ensuring competition in the fixing of insurance rates and thereby the price of the insurance product, and preventing the formation of cartels.

Regulation and its interlinkages with international standards In an increasingly globalizing world, government regulatory activities encounter challenges arising from the linkages between the national and international levels. Two of these potential linkages are of particular interest for developing countries and their participation in international trade in insurance services: (a) trends towards the harmonization of prudential measures as well as the development of international standards for insurance services more broadly; and (b) the fact that the GATS refers to international standards and, in the Annex on Financial Services, sets out a carve-out for prudential measures.

Harmonization of prudential measures and the need for international standards Linkages between different countries financial services sectors are increasing. For example, the effects of the financial crises of the 1990s were not confined to those countries where the crises originally arose, and regulatory responses may need to reflect the greater connectedness between markets and economies. International standards in insurance services, can contribute to the important goal of preventing and correcting financial sector instability. From a business perspective, harmonization can also help create favourable conditions and a level playing field for investors, thereby facilitating easy operation of foreign insurance service suppliers. There is currently a move towards international standards in the insurance services sector. There are efforts to define those measures which may be resorted to for prudential reasons. Relevant international standards and guidelines for the insurance sector include primarily those formulated by the International Association of Insurance Supervisors (IAIS), the General Accepted Accounting Principles (GAAP), the International Financial Reporting Standards (IFRS), the Basel Committee and International Organization of Securities Commission (IOSCO), and those originating from the OECD. Together with other OECD bodies, the OECD Insurance Committee works to promote liberalization of investment and other cross-border operations of insurers. This work includes the development of principles and standards related to insurance market liberalization; work to revise the OECD Codes; insurance guidelines for emerging economies; and other activities (e.g. development of guidelines for the governance of insurance companies and pension funds). Some of the OECDs work (such as work to promote regulatory awareness) extends to non-OECD member countries. At the same time, harmonization of insurance sector regulation gives rise to a series of questions. One relates to the fact that each country may need to design its prudential and other regulatory measures according to the specificities of its economic and developmental situation (which leads to differences in the types of measures implemented). Particularly for developing countries, this may require a gradual approach to the adoption of global standards, keeping in mind individual policy objectives and resources. Another relates to the fact that standard-setting bodies could be used to assess countries prudential regimes. It has been suggested that the joint IMF/World Bank Financial Sector Appraisal Programme (FSAP) be used for this purpose.While regulatory assessments can

improve the understanding of best practices followed by other countries, differences in national insurance regulation as well as in the economic and institutional underpinnings of countries financial services sectors suggest that any such best practices cannot be rigorously applied across the board. Technical assistance, including for the development of local expertise and appropriate institutional structures, as well as flexibility in the design and implementation of regulatory systems in accordance with national insurance policy objectives are likely to be key. A third question relates to the fact that developing countries frequently lack the necessary resources to effectively participate in international standard-setting processes. In 2004, Antigua and Barbuda, on behalf of several other small and vulnerable economies, raised this issue in the WTO Committee on Financial Services. More specifically, Antigua flagged the need to ensure that international regulation of financial services becomes an inclusive process for small developing-country members. These questions are even more important in light of the fact that the GATS refers to both, international standards as well as measures for prudential reasons. Article VI:5 (b) of the GATS, for example, sets out that a determination of a members conformity with certain GATS obligations shall take into account international standards of relevant international organizations applied by that member. Thus, international standards may play an important role. Interestingly, the GATS explicitly refers to international standards applied by a member, as opposed to international standards as such. Possibly, this is a response to the fact that in the area of services, international standards are mu ch/to date less developed than in the area of goods. Besides article VII of GATS (which addresses recognition, including by encouraging the acceptance of multilaterally agreed criteria and the development of criteria for mutual recognition (para. 5)), paragraph 3 of the Annex on Financial Services deals with recognition. In fact, paragraph 3 specifically addresses prudential measures and, in lit. (a) states that a Member may recognize prudential measures of any other country in determining how the Members measures relating to financial services shall be applied. It further states that recognition may be achieved through harmonization or otherwise, including on an autonomous basis. Subsequently, in lit. (b), it requires members who are part to such an agreement to grant other members adequate opportunity to accede to or to negotiate comparable agreements, as well as procedures for information sharing. In 1997, WTO

members adopted the Guidelines on Mutual Recognition in the Accountancy Sector. These guidelines are voluntary and nonbinding and are aimed at facilitating the negotiations of mutual recognition agreements (MRAs) in the accountancy sector as well as accession of third parties to existing ones. The Guidelines cover both the negotiating process and the substance of the agreements.

The prudential carve-out Article VI of the GATS covers domestic regulation. For sectors where a member has undertaken specific commitments, it requires the reasonable, objective and impartial administration of regulations pertaining to services trade. Article VI also aims to ensure that domestic regulations do not constitute unnecessary barriers to trade in services, and do so, amongst others, by providing a negotiating mandate for any necessary disciplines to that effect. Over time, there have been concerns about the extent to which article VI, and any future disciplines developed under it, could constrain domestic regulatory prerogatives. The challenge in current negotiations of future disciplines is to navigate between establishing specific and effective disciplines to secure market access (including in sectors and modes of export interest to developing countries) and preserving domestic policy flexibility and the right to regulate. Also the Annex on Financial Services contains a provision on domestic regulation. paragraph 2 of the Annex sets out the prudential carve-out, stating that, notwithstanding any other provisions of the Agreement, a Member shall not be prevented from taking measures for prudential reasons. This provision raises a series of important questions, including about what exactly, are measures for prudential reasons. According to the Annex, these include measures for the protection of investors, depositors, policyholders or persons to whom a fiduciary duty is owned by a financial services supplier, or to ensure the integrity and stability of the financial system. This language suggests that the list is indicative, identifying some but not all prudential measures. The exact nature of such measures,

including their nature in the context of insurance, as opposed to other financial services remains to be clarified.

Given the leeway the above language might entail, some members have suggested that there is a need to clarify what is covered by the prudential carve-out. Some developed countries (having moved towards international cooperation in the banking and insurance sectors) view a clear definition of prudential regulation to be useful. It would help increase transparency, including for foreign insurance suppliers (e.g. EC, Canada, Australia, Switzerland and the United States). The EC and Switzerland have also suggested for domestic regulatory reform to reflect international standards developed by competent international

organizations/international forums outside WTO. Others, however, are more cautious. Developing countries refer to the complexity of issues involved and to the fact that prudential measures are essential for the integrity and stability of the financial system. A too narrow interpretation of the prudential carve-out may weaken the right to regulate which is central to the GATS. In sum, the challenge is to understand prudential measures in a manner broad enough for prudential objective, but also not too broad so as to undermine the purpose of GATS regarding security, predictability and liberalization of services trade. Additional complexities arise from language stating that prudential measures can be taken notwithstanding any other provisions of the agreement and that where such measures do not conform with the provisions of the Agreement, they shall not be used as a means of avoiding the Members commitments or obligations under the Agreement. These questions are significant, not only because of the sensitivities surrounding the insurance sector or the fundamental role the sector plays in a countrys economic development, but also because they can be subject to WTO dispute settlement. Interestingly, paragraph 4 of the Annex requires that dispute settlement panels on prudential issues shall have the necessary expertise.

CHAPTER 4 INSURANCE SERVICES IN THE GATS AND DEVELOPING COUNTRIES

GATS and insurance services Provisions relevant to insurance services are included in: the GATS Agreement, the Annex on Financial Services, the Understanding on Commitments in Financial Services and individual members schedules of specific commitments. Through its objectives and principles of progressive liberalization and positive listing of specific commitments, the GATS allows WTO members to carefully determine the extent of liberalization they wish to commit to. Along these lines, a member may choose to (a) select sectors and modes of supply; (b) schedule market access restrictions such as numerical limitations on insurance licences or foreign equity caps on insurance subsectors; (c) limit access to foreign suppliers by scheduling national treatment limitations such as residency requirements for senior management; (d) take additional commitments, with respect to measures which are not subject to scheduling under articles XVI and XVII, including those regarding qualifications, standards or licensing matters. The Understanding on Financial Services provides an alternative mechanism for scheduling deeper commitments. As a voluntary tool, to date, the Understanding applies mostly to developed countries (apart from Nigeria and Sri Lanka). However, in current negotiations, developing countries are requested to subscribe to some, if not all, of the provisions of the Understanding. While the Understanding sets out rather detailed rules, even if WTO members agree to make commitments according to the Understanding, they retain some flexibility in so far as they can add conditions and limitations to their commitments. Members using the Understanding do so on an MFN basis. The Understanding gives details about the sectoral scope and substantive nature of financial services commitments. For Modes 1 and 2, it lists the specific insurance services that would be covered (e.g. insurance of risks relating to, amongst others, maritime shipping, commercial aviation; goods in international transit; insurance and retrocession; provision and transfer of financial information, financial data processing and advisory and other auxiliary services). For Modes 3 and 4, however, the sectoral coverage is openended to all financial

services. The Understanding also specifies the nature of the commitments (e.g. for Mode 1 to permit non-resident suppliers of financial services to supply, as a principal, through an intermediary or as an intermediary, and under terms and conditions that accord national treatment; for Mode 3, the right to establish or expand within the members territory, including through the acquisition of existing enterprises, a commercial presence). Finally, the Understanding contains provisions on: standstill; government procurement; new financial services (requirement to permit suppliers established in its territory to offer in this territory any new financial service); transfer and processing of information; best endeavour commitments to remove certain nondiscriminatory measures; additional definitions (e.g. for commercial presence) and clarifications (on national treatment). In article XIX, the GATS mandates WTO members to conduct successive rounds of negotiations, with a view to progressively liberalizing trade in service. Having started in 2000, these built-in negotiations were subsequently folded into the Doha work programme which places the needs and interests of developing countries at its heart. The work programme reaffirms the Guidelines and Procedures for the Negotiations adopted by the Council for Trade in Services on 28 March 2001 as the basis for continuing the negotiations, with a view to achieving the objectives of the GATS, as stipulated in the preamble, article IV and article XIX of that Agreement. The deadline for submitting initial request for specific commitments was set for 30 June 2002, and initial offers for 31 March 2003. In 2004, the 1 August WTO General Council Decision provided for a new timeline for the tabling of revised offers (May 2005) and called for high quality of offers, particularly in sectors and modes of supply of export interest to developing countries, particularly in Mode 4. Request and offers in insurance services, GATS Rules (Subsidies, Emergency Safeguards Mechanisms and Government Procurement) as well as future disciplines on domestic regulation are part of these negotiations.

Classification The Annex on Financial Services broadly sets out definitions of what amounts to insurance and insurance-related services. Given that this classification differs from the United Nations Central Product Classification (CPC), there are potential for conflict and lack of consistency or adequate coverage in definitions. This is also reflected in the scheduling of commitments.

Several members endorsed the use of the Annex as a basis, since it is more comprehensive and disaggregated than the W/120 and this will also improve clarity. Some found that broad Annex definitions provide enough flexibility for emerging services and different regulatory approaches (based either on the content of services provided or the nature of the institution). Others found that the Annex is not comprehensive enough to include new products such as electronic merchanting systems or other activities such as venture capital, electronic bill presentment and securitization. However, it has also been pointed out that broad definitions can lead to conflicting interpretations and leave central questions to dispute settlement. The evolving nature of the global insurance sector further exacerbates this situation. A WTO background note explains that the GATS classification is well adapted to new products, as it is based on the content of services supplied. Some members face difficulties translating their domestic laws formulated on the basis of financial institutions into their GATS commitments. Switzerland proposed reviewing the entire classification system for financial services so as to take into account (a) differences in domestic regulatory structures, (b) new financial products that may be classified in more than one sector, and (c) emerging trends (e.g. bancassurance) that make existing distinctions obsolete. Specifically regarding insurance, Norway suggested new definitions of marine and energy insurance and suggested broadening the definition used in the Understanding to include insurance services with regard to passenger transport and larger fishing vessels. On energy insurance, the proposal suggests insurance of the commercial upstream or offshore segment of the market such as exploration, development, production activities and properties of petroleum sector, both onshore and offshore.

Services supplied in the exercise of governmental authority Setting out the scope of the GATS, article I:3 (b) specifically excludes services supplied in the exercise of governmental authority from the coverage of the agreement. In paragraph 3(c), the provision clarifies that services excluded are those which are not supplied on a commercial basis or in competition with one or more service suppliers. This provision has given rise to an intense debate about what sort of services, exactly, would be covered by this carve-out.

The Annex provides some clarification on this issue as regards financial services. First, it states that the above-mentioned paragraph 3(c) definition services supplied in governmental authority shall not apply to financial services covered by the Annex. Second, it lists three types of services which are considered services in governmental authority and are therefore excluded from the Annex: (a) activities conducted by a central bank or monetary authority or by any other public entity in pursuit of monetary or exchange rate policies; (b) activities forming part of a statutory system of social security or public retirement plans; and (c) other activities conducted by a public entity for the account or with the guarantee or using the financial resources of the Government). Third, it specifies that any of the activities listed under (b) or (c) above will, if they are provided by financial service suppliers in competition with a public entity or a financial service supplier, no longer be considered a service supplied in governmental authority and will therefore no longer be excluded from the coverage of the Annex.

Uruguay Round commitments Among the 11 services sectors covered by W/120, the financial services sector ranks second in terms of numbers of commitments (with tourism registering the highest). As of March 2005, 81 per cent of members had committed to at least one of the subsectors falling under financial services. Country participation was highest in Eastern Europe, where all seven countries made commitments. Among African countries, only 13 out of 41 WTO members made commitments. In Latin America, 18 out of 32 members have commitments, while in Asia, 17 out of 25 have commitments. Regarding the extent of bindings, there are considerable differences, with four small countries, Bahrain, Gambia, Guyana and Solomon Islands committing fully to Modes 1, 2 and 3. Mode 3 is the mode where members

demonstrate relative willingness to guarantee unrestricted entry, with Eastern Europe representing potentially the most liberal market for foreign service suppliers. Among the conditions countries maintain are limitations on the types of legal entity, the number of suppliers, foreign equity participation and investment across financial institutions, along with certain nationality and residency, authorization and licensing requirements. Some have also included the application of economic needs tests and reciprocity conditions for entry.

CHAPTER 5 CURRENT STATUS OF GATS NEGOTIATIONS ON INSURANCE SERVICES

Market access and national treatment proposals The following are selected aspects of current proposals relating to market access and national treatment: Identifying sectors for further liberalization (e.g. intermediation and auxiliary services including, actuarial, risk assessment and claims settlement services; life insurance; reinsurance and retrocession; transport services and reinsurance; marine aviation and transport) Identifying the nature of commitments/the removal of limitations (removal of mandatory cessation requirements; dismantling of State-run monopoly insurance companies) Identifying modes for further liberalization (developed countries have asked for Mode 4 commitments in terms of temporary entry of natural persons, including the temporary movement of intra-corporate transferees and contractual service suppliers, nationality and residency requirements for executives and employees, and the reduction of limits on the number of foreign employees) Identifying cross-cutting issues (most proposals underlined transparency issues as important for reducing trade effects of post establishment regulatory barriers and some propose to schedule commitments according to the Understanding) Modes 1 and 2 Developing countries have expressed concerns regarding Mode 1 and 2 liberalization given the sensitivity and importance of the financial services sector and weaknesses of their supervisory and regulatory frameworks. It has been pointed out that any liberalization should take into account the financial, monetary and exchange policies of the countries concerned. Mode 1 specific concerns relate to volatile capital movements, which is further exacerbated by technological changes and the blurring distinction between Mode 1 and 2. Switzerland has recommended reassessing commitments in Modes 1 and 2 highlighting the need for greater

homogenization and perhaps the possibility of merging the two modes in financial services. For developing countries, it could be useful to look at specific insurance subsectors which could benefit from liberalization in Modes 1 and 2 and which cannot be provided domestically as they may require a large capital base and technical knowhow.

Initial and revised offers Those developing countries which consider it necessary to preserve some local presence in the financial services sector use a series of limitations, including: domestic equity participation, local content and technology transfer requirements or quotas for local personnel. Restrictions on commercial presence, quotas, including restrictions on the geographical expansion of foreign banks and ENTs are also used. Developed countries, which are key players in financial services-related activities, request for further liberalization in this sector, for example, by addressing caps on foreign equity participation. Other barriers to trade in insurance services include: restrictions on the type of legal entity (e.g. joint venture requirements), limitations on real estate purchase or rental, discriminatory tax and subsidy measures, nationality requirements, unspecified licensing and authorization requirements, ENTs, quotas, existence of monopolies, mandatory cession requirements, limitations of economic activity through geographical restrictions, minimum capital requirements, nationality and residency requirements for high-ranking personnel and/or board of directors. Besides requests for reducing barriers to trade and classification issues (see above) also regulatory issues have figured prominently in the current round of service negotiations. Members agree that an appropriate regulatory framework is a prerequisite for opening financial markets. Accordingly, members expressed their views about where to continue discussions on improving transparency: either sectorally (i.e. in the Committee on Trade in Financial Services) or in the Working Party on Domestic Regulation. The latter has received more support than the former. Countries also acknowledged the need to consider the relationship between any future disciplines on domestic regulation and the prudential carveout. Some developing countries expressed concern about the prescriptiveness of current proposals on transparency and their possible impacts on a members right to regulate and to pursue national policy objectives.

Based on a recent summary of discussions, some members have mentioned their interest to see the following elements in future offers: (a) the use of the Annex for scheduling commitments; (b) more Mode 3 commitments, preferably full binding or at least the right to establish new and acquire existing companies in the form of wholly-owned subsidiaries, joint ventures or branches; (c) commitments on Modes 1 and 2 in appropriate subsectors; (d) elimination of national treatment and market access limitations including discriminatory application of certain laws and regulations and non-discriminatory limitations such as monopolies, numerical quotas, or economic needs tests; and (e) transparency in the development and application of laws and regulations, and speedy and transparent licensing procedures. As regards offers, 32 (out of 68) offers have been made with respect to insurance and insurance-related services. The main features of offers across country groups are: Developed countries: while there has been a reduction or elimination on restrictions relating to the geographical application of existing limitations, limitations relating to establishment, types of transactions and nationality requirements for Board of Directors, horizontal restrictions on investments (including limitations on type of legal entity and limitations on foreign equity participation, taxation, subsidies and purchase of real estate and on Mode 4) remain. Along these lines, limitations maintained include limitations on the provision of insurance activities (e.g. only through incorporation under provincial statutes, reciprocal insurance exchanges). Developing countries: some improvements regarding their insurance and insurance-related offers:, including the removal or improvement of foreign equity limitations, limitations on the type of legal entity, ENTs, or asset requirements. The phasing-in of commitments resulted in the expansion of geographic coverage of the commitment as well as the expansion of the type of activities commitments. Box 4. Transparency proposals Transparency (for financial services in general and insurance in particular) has been the subject of proposals and discussions in current WTO negotiations. Main elements of the proposed transparency framework on financial services include: (I) for new regulations or amendments: (a) prior comment; (b) publication of the final text (and as appropriate addressing substantive comments received); (c) a mechanism to respond to public inquiries; (II) for the application of regulations: (a) public availability of all laws, regulations, the provision of which is permitted. Some members also made new

procedures and administrative or judicial decisions of general application; (b) reasonable advance notice before requiring compliance with new/amended regulations; (c) listing activities requiring authorization or licence to supply a service (plus respective procedures/criteria); (d) information about reasons possibly justifying denial; (e) information on types of conduct, practices, and activities, the violation of which could result in disciplinary actions (plus information on respective procedures); (III) other principles: (a) independence of the regulator; (b) acknowledging receipt of an application and informing the applicant of licensing and authorization decision within reasonable period of time; (c) upon request giving reasons for denial of authorization or licence and llowing for resubmission of an application; (d) procedures for review/appeal of administrative decisions, and for the service supplier to submit its views; (e) reasonableness of administrative requirements (e.g. fees). More specifically as regards the insurance sector, it was mentioned for WTO members to: (1) not limit the ability of insurance service suppliers to provide information on their credit worthiness to the public; (2) make financial reporting information available to the public; (3) make regulations governing identification and handling of financially-troubled institutions available to the public; (4) mechanisms to accelerate the offering of insurance products by licensed suppliers; (5) avoiding certain requirements for product filing or approval; (6) allow the introduction of new products which will be deemed to be approved if no action is taken to disapprove them within a reasonable period of time; (7) avoid limits on the number/frequency of new product introductions.

Other approaches to liberalization While the main method of negotiations is the request/offer method, some have suggested complementary approaches. Proposals differ in details, but concur in using simple and artificially-set cross-sectoral, formula-type approaches, establishing quantitative and qualitative criteria to which individual offers should correspond. Some proposals suggest complementing multilateral baselines with more ambitious plurilateral initiatives, and ultimately a continuation of the bilateral request/offer process. One of the proposals (by Japan) also offers specific ideas for complementary approaches in financial services. For example, it suggests undertaking commitments in all subsectors; commitments in Modes 1 and 2 in accordance with the Understanding; or a focus on Mode 3 (elimination of: limitations on foreign equity participation; on types of legal entity and on the total number of

suppliers). Given the importance of Governments regulatory activities, it may be useful to carefully consider the potential implications of Trade and development aspects of insurance services and regulatory frameworks such proposals. Many developing countries are of the view that complementary approaches would reverse the logic and spirit of the GATS and the Negotiating Guidelines, and that this could lead to a substantial loss of current, built-in flexibilities. In addition, complementary approaches could not fully take into account the complexity of services sectors and their regulatory frameworks. Issues to be considered are: possible challenges of complementary approaches as regards insurance services; reduction of regulatory flexibility; changes in legal regimes, which are based on historical, social and developmental considerations; assigning negative scores to limitations (e.g. those referring to legal or institutional forms or those reflecting societal differences). A model schedule for future commitments in insurance services has also been proposed,with the objective of addressing effective market access for insurance providers. The model schedule would have two parts: one for commitments in the market access and national treatment columns (both for new as well as improved commitments), and one taking the form of additional commitments, covering domestic regulation type of measures (in the form of best practices). While the first part would be upon individual members to adopt, the second part would be uniformly adopted by a critical mass of countries.

CHAPTER 6 CONCLUSION The GATS agreement has been criticized for tending to substitute the authority of national legislation and judiciary with that of a GATS Disputes Panel conducting closed hearings. WTO member-government spokespersons are obliged to dismiss such criticism because of prior commitment to perceived benefits of prevailing commercial principles of competition and 'liberalisation'. While national governments have the option to exclude any specific service from liberalisation under GATS, they are also under pressure from international business interests to refrain from excluding any service "provided on a commercial basis". Important public utilities such as water and electricity most commonly involve purchase by consumers and are thus demonstrably "provided on a commercial basis". The same may be said of many health and education services which are sought to be 'exported' by some countries as profitable industries. This definition defines virtually any public service as being "provided on a commercial basis" and is already extending into such areas as police, the military, prisons, the justice system, public administration, and government. Over a fairly short time perspective, this could open up for the privatisation or marketisation of large parts, and possibly all, of what today are considered public services currently available for the whole population of a country as a social entitlement, to be restructured, marketised, contracted out to for-profit providers, and eventually fully privatised and available only to those who can pay for them. This process is currently far advanced in most countries, usually (and intentionally) without properly informing or consulting the public as to whether or not this is what they desire.