Trade, economic freedom and general insurance in China and Asean-5

SINCE 2013, a lot of work and money has gone towards resurrecting the historic Silk Road as part of the Belt and Road Initiative (BRI), which aims to boost trade between Asian and European countries.

As a result, general insurance's risk-mitigation activities may help to facilitate global financial services market integration.

The implementation of the BRI is anticipated to spark a new wave of trade liberalisation, opening up significant economic potential for both Asean and China. Given the re-calibration of the global supply chain because of the trade war, Asean has emerged as one of China's most important trading partners.

However, BRI will not materialise, if economic expansion is emphasised without regard to the risks that come with it. Insurance, especially general insurance, is one of the most important tools to facilitate the integration of the financial services market between Asean and China.

General insurance claims are offering coverage for property insurance for losses due to incidents such as fire, accidents or man-made mishaps. General insurance is able to provide risk transfer and indemnification of losses, which helps expand aggregate economic activities.

In addition, economic freedom tempers the risk-taking incentives of general insurance services. Emerging-market governments may use general insurance instruments to promote exports, such as insurance credit subsidies, which may have an impact on the degree of economic freedom.

It has been argued that the "regulator stability" theory does not favour economic freedom. Regulation leads to a reduction in unit prices, a reduction in the size of the involuntary market, and improvements in products, leading to insurance market growth.

It has also been suggested that stringent regulation could increase insurance governance's effectiveness, as well as the risk-control abilities and business acumen of the industry.

Conversely, it has been suggested that "regulatory fragility" favours economic freedom. Under this view, regulation causes higher loss ratios, supply shortages, and inefficient sales techniques that hinder insurance market growth.

According to the data extracted from the World Bank that consists of countries from Asean-5 (Indonesia, Malaysia, Philippines, Singapore, and Thailand) and China, spanning the period from 1995 to 2015, trade is positively associated with general insurance growth.

This finding suggests that the BRI, which is a strategy to promote commerce between these countries, could open up more opportunities for the insurance industry and help it grow. The interest rate has a significant negative relationship with insurance development.

Because the insurance industry in China and the Asean-5 is growing, it is more exposed to interest rate shocks in these nations than in mature markets. In China and the Asean-5, insurance markets are also adversely correlated with inflation.

Inflationary pressures could erode insurance businesses' solvency margins, causing them to fall into the bankruptcy trap and reducing insurance growth. With regards to stock trading, it has a positive and significant influence on the development of insurance, which may indicate that money devoted to stocks will foster economic growth and increase the need for insurance products.

On the other hand, the ratio of credit provided by financial institutions to GDP does not significantly influence the development of the insurance industry. It might be because firms are more in debt and therefore have a lower cash value or fewer funds to create a demand for insurance.

As for the economic freedom indicators, tax burden freedom, money freedom, and trade freedom have a positive relationship with insurance development. The removal of existing regulations imposed on financial institutions may offer financial institutions more flexibility to expand their business.

Therefore, the general insurance companies could accept the general risks from these regions by collecting the insurance premium according to their risk appetite.

In other words, it allows the general insurance industry to be more financially liberalised and become freer to underwrite the insurance business based on their capital ratio adequacy, and thus it will increase operational efficiency.

Thus, a key policy implication of the above findings is that the enforcement of regulations to restrict these freedoms would facilitate insurance development.

These findings are in line with the statement made by the chairman of the 20th Asean–China Summit, who welcomed the efforts being made to reinforce anti-corruption cooperation and harmonise domestic efforts to promote good governance and the rule of law in order to strengthen the Asean–China strategic partnership in a wide range of economic, political-security, and socio-cultural areas.

Furthermore, government action is necessary for the citizens of a nation to defend themselves and promote the peaceful evolution of insurance and economic growth. It is because, according to the Heritage Foundation, the goal of economic freedom is not merely the absence of government constraints, but rather the formation and continuation of reciprocal wisdom of liberty for all.

In the longer term, the world might see a convergence in Asean and China's economic development as well as the BRI strategy for China’s international commitment to trade and finance.

Dr Lee Hui Shan is an Assistant Professor at Universiti Tunku Abdul Rahman. The views expressed here are entirely the writer’s own.

The SEARCH Scholar Series is a social responsibility programme jointly organised by the Southeast Asia Research Centre for Humanities (SEARCH) and the Centre of Business and Policy Research, Tunku Abdul Rahman University College (TAR UC), and co-organised by the Association of Belt and Road Malaysia.