International indebtedness arising from insurance transactions

A lack of national insurance markets and institutions causes countries to lose foreign exchange and investment capital.

Reinsurance is essentially an extension of the principle of spreading risks as widely as possible, and reducing them to known costs. By retaining only a part of risks directly underwritten, and ceding the remainder to other direct insurers acting in the capacity of reinsurers or to professional reinsurers, the insurers themselves are widening the spread of risks and reducing part of the risk element to a cost. As its nature would suggest, reinsurance is a major international aspect of insurance and one that involves very large sums. Apart from reinsurance, the other main overseas flow to which non-life insurance operations may give rise (in those developing countries exercising any significant degree of regulation over insurance) consists of surpluses or profits earned by foreign agencies, branches and subsidiaries.

Insurance costs involve a net external debit in normal years to practically all developing countries, whether measured in terms of net indebtedness or of physical flows of funds. The incidence of such flows is clearly and inseparably bound up with the lack of a significant local insurance sector, the absence of a substantial statutory framework for insurance, and with shortages of adequate local forms of investment for an insurance portfolio. These deficiencies are bound up one with another, and their rectification tends often to be almost simultaneous.