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Managerial barriers to the internationalization of U.S. property and liability insurers: theory and perspectives.

Managerial Barriers to the Internationalization of U.S. Property and Liability Insurers: Theory and Perspectives

Trade Barriers to International Property and Liability Operations

Government Trade Barriers

Numerous articles in insurance trade literature document instances where governmentally imposed trade barriers may have prevented entry into specific foreign markets [National Underwriter (1985), Risk Management (1980), McIntyre (1984), Nutter (1981)]. Academic attention has also been given to documenting the existence of trade barriers and their economic consequences [Organization for Economic Cooperation and Development (1983), Carter and Dickinson (1977), Detwiler (1983), Pfeffer (1976), Skipper (1987)].

However, the importance of foreign trade barriers as an explanation for the lack of international involvement of U.S. property and liability insurers is not known [Fisher (1982), Ripol (1983), Skipper (1987)].

The purpose of this article is to examine, in a theoretical context, the foreign market entry patterns of U.S. property and liability insurers. The results of a survey of industry executives' attitudes toward foreign operations are analyzed. An explanation for that behavior which is consistent with theory is also proposed.

An Information Gap

One of the most serious obstacles to foreign operations of U.S. insurers is the lack of market information. That information gap may actually be a greater barrier to entry into foreign markets than are governmental trade barriers. According to Skipper (1987, p. 63), "the most impotant practical problems relating to [trade in] services revolve around data inadequacy." Pfeffer (1978) also speaks to the problem of obtaining data necessary for foreign market operations. Despite trade barriers and lack of information, a few U.S. property and liability companies have entered foreign markets. CIGNA Corp., American International Group, continental Insurance, Allendate Mutual and others have been exceptionally active abroad. However, the majority of U.S. insurers have made no attempt to enter foreign markets.

With so many insurers in the United States, why have so few chosen to engage in international operations? Why have those who have chosen to do so become so active? The answer to these questions may, in part, lie in the nature and cost of foreign market information available in the United States. In turn, the source of this information barrier may be the result of the historical pattern of international operations of U.S. companies.

The Modern History of the International Activities of

U.S. Property and Liability Companies

By the beginning of World War II, the number of U.S. property and liability insurers operating in Europe had declined from a high of 21 immediately following World War I to only a dozen [Glass (1960)]. During World War II, the industry responded by providing international coverages, especially war risk coverage. But the post-war era of domestic prosperity again saw the industry turn it back on international operations. The European business of U.S. companies immediately following the war was, at best, negligible. Writing in the late 1950s, Glass notes that only seven U.S. companies, excluding the American and Foreign Insurance Association (AFIA) and American International Underwriters (AIU), had substantially rebuilt their European business after World War II [Glass (1960)]. They were: The Insurance Company of North America of Philadelphia, American Home Insurance Company of New York, Glens Falls Insurance Company of Hartford, Great American Insurance Company of New York, Hanover Fire Insurance Company of New York, Home Insurance Company of New York, and National Union Fire Insurance Company of Pittsburgh.

In addition, the Allstate Insurance Company had entered the European market on a broad scale after World War II. The company began its operations through a subsidiary established in Zurich, Switzerland. Glass states that:

"It is remarkable that an American direct insurer has, for the very first time in insurance history, invaded Europe with a special form of insurance merchandising and has introduced with refreshing efficiency United States' business methods which offer lower rates to European insurance buyers" [Glass (1960)].

However, few other U.S. insurers became actively involved in international insurance operation after the war.

Dover (1960) reflected upon the relatively small role of U.S. insurers in the international marine insurance market. He observed that "there is no business quite as international as is insurance. . . (and) no branch of the business more international than is marine insurance" (p. 24). Certainly no line of primary property and liability insurance is more directly concerned with international trade than is ocean marine. Dover (1960) cited the "dynamic potential of the United States" (p. 26) but noted that, despite this potential, U.S. insurers had not yet become active in the international market. Little has changed in the 30 years since Dover's observation.

Other U.S. industries shook off their economic isolationism in the post-World War II era. Responding to the need for reconstruction in post-war Europe and stimulated by the creation of the European Economic Community in 1958, U.S. manufacturing industries invested heavily in Europe and elsewhere overseas. Many U.S. service industries (including commercial and investment banking, advertising, accounting, brokerage, law, etc.) followed their customers abroad. This appeal of "following the customer" was the primary attraction that drew many of these companies overseas. A notable exception to those U.S. service industries following their domestic customers abroad was the U.S. property and liability insurance industry.

Why Such Parochialism?

Two reasons are commonly cited for this under-representation of U.S. insurance companies in international markets: property and liability insurers were content to confine their activities to the domestic market, and the strict adherence to U.S. antitrust laws prevened U.S. companies from entering into firm rating agreements with other markets or subscribing to international agreements of any kind which might be regarded as in conflict with antitrust legislation [Dover (1960)].

No doubt confusion over antitrust laws (as influenced by the McCarranFerguson Act) and other nuances of state regulations has contributed to the parochialism of the U.S. insurance industry [Kimball and Pfenningstorf (1981), Pfeffer (1978), Skipper (1987)]. Insurers, be they domestic, foreign or alien, must operate within the 51 sub-markets of the United States, each with differing regulations. Further compounding this problem is the extraterritorial jurisdiction imposed by some states through laws such as new York's Appleton Rule. The regulatory system and the constraints imposed by it may also have contributed to the proliferation of U.S. insurers, of the 7,100 property and liability insurers in the entire non-Communist world, almost 50 percent are in the U.S. [Sigma (1985)].

The Eclectic Theory of International Production

Many theories have been devised to explain the reasons for foreign direct investment. No one yet explains all direct investment. Nor are all of the theories very useful in explaining international investments in services. Several, including the eclectic one, have been found to be appropriate in explaining the behavior of service firms [Boddewyn, Halrich, and Perry (1986)]. Although more frequently used to examine international banking expansion [Gray and Gray (1981), Pecchioli (1983), Rugman (1981), Wells (1983), Yannopoulos (1983)], the electric theory can also aid in understanding the lack of international expansion in the Property and Liability industry as well.

The eclectic theory proposes that, in order for a firm to be induced to enter a foreign market, the firm must have specific ownership advantages (assets or endowments) whose benefits exceed the cost of servicing a distant market in an unfamiliar environment, and which allow it to compete favorably with the indigenous industry [Dunning (1980), Dunning (1979)]. How the firm uses its ownership-specific advantages depends on the degree of profitability derived from the use of these assets or endowments in conjunction with the resources available in the foreign market relative to the costs of that international business.

There are many ways the firm may respond to the opportunities of international markets. For example, it may choose to sell specific services, such as accident and loss control services; it might license its name through a managing general agent; or, the firm could internalize its firm-specific advantages through direct entry into foreign markets.

Factor inputs necessary to international operations consist of two types: location-specific inputs in the foreign market (financial infrastructure, market structure, natural resources, etc.) which are available to all firms entering a particular foreign market; and firm-specific inputs such as technology, marketing skills and management skills, which the firm itself may create [Dunning (1979)]. A key characteristic of these firm-specific inputs is that:

". . . although their origin may be linked to location-specific endowments, their use is not so confined. The ability of enterprises to acquire ownership endowments is clearly not unrelated to the endowments specific to the countries in which they operate and particularly their country of origin. Otherwise, there would be no reason why the structure of foreign production of firms of different nationalities should be different. But, in fact, it is so--and substantially so" [Dunning (1980, p. 10)].

Finally, the eclectic theory seeks to explain the decision to transfer (sell or license) or internalize (directly use) these firm-specific ownership advantages within a framework of the costs of the transactions. Market imperfections, and hence high transaction costs, arise where information and/or negotiation costs are high or where the economies of interdependent activities cannot be fully captured. The likelihood of internalization of firm-specific ownership advantages, and hence foreign market entry, is increased where: price discrimination is not practiced; enforcement costs are high for protecting property rights; and where the firm wishes to have a high degree of control over the product or service. This would appear to be the case in insurance since: little direct comparison buying is done; protecting intellectual property rights such as underwriting procedures and pricing structures is difficult; and most insurers wish to have a high degree of control over foreign operations. Additionally, the likelihood of internalization of firm-specific ownership advantages is increased by the presence of underutilized capacity, especially managerial skills, which the firm can exploit at low marginal cost.

Because the cost of gathering information concerning foreign markets is high for U.S. insurers, the transaction costs of entering foreign markets are also high. European insurers, for example, would have lower transaction costs when entering other European markets than would U.S. insurers entering European markets. As a consequence, any excess capacity available to U.S. insurers would more likely be applied domestically because of the lower transaction costs.

A second factor affecting transactions costs is experience. As the firm gains experience in entering foreign markets, this knowledge can be transferred to other market entries. Experience has the two-fold effect of reducing transaction costs for subsequent market entries and of increasing the value of the firm-specific ownership advantages. As the value of the insurer's firm-specific assets increases and its transaction costs are reduced, it is increasingly induced to use any excess capacity where it can be applied most profitably, no matter where in the world this may be. Therefore, once an insurer has entered a foreign market, it becomes more likely to enter a second, and so on. Because European insurers have lower transaction costs for their first foreign market entry, and hence are able to build experience at lower cost, one would expect to find proportionately more European insurers entering foreign markets than U.S. insurers. As will be seen below, the evidence supports this conclusion.

Other factors that arise from the country of origin that may contribute to firm-specific ownership advantages include: the competitiveness of the market, the availability of alternative distribution systems, and the intensity of product development. In each of these cases, U.S. property and liability insurers should have gained ownership advantages that would allow companies to enter foreign markets and internalize these advantages. Yet few U.S. insurers have been able to capture these advantages because of information costs.

Patterns of Foreign market Entry

Although the number of U.S. property and liability companies directly involved in foreign markets is relatively small, those that are active have entered markets on all continents. U.S. property and liability insurers have penetrated 43 foreign countries--more than the insurers of any other nation [Sigma (1987)].

Table 1 shows all of the countries with property liability companies active in ten or more countries. It also shows the number of foreign representations from each country. U.K. and U.S. companies are, by far, the most active internationally--especially in terms of their large number of representations. Although British insurers have many more foreign representations (531 vs. 345), U.S. companies are active in more countries (43 vs. 41).

The next most active countries in terms of entry into foreign markets are: France (33 countries with 130 representations), Switzerland (27 countries with 104 representations), and italy (19 countries with 61 representations). Germany, although active in only 16 countries, has 114 representations. The Netherlands, Japan, and Belgium are also very active in the international property and liability field with more than 50 representations each.

Of the U.S. total of 345 offices, 115 are in the U.S. commonwealth of Puerto Rico and 75 are in Canada (Table 2). other than in those two naions, U.S. companies have only 155 representations, versus 531 for Great Britain.

While it is likely that some companies have more than one representative in a particular country, it can reasonably be assumed that most companies have only one. Also, many of those companies that are active internationally are active in many foreign countries. Nevertheless, a comparison between the total number of representations for all property and liability insurers of each country with the total number of property and liability insurers in that country is helpful. Such comparison helps shed some further light on the interest of the insurance industry of each country in foreign markets. This is shown in Table 3.

Viewed in this context, the U.S. ranks lowest among the 13 countries with the greatest foreign representation. The ratio of foreign representations to number of home property and liability companies exceeds 1.00 in Japan with an average of more than three foreign representations for every Japanese property and liability company, and in Switzerland, the United Kingdom, and New Zeland. The U.S. is ranked last with a ratio of less than 0.10. When U.S. representation in Puerto Rico is dropped from inclusion in the foreign activities of U.S. companies, the ratio falls to only 0.07 (less than one foreign office for every 14 property and liability companies). Thus, only a very small share of U.S. property and liability companies has even one foreign representation.

Given the significant number of countries in which U.S. insurers have some form of representation, one must conclude that at least some U.S. companies have found the means to enter many foreign markets despite the existence of trade barriers. While it is no doubt true that some insurers have encountered government barriers to entry, such as those in Argentina and Korea [Organization for Economic Cooperation and Development (1983)], other explanations would seem to exist that account for the low level of U.S. participation in foreign insurance markets.

The Survey of Reasons for Not Entering International Markets

In January 1986 a questionnaire was sent to 432 property and liability insurers headquartered in 63 countries. Included in the sample were the 138 largest U.S. property and liability insurers based on premium volume. The primary purpose of this research was to identify and analyze the techniques that primary property and liability insurers use to enter foreign markets [Schroath (1987)]. A second purpose of the research was to identify those companies that had not successfully entered any foreign market and to determine what the respondents believed to be the major barriers to establishing operations in a foreign country.

Sixty-seven of the 138 U.S. companies (nearly 49 percent) provided responses usable in the second phase of the research. Although the respondents were not required to identify themselves, almost two-thirds did so in order to receive a summary of results. At least four of those identified are among the largest insurers in the United States. The smallest company identified operated in only a few states. A review of identified companies indicates that, based on size and scope of operation, those companies in the sample are quite likely to be representative of U.S. property and liability insurers capable of engaging in international operations.

Results of the Survey

The 67 U.S. respondents provided 211 responses to questions concerning reasons for not entering foreign markets and barriers to foreign market entry. Most of the responses could be grouped into nine general categories (Table 4).

Relative Appeal of U.S. Markets: The most frequently cited response, by far, was that companies felt opportunities for expansion were greater in the United States than in foreign markets (Table 4, #1). Approximately 82 percent cited sufficient market opportunities in the United States as a reason for not entering foreign markets. One of the largest insurers stated:

Since we still have great opportunities for development in this country, we would not expand into foreign markets in the near future unless such expansion was required because of problems involved with our United States' accounts. Such an expansion would require a familiarity with foreign conditions and regulations that we do not have; while such lack of familiarity would not necessarily deter us if such an expansion were indicated, at the present time we have our hands full in this country.

Lack of Knowledge of Foreign Opportunities: The second most frequently cited reason for lack of foreign expansion (49 percent) was lack of knowledge of foreign opportunities (Table 4, #2). Typical of responses in this category was the comment:

We have never seriously considered entering foreign countries to do direct business. Therefore, we simply have no knowledge of foreign market opportunities or problems in entering foreign markets.

Lack of Qualified Personnel: Also important to insurers as a barrier to foreign market entry is the availability of qualified personnel. Thirty-seven percent of the respondents reported that the lack of qualified executive or technical personnel (Table 4, #3) prevented them from seriously considering foreign operations.

Lack of Knowledge of Regulations: Nearly as important (33 percent of the respondents) is regulation or, more accurately, lack of knowledge of regulatory practices in foreign markets. Although it was not always clear whether respondents were referring to regulation in the United States or in host countries, many clearly stated that a lack of understanding of foreign regulatory practices prevented them from pursuing foreign market entry. Responses in this category did not cite specific host-country barriers as the regulatory concern, but lack of knowledge of regulatory practices.

Cultural, Language, and Foreign Exchange Problems: Tied for fifth in importance (30 percent of all U.S. respondents) for deterring the respondents from entering foreign markets were perceived problems relating to culture and language (#5a), and foreign-exchange problems, either from currency fluctuations or profit repatriation difficulties (#5b).

Cost of Project or Availability of Capital: Twenty-one percent of the companies reported they believed the costs of conducting foreign operations prevented them from seriously considering foreign market entry (#6). Seven companies (ten percent) reported they felt sufficient capital was not available for expansion into foreign markets (#7). However, due to the cyclical nature of profitability in the U.S. property and liability industry, the managers' perception of this problem may have been somewhat amplified because of poor profitability when the survey was taken in January 1986. In times of greater profitability, lack of capital is less likely to be perceived as an internal barrier to foreign expansion.

Preoccupation with Domestic Markets: Nine percent of the respondents reported that their management was preoccupied with domestic problems and did not feel that it had time to investigate foreign market opportunities. Some respondents cited corporate reorganization as the problem, but responses are more typified by the executive who stated "Getting our act together at home is the most important thing we can do right now."

Miscellaneous Responses: Three companies stated they refrained from foreign operations because they perceived profitability to be too low. Six additional reasons for failure to internationalize were cited only once (Table 4, #9). In summary, the reasons given were:

Foreign markets are unprofitable (three responses).

Reinsurance is a problem domestically and would be more of a problem internationally.

The logistics of managing an operation beyond the U.S. present too great a problem.

General economic instability in the world makes foreign markets unattractive.

The time necessary to establish foreign operations is too great.

Competition from international insurers such as American International Group and Continental prohibits expansion abroad.

Foreign market barriers to entry prevent the establishment of foreign insurers.

Government Barriers

Of the 211 responses from U.S. insurers concerning reasons for not entering foreign markets, only one stated specifically that trade barriers erected by host-country governments presented a problem. The rest of the 16 categories of responses are basically limitations imposed from within the firm itself.

Indeed, it is the basic contention of this study that some of the major reasons why U.S. property and liability companies fail to compete more extensively in international markets are internal to the firm. It is not governmentally imposed barriers but managerial barriers that represent the greatest obstacles to the successful penetration of international markets.

Managerial Barriers

In International Business: Environment and Management written, several years before the survey cited above, Korth (1985, pp. 80-83) identified five "managerial barriers to international business:" limited ambition, unrecognized opportunity, perception of a lack of necessary resources, fear, and inertia. The managerial barriers are obstacles which are largely internal to the firm rather than obstacles which are imposed by either the markets (e.g., market potential or the degree of competition) or by governments (e.g., laws restricting foreign market entry).

Managerial barriers are, on the one hand, very lamentable because the company is the author of its own limitations. On the other hand, since the company has created its own barriers, there is a basis for optimism: corporate management has a much better opportunity to overcome them than it does with government-imposed or market-imposed barriers.

Domestic vs. International Business

Managerial barriers are not unique to international business. The identical group of self-imposed limitations can interfere with the domestic expansion of a successful company from local to state-wide markets, from state-wide to regional markets, and from regional to national markets--all within the United States. A recognition of some of these managerial limitations may even help some firms in their domestic markets. However, this article focuses only on international markets.

Insurance vs. Other Industries

The experience of other service firms can help insurers recognize international pitfalls and benefits. Tools and procedures have been developed to avoid or reduce the problems inherent in international operations. The task is to identify the tools and know when to use them.

In addition to their value as examples for U.S. insurers, the overseas operations of other service companies which have preceded U.S. property and liability companies abroad should ultimately prove to be one of the strongest attractions for drawing many U.S. insurers abroad. These companies (banks, advertising firms, accounting firms, law firms, etc.) are also the clients of major insurers.

Limited Ambition

The perception of corporate management that the insurer has sufficient opportunities and problems in the United States (Table 5, Section B-1) reflects limited ambition on the part of management. For some insurers, especially small or rapidly growing companies, this may be very reasonable. However, there are many other insurers who might find international opportunities much more attractive than domestic ones--if they would only make the effort to look.

Sufficient Opportunities in the U.S.: Approximately 82 percent of those responding indicated they felt that their companies had sufficient growth opportunities in the United States. While this may be true for any individual insurer or for companies without nationwide representation, aggregate data from world markets suggests otherwise.

For example, one Swiss Reinsurance study, which was published in Sigma, found that the non-life market is growing much faster abroad. The U.S. market share of total worldwide property and liability business declined from 65.8 percent in 1965 to 57.2 percent in 1985 [Sigma (1985)].

An earlier Swiss Reinsurance Study of 30 countries, also published in Sigma, covered the period from 1960 through 1982 [Sigma (1985)]. These data also indicated that, during the period of that study, the U.S. market for property and liability insurance grew at a rate lower than that of many other markets. Based on these data, larger U.S. property and liability companies, unless they are truly growing domestically at a very large pace (and prospering) or are faced with very strong competition at home, should at least examine foreign opportunities. Even many smaller companies may find very profitable niches abroad.

The importance of such an effort is underscored by the stronger competitive position of those insurers who do expand the geographic coverage of their services into international markets and by the competitive strength of foreign insurers who expand into the United States. A company which can offer worldwide insurance services is likely to be much more attractive to potential corporate clients, domestic as well as foreign, than is a company that can provide only some of those needs directly. That is, U.S. insurers will find that they need to be able to extend their services abroad or risk seeing important current clients turn to Japanese and European competitors who can.

Management Preoccupation with U.S. Problems: Some insurers simply stated that they were too busy focusing on domestic markets to be concerned about international markets. While many companies are having sufficient difficulty handling the problems and competition of U.S. markets, it is an easy mistake for managers to focus only on what is near. Management must plan for the future, trying to anticipate problems, seeking means for improving performance, hiring and training tomorrow's management, and searching for new opportunities. Many of the best opportunities are likely to be in the relatively underdeveloped markets abroad, including some European countries.

Unrecognized Opportunities The respondents to the survey identified many reasons for their reluctance to internationalize which were classified as variations on the failure to recognize potential opportunities abroad (Table 5, Section B-2). These were grouped into two subcategories: lack of knowledge and management perceptions of foreign markets.

Lack of Knowledge: Insufficient knowledge is certainly a serious obstacle to evaluating foreign markets. Respondents identified two knowledge deficiencies that presented problems: knowledge of opportunities and knowledge of regulations. These responses may be representative of another more fundamental problem in international markets: lack of data.

Only recently has the A. M. Best Company begun publishing data concerning international operations of property and liability insurers. National income accounting data, traditionally used as a key component in market analysis, is woefully inadequate for insurance-market analysis. Although from time to time the Swiss Reinsurance Company publishes studies documenting such factors as insurance elasticity of demand, insurance penetration, insurance density, and market share of world premiums by country, there is, as yet, no consistent and reliable source of international market information.

Lack of knowledge of regulation in foreign markets also presents a very real internal barrier to international operations. Articles in both the trade and academic literature have documented potential barriers to trade in insurance. Yet, the insurance-industry respondents were not greatly concerned with governmental barriers.

Unfortunately, most of the attention has focused on barriers to tapping opportunities. Not enough attention has been paid to compiling information about markets where entry is comparatively easy from the regulatory standpoint. Additionally, information about regulatory practices in a particular market is neither centralized nor standardized. Occasional publications, such as the International Insurance Industry Guide (1977), published by Coopers and Lybrand, and Insurance in the World's Economies (1982), published by the Philadelphia World Insurance Congress, may provide some general guidelines. However, pragmatic up-to-date information concerning regulation is still difficult to obtain.

Management Perceptions of Foreign Markets: Respondents identified a number of barriers which appear to be generally the result of managerial notions of conditions abroad. These ideas appear to be more the result of ill-founded perceptions than of careful evaluations based on actual knowledge. These perceptions are very closely allied to the problem of lack of knowledge relating to concerns of high cost, unattractive markets, small markets, and unprofitable markets. Given the dearth of readily available information regarding the true condition of those issues, it is very unlikely that most of the respondents were basing their attitudes on careful study.

Perception of a Lack of Necessary Resources

Lack of Personnel: The long-standing parochialism of the U.S. property and liability industry is reflected in the lack of personnel qualified for international business (Table 5, Section B-3-a). Without qualified personnel, firms lack the ability to digest and analyze information concerning foreign market opportunities, and to respond to the opportunities that are perceived. Consequently, these opportunities go unnoticed or the firm does not have the capacity to act upon them in a timely fashion.

However, a shortage of the necessary personnel is a relative, not an absolute, constraint; skilled personnel can be hired or trained. This is a requirement that is common to many new ventures. It need be no more serious for expanding into international markets than for venturing into may kinds of domestic markets.

Lack of Capital: In a similar vein, inadequate funds may be a managerial, rather than a capital-market, barrier for many insurers. Capital shortages are also often relative rather than absolute limitations. If companies identify attractive market opportunities, be they foreign or domestic, they often find capital.

Lack of Reinsurance: One respondent observed that, if reinsurance was a problem for it domestically, it was likely to be much more difficult internationally. In fact, reinsurance may be more readily obtainable in markets outside the United States. Other markets have not experience the "liability crisis" that has affected the U.S. market and strongly influenced the attitudes of major reinsurers.

Lack of Time: The final resource shortage noted was the shortage of time. Time is a problem for everyone. If the existing management could not handle the additional burden of entering new markets, then hiring additional management may be necessary.

Fears of Management

Management is beset by many fears of foreign markets: social and cultural concerns including different customs, religious problems, tribal or caste disputes, languages, social unrest, and others; political and legal concerns involving different policies, laws, political systems, and political unrest; and, economic concerns about different currencies, economic systems, rates of inflation, taxes, marketing systems, labor attitudes, economic unrest, and so forth. However, many of these risks and difficulties are greatly exaggerated. There are programs, both private and public, for providing various tools for protecting against many of the risks and easing many of the difficulties.

Fear of Cultural and Language Differences: Few managers are likely to acknowledge fear of foreign markets as their reason for failing to internationalize. However, the fifth most commonly identified rationale for failing to expand into foreign markets was concern about culture and language problems (Table 6, Section B-4). Indeed, potential problems created by foreign cultures and languages are endemic to any international operation.

Insurers in other countries and other financial institutions in the United States have confronted and overcome these barriers as is witnessed by the number of alien insurers operating in the United States and the number of U.S. banks operating in foreign markets. The above-mentioned lack of skill is also relevant here. Fortunately, there are managers with transferable international skills that can be obtained from other industries or from other property and liability companies.

Foreign Exchange Risk: The problem of foreign exchange risk is a very real one for U.S. insurers as well as for insurers from other countries. Foreign currency transactions present the firm with an additional set of unknowns and risks. These risks are compounded by the regulations of nearly all states in the U.S. Current practices do not permit property and liability insurers to hedge their foreign exchange exposures through the use of forward contracts, option contracts, or futures contracts [Schroath and Korth (1987)]. There are, however, other techniques which can be used to address the foreign exchange risk problem. This problem is examined in detail in Schroath and Korth (1987).

Other Concerns: Other respondents expressed their worries about logistical difficulties, economic instability abroad, and competition from other U.S. property and liability companies in foreign markets. Again, there appears to be a strong element of speculation in these responses rather than ideas based on solid facts.


The final managerial barrier to international business is inertia. None of the respondents was so blunt as to say "we just have not made the effort." However, the lack of knowledge, of skilled personnel, and of capital when such resources are obtainable, and the feeling of an inability to handle problems of culture, language and foreign exchange when the means for surmounting these obstacles are within reach, all reflect the problem of inertia.

Summary and Conclusion

An examination of the pattern of foreign market entry of U.S. property and liability insurers reveals that in recent years proportionally few U.S. insurers have entered foreign markets. Those few companies that have entered foreign markets have been exceptionally active, engaging in international operations in more countries than the property and liability industry of any other country. A possible explanation for this pattern of foreign market entry lies in an examination of the transactions costs of entering foreign markets from the United States.

Because there is a paucity of information concerning foreign markets and because what information is available suffers from the problems of currency, completeness and comparability, the cost of information gathering is high for U.S insurers. Once a firm has invested in data gathering, however, the information accrues to the firm as an asset specific to the individual firm, not to the industry as a whole. Experience in entering foreign markets is likewise a firm-specific asset. Consequently, those firms which possess knowledge of foreign markets and which have experience in entering foreign markets are more likely to internalize these firm-specific assets and exploit them profitably by continuing to enter additional foreign markets.

A survey of U.S. property and liability insurance executives tends to confirm that knowledge of foreign markets represents a major managerial barrier to foreign market entry. This knowledge barrier flows directly from the high cost of information gathering and the historical pattern of foreign involvement of U.S. insurers.

Policymakers in the United States have indicated a desire to liberalize and improve trade in services. This is evidenced by the attempt to include services trade, including insurance, within the framework of the General Agreement of Tariffs and Trade and, more recently, by the inclusions of services trade, again including insurance, in the Free Trade Agreement negotiated with Canada. By itself, reducing trade barriers may not be sufficient to induce U.S. property and liability insurers to engage in international operations. Complementary efforts should be undertaken to provide to U.S. property and liability insurance executives information of the kind and quality necessary to adequately understand and assess foreign market opportunities.


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[18] Pecchioli, R. M., 1983, The Internationalization of Banking: The Policy Issues (Paris: Organization for Economic Cooperation and Development).

[19] Pfeffer, Irving, 1978, Problems in International Insurance Markets, Issues in Insurance: Volume II (John D. Long, ed.) (Malvern, PA: American Institute for Property and Liability Underwriters).

[20] Pfeffer, Irving, 1976 June (pp. 275-290), Nontariff Barriers to Alien Insurance in the U.S., The Journal of Risk and Insurance.

[21] Ripol, Jose, 1983 November (Vol. 84, pp. 28-32), Should the Barriers Come Down?, Best's Review Property/Casualty ed.

[22] Rugman, A. M., 1981, Inside the Multinationals: The Economics of Internal Markets (New York; columbia University Press).

[23] Schroath, Frederick W., 1987, Analysis of Foreign Market Entry Techniques for Multinational Insurers, Ph.D. Dissertation (University of South Carolina).

[24] Schroath, Frederick W., and Christopher M. Korth, 1987 (pp. 69-77), Foreign Exchange Problems for Property/Liability Companies, Focus on the Future: The Insurance Industry Looks Toward the 21st Century (Malvern, PA: The Society of Chartered Property and Casualty Underwriters).

[25] Sigma, 1985 February (Zurich: Swiss Reinsurance Company).

[26] Sigma, 1985 May (Zurich: Swiss Reinsurance Company).

[27] Sigma, 1985 September (Zurish: Swiss Reinsurance Company).

[28] Sigma, 1985 November/December (Zurich: Swiss Reinsurance Company).

[29] Sigma, 1987 June (Zurich: Swiss Reinsurance Company).

[30] Skipper, Harold D. Jr., 1987 March, Protectionism in the Provision of International Insurance Services, The Journal of Risk and Insurance (Vol. LIV, No. 1).

[31] Trade Barriers Hurting U.S. Marine Insurers, 1985 June 7 (p. 45), National Underwriter Property/Casualty ed.

[32] Unfair Foreign Practices Hit U.S. Trade, 1980 September (pp. 66-74), Risk Managagement.

[33] Wells, L. T., 1983 (pp. 117-135), Nonmanufacturing Investments, Third World Multinationals (Cambridge, MA: MIT Press).

[34] Yannopoulos, G. N., 1983 (pp. 236-257), The Growth of Transnational Banking, The Growth of International Business (Mark Casson, ed.) (London: George Allena and Unwin).

Fredick W. Schroath is Acting Associate Dean of the College of Business at kent State University.

Christopher M. Korth is Professor of International Finance and Banking at the University of South Carolina.
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Author:Schroath, Frederick W.; Korth, Christopher M.
Publication:Journal of Risk and Insurance
Date:Dec 1, 1989
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