Prapasiri Kositthanakorn
+662 344 1228
Charles Ostick
+663 344 1167
Charles [email protected]
Tom Ashton
+662 344 1472
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Financial reporting, capital and taxation
Financial reporting requirements
Accounting and financial reporting including technical provisions for insurance activities is mainly rule based, regulated by the Ministry of Finance. In general, the accounting and financial reporting is in compliance with Vietnamese Accounting Standards, the Vietnamese Accounting System and regulations applicable to insurance companies operating in Vietnam.
Financial statements are statutorily required to be audited by independent auditing firms. Apart from the statutory audit on the financial statements, the
following, where applicable, are also required to be certified by independent audit firms for foreign
insurance companies, reinsurance companies, branches and insurance brokerage companies:
Activities of receiving and assignment of reinsurance
Technical provision setting
Solvency ratio
Commissions, revenues, expenses, profits and profit distribution
Investments from the owner’s equity, investments from the provisions
Fixed assets and depreciation
Receivables, liabilities payable, owner’s equity
Fund splitting and surplus of contract owner funds for life insurance enterprises.
Insurance enterprises and foreign branches are required to prepare and submit financial statements to the Ministry of Finance on a quarterly and annual basis.
Insurance enterprises and foreign branches also prepare and submit to the Ministry of Finance statistical reports and operational reports on a monthly, quarterly and yearly basis.
Capital regime and requirements
For insurance companies, legal capital is set by the Ministry of Finance as a minimum level for establishing and running insurance business. Minimum legal capital for non life insurance companies and life insurance companies are VND300 billion and VND600 billion, respectively. Apart from the legal capital requirements, insurance companies are also subject to certain other requirements such as capital adequacy and
solvency ratio.
Taxation
Vietnam only has national taxes (ie there are no local or municipal taxes), nor are there specific insurance
business related taxes. The following major taxes must be considered:
Corporate income tax (CIT): enterprises established in Vietnam are currently subject to 25% CIT (there is a proposal to reduce the standard rate to 23% from 2014). There are no specific tax incentives for insurance companies. In addition to the general CIT rules, insurance companies are subject to insurance specific regulations which may limit the deductibility of certain expenses. Tax losses can be carried forward to offset taxable profit of subsequent years for a maximum period of 5 years.
Value added tax (VAT): certain insurance, including inter alia life insurance, health insurance, human accident insurance, is VAT exempt. For VAT exempt services, no input VAT can be claimed. Insurance, which is not included in the list of VAT exempt insurance, is subject to 10% VAT. In such case, input VAT can be credited against output VAT.
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Products and the market
Products
The Vietnamese general insurance sector offers various risk products to individuals and businesses. The main lines of insurance (and % of 2012 premiums) that are driving the sector are: Motor (28%), Personal Accident &
Health (18%), CAR & EAR (builders’ risk) (13%), Hull and P&I (8%) and Cargo (8%). General insurance lines have been growing rapidly in recent years with a 21% and 10% annual increase in premiums in 2011 and 2012, respectively.
The Vietnamese life insurance sector provides a wide range of life products. However, the main contribution to the sector only comes from two products: Endowment (67%) and Investment Insurance (24%). The remaining products are still very limited in the market such as Riders (6.2%), Term Life (1.8%), Whole Life (0.9%) and especially Annuities which only accounts 0.3% of the sector.
Group policies are very limited in the Vietnamese market with 99% of life insurance contributions coming from individual policies. Various life companies are now developing new products for the Vietnamese market.
The insurance sector is regulated by the Insurance Supervisory Division of the Ministry of Finance. The Insurance Law, circulars and other regulations set out the rules which insurance companies are required to comply with. This covers solvency, selling, products and many other aspects of insurance business.
New products need to be approved by the Ministry of Finance and the reserving methodologies must also be approved by the Ministry. Investment opportunities are restricted both by regulatory and commercial
considerations.
In Vietnam, the main distribution channel for insurance activities is agencies. The insurance is normally
distributed via small independent agencies. The current significant growth in agency networks in Vietnam should support the large forecast increases in overall premiums.
Other channels such as brokers, co-insurers, reinsurance companies, direct clients are still not typical in Vietnam.
Distribution channels through bancassurance and internet sale have been set up in Vietnam. However, the Vietnam market has shown that the development of bancassurance is still slow due to limit of commission for banks which may not be as competitive as commissions for brokers. Internet sales are slow as Vietnamese continue to prefer cash settlement for transactions.
Settlements through online banking have been just developed in Vietnam recently.
Headline market statistics and commentary
Drivers
Historical growth in premiums has been strong at approximately CAGR 25% for GI and 15% for LI between 2006 and 2012. This growth has been driven by:
One of the fastest growing economies in Asia in recent years (GDP CAGR c.7% between 2000 and 2012)
A growing and increasingly wealthy local population
The proportion of middle and high income people, with disposal income to spend on insurance products, has increased significantly from 47% in 2008 to 64%
in 2010 in major cities
Rapid urbanisation with better access to insurance products in urban areas
Historical population growth of around 1% p.a.
Potential barriers to entry
There are restrictions on foreign ownership when buying into a local insurance company with a maximum ownership cap of 49%. However, we have seen evidence of foreign insurers increasing their ownership over 49% after their initial investment but this is subject to Ministry of Finance/Government approval.
Application for an insurance licence as a wholly owned foreign insurer is a complex and very long process.
Generally poor levels of financial data and weak back office systems make due diligence challenging.
Frequent changes in regulations and their interpretation.
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Key developments and future outlook
Key issues
The use of life insurance savings policies is being somewhat constrained by the high inflationary environment in Vietnam where only approximately 5% of the population has life cover. However, the monetary policies implemented by the State Bank of Vietnam in the past two years have helped to reduce inflation from a high of 19% in 2011 to around 8% in 2012.
Vietnamese have historically favoured investment in gold over life insurance savings policies.
There are a large number of small GI insurers in Vietnam with 24 of the total 29 representing just 28%
market share by premium. The majority of these small operators are local and lack access to new capital needed for growth.
Commercial lines (which represent a significant proportion of general insurance in Vietnam) are starting to be constrained by a slowdown in industrial production and manufacturing activity following a slowdown in the wider economy in 2012 after the introduction of monetary policies by the State Bank of Vietnam in 2011.
The slowdown in the Vietnamese economy during 2012 has raised concerns over the sustainability of previously high investment income due to falling interest rates (although still high in a global context at around 12%).
Underdeveloped and often volatile capital and bond markets in Vietnam can make it difficult to plan investment strategies, estimate future investment income levels and assess investment asset valuations (impacting capital adequacy and solvency ratios).
Vietnam suffers from a lack of insurance technical expertise including qualified actuaries.
Local firms are increasing looking for strategic investors to improve know-how and technology.
Notable M&A activity during 2012 included Insurance Australia Group’s acquisition of 30% of the equity of AAA Assurance in April 2012 and HDI Gerling (a subsidy of the German Talanx Group) increasing its investment in PetroVietnam Insurance from 25% to 32% in July 2012.
Future outlook
The potential for growth remains positive due to market demographics and overall economic growth.
Both the General and Life insurance segments are growing at double-digit rates and total market premiums are forecast to increase by CAGR c.19% for general insurance and c.11% for life insurance up to 2017.
The growing and increasingly wealthy local population makes the market attractive and low penetration rates indicate scope for future sustained growth.
Local companies without a foreign strategic investor are likely to be open to talks on selling a minority stake provided this comes with a certain degree of technical support and expertise post acquisition.
Some local non-life insurers may expand into the life sector if they have sufficient technical and
capital support.
A number of GI companies listed on Vietnam’s two stock exchanges during 2011.
Key players and competition
Competitive environment
Vietnam has a small and under-developed insurance market but has been growing extremely rapidly. The overall insurance market in Vietnam earned VND 41.1 trillion (US$ 2.0 billion) premiums in 2012, an increase of 12% against 2011
Although insurance penetration (total
premiums/GDP) is currently low at around 1.4%
(0.6% for LI and 0.8% for GI), total market premiums are forecast to grow by CAGR c.19% for general insurance and c.11% for life insurance up to 2017
The market is dominated by a small number of large players in both the life sector (Prudential and Bao Viet Life) and non-life sector (Bao Viet and Petro Vietnam insurance)
There are currently 29 General, 11 Life and 2 Reinsurance companies along with 12 brokers operating in the Vietnamese market
• The life market is relatively concentrated with 12 players in the market and Prudential, Bao Viet and Manulife dominating the sector and holding a combined c.80% market share (by premiums).
The general insurance sector is less influenced by foreign players with the top 5 all being local companies and representing a combined c.72%
market share (by premiums). The sector is fairly fragmented with 24 of the total 29 operators making up the remaining c.28% of the market
Although new foreign insurers continue to enter the Vietnamese non-life insurance market, it continues to be dominated by Bao Viet and PetroVietnam
Insurance. These two insurers represented a
combined 45% of the total market premiums of VND 22.8 trillion in 2012
Total non-life insurance premiums increased 10% in 2012 (down from 21% in 2011)
The life insurance market is even more concentrated that the non-life market with the Prudential and Bao Viet Life representing 64% of total premiums in 2012
Total life insurance market premiums were VND 18.4 trillion in 2012, an increase of 15% from 2011.
Key players
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