5 Integración, pruebas y resultados
5.1 Comparación de modelos
The following is a brief summary of some of the key areas of regulation impacting on general insurance companies in Vietnam including:
the insurance regulatory body,
requirements for foreign insurance companies or foreign investors,
licensing of new insurance companies,
capital and solvency requirements,
policy liability reserving requirements and
pricing regulations and tariffs.
Insurance regulator
The insurance regulator is the Insurance Department of the Ministry of Finance (“MOF”). It supervises market conduct such as policy terms, conditions and tariffs, commissions and agent management. It also supervises companies’ financials including capital requirements, minimum solvency ratio and liability provisions etc.
We understand that the regulator cooperates closely with the Monetary Authority of Singapore (“MAS”) and Asian Development Bank (“ADB”) who have provided them with technical support.
The Insurance Law provides a basis framework and the legislative detail is contained in various regulations (decree) and guidelines. Important regulations and guidelines include the following:
Decree No 42/2001/ND-CP (1 August 2001) detailing the implementation of a number of articles of the Insurance law.
Decree No 43/2001/ND-CP (1 August 2001) sets out the financial regulations to insurance companies and insurance brokerage companies.
Circulars No. 98 and 99-2004-TT-BTC (19 October 2004) set out the implementation guidelines on Decree No 42 and 43 respectively.
Decree No 118/2003/ND-CP (13 October 2003) sets out the penalties for administrative violations of individuals or companies.
Decree No 115/1997/ND-CP (17 December 1997) sets the regulations on the Motor compulsory third party liability insurance.
Decree No. 46 released on 27 March 2007 implemented new rules on foreign insurers wishing to operate in Vietnam, and included a new solvency standard which will change the solvency standard for general insurers.
Up to March 2007, both local and foreign insurers were regulated by the same legal framework, with the same minimum capital requirements, solvency requirements, guaranteed deposits, reserving requirements and pricing requirements. However, many wholly-owned foreign insurers were subject to further restrictions such as in setting up of branches, selling compulsory insurance business etc.
These restrictions will be phased out after five years from the country’s WTO accession.
Participation by foreign insurers and other foreign investors including licensing requirements Foreign companies may participate in the Vietnamese insurance industry in one of three ways:
by purchasing shares of a domestic company,
by establishing a joint-venture (“JV”) insurance company, or
by establishing a fully foreign owned insurance company.
Insurers are not permitted to conduct both life and general insurance business simultaneously. One exception is that life insurers are allowed to sell personal accident and health care insurance as a supplement to life insurance.
Article 63 of the Insurance Law sets out the conditions to establish a company and the main prerequisites include:
meeting the minimum paid-up capital requirement,
lodging a formal application,
the form of the company and its charter must comply with the law and other regulations, and
the management personnel must have appropriate skills, expertise and professional qualifications in insurance.
With the advent of Decree No. 46 released on 27 March 2007, foreign applicants are further subject to the following requirements:
minimum assets of at least US$2 billion,
at least 10 years of experience as an insurer, and
must be licensed to operate in their country of origin.
An new licence application should include the following:
a written application requesting to establish an operation,
a draft charter of the company,
a 5 year business plan, specifying the methods of establishing insurance reserves, the company’s reinsurance program, the investment plan, business efficiency, solvency, and the economic benefits of the operation,
curricula vitae of the management personnel including certificates evidencing their skill, expertise and professional qualifications,
details of the capital contribution plans, including a list of organisations/individuals contributing more than 10% of the paid-up capital,
the financial status and/or other information regarding the shareholders, and
insurance rules, terms, premiums and commissions for each type of product planned to be sold.
The Ministry of Finance has advised that it will decide whether or not to grant a licence within 60 days from the date of receiving a complete application. Written notice with reasons will be given if an application is rejected.
Although foreign ownership is permitted in Vietnam, it has been carefully controlled to date.
Restrictions are often placed on operating licences to prevent writing certain lines of business.
Typically, foreign insurers were restricted to writing only business from foreign invested companies, but excluding motor and personal accident. These restrictions have been eliminated as a result of the country’s accession to the WTO. Although the current law still prevents foreign insurers from writing the business of state-owned enterprises and projects, the regulator has indicated that these restrictions will also soon be eliminated.
For foreign-invested companies (except for wholly owned foreign insurers), such companies may open one branch apart from their head office to conduct insurance business in the first year of operation. After three years of operation, up to two new branches are allowed. After five years of operation, the number of additional branches shall be based on the market demand as well as any international agreements the Vietnamese government has adopted. There is no additional minimum capital requirement for each new branch.
Wholly owned foreign insurers are restricted from establishing new branches within the first 5 years following Vietnam’s accession to the WTO unless a Bilateral Trade Agreement is in place between Vietnam and the country of origin of the foreign insurer.
Capital and solvency requirements
The minimum capital requirement under recently revised regulations for foreign general insurers is VND300 billion (approximately USD18.8 million). This is a substantial increase from VND70 billion (approximately USD4.4 million) under the previous regulations.
Furthermore, foreign applicants must deposit 5% of their paid-up capital with a commercial bank in Vietnam within 60 days after receiving their licence, and insurers are required to set up a hedge fund protecting clients against risks.
New restrictions have been placed on general insurers, limiting their investments in government bonds, corporate bonds and joint-ventures to 35% of their hedge funds.
We understand the reasons for recently increasing the minimum capital requirements are:
The regulation is aiming to increase the strength of the market.
The regulator intends to keep control of the market and avoid an overly fragmented market such as that currently in the Philippines and Thailand.
There is no additional minimum capital requirement for establishing additional branches once a licence is obtained. However, there is a restriction on the number of branches that can be set up in each year.
In terms of solvency, a company must operate with a solvency margin exceeding the maximum of 25% of retained premium and 12.5% of gross written premium written in the previous year.
The solvency margin is defined as the difference between the value of assets and liabilities, however the following assets are excluded in the solvency calculation:
capital investment in other insurance companies,
bad debts, and
rewards and welfare fund.
In the case of a joint-venture insurance company, the capital contribution by the Vietnamese parties must not be lower than 30% of the paid-up capital.
Policy liability reserving requirements
General insurance companies are required to set minimum policy liability provisions for both outstanding claims and unearned premiums although there is currently no requirement for certification of the reserves by an approved actuary. The rules are set out in regulatory Circular 99.
Outstanding claims
Outstanding claim reserves are required to be established by line of business using a statistical or actuarial methodology and must include appropriate allowance for incurred but not reported (IBNR) claims using a “chain-ladder” approach. This is a relatively new requirement of insurers, and it appears that very few of the existing insurance companies are likely to be able to meet these requirements at the present time due to not having retained sufficient historical policy and claims data in the past.
Unearned premium reserves
The required methodology for determining unearned premium reserves is consistent with international accounting requirements, based on 1/365, 1/24 or 1/8 methods.
Contingency reserves
Prior to 1 January 2006, insurance companies were required to maintain contingency reserves in order to compensate for future large claims or events in case the total net written premium in the financial year was potentially not sufficient to meet claims payments.
We understand that from January 2006, contingency reserves are no longer required and most insurers are now removing these reserves from their accounts.
Other reserves
Insurance companies are also required to set up a compulsory reserve fund. The purpose of this reserve is to supplement their paid-up capital and ensure the company’s solvency. The fund is set up by 5% of the annual after-tax profit each year, until the level of the compulsory reserve fund is equal to 10% of the company’s paid-up capital.
Pricing regulations and tariffs
In Vietnam, premium rate tariffs apply for “obligatory” forms of insurance only, including motor compulsory third party liability, aviation passenger liability, professional indemnity insurance for various professions, fire and explosion insurance, insurance of construction works, passenger and inflammable goods transportation, employer’s liability in respect of foreign invested companies and insurance cover for Vietnamese citizens travelling abroad.
A file and approval process applies for health and personal accident insurance. The insurers are required to file:
a request to the regulator to approve the product prior to the commencement of underwriting,
rules, terms and conditions, premium rates and commission rates,
formula and methods in calculating premiums and reserves, with explanations, and
relevant data including sample proposal forms, the sales tools and sample forms of information which the client must disclose and sign when purchasing the insurance.
For other products, the insurance companies are only required to file the rules, terms and conditions and premium rates (in Vietnamese, except for products subject to international practice such as aviation and marine which can be filed in English) with the regulator.
5.4 Market size and growth
The following chart shows the gross written premium (GWP) volumes of general insurance business in Vietnam in recent years in USD.
General insurance gross written premium - Vietnam
1999 2000 2001 2002 2003 2004 2005 2006
Year
million USD
Source: Swiss Re Sigma World Insurance Series
General insurance premium volumes in Vietnam have grown at a compound average rate of around 23% per annum since 1999 in local currency.
5.5 Market penetration
The following chart shows the market penetration indicators over the seven year period to 2006, namely market penetration rate (GWP as a percentage of real GDP) and the market density (GWP per capita).
General insurance penetration and market density in Vietnam
0.0%
Source: Swiss Re Sigma World Insurance Series
Although the Vietnam general insurance market has recorded very strong growth in premium volumes in recent years, penetration remains very low with annual gross written premium representing only 0.7% of GDP, among the lowest penetration rates in Asia (c.f. for Australia, the comparative figures are 3.1% of GDP).
5.6 Market share
As of March 2007, there were 22 licensed general insurance companies operating in Vietnam, comprising 13 domestic and 9 foreign companies. Among the domestic insurers, 10 were joint stock companies and 3 were state-owned. Five of the foreign insurers were 100% foreign-owned and 4 were joint ventures with local companies. American International Group (AIG) was the first foreign insurer granted a licence in Vietnam.
The Vietnam general insurance market is currently highly concentrated due to the immaturity of the market and predominance of the original state-owned insurance companies. At the end of 2006, the top 4 insurers had a combined market share of nearly 90%. The top 3 insurers in Vietnam’s general insurance market are Bao Viet, Bao Minh and PetroVietnam with a combined market share of 75%
by the end of 2006.
Bao Viet was a previously state-owned insurer with the Ministry of Finance as its principal shareholder. The company operates in more than 60 provinces and dominates in most lines of business. It writes all lines of business including life insurance. The market share of the company declined from 52% in 2000 to 35% in 2006. The company structure was changed in August 2007 to a joint stock company, with shares to be sold to local private investors, foreign investors and its own employees. The multinational financial services group HSBC has recently been announced as having been approved to buy 10% of shares in the company.
Bao Minh was another state-owned company which was partly privatised in 2004. The company writes only general insurance and had a market share of around 21% in 2006.
PetroVietnam Insurance is a wholly-owned subsidiary of an energy company, PetroVietnam. The insurance company writes all lines of business, and specialises in marine, engineering and energy insurance.
A high level breakdown of market share based on gross written premium in 2006 is shown in the following chart.
Vietnam general insurance market share by gross written premium in 2006
Bao Viet 35%
Bao Minh 22%
Petro Viet Insurance 18%
Other local domestic companies 18%
Foreign companies 7%
Source: Association of Vietnamese Insurers
General comments on domestic insurers
There are currently a number of key advantages for the domestic companies over foreign companies, including:
fewer restrictions in the type of business that can be written,
stronger relationships with the government, regulator and other local financial institutions (e.g.
banks),
a more well established distribution network with a more extensive reach, and
stronger brand recognition.
However, the local insurers also have some disadvantages, including:
a lack of insurance expertise and relatively weak management compared to foreign companies,
limited experience in product development, risk management, underwriting, claims management, actuarial, IT etc.,
limited focus on corporate governance, and
pressures on management in a changing environment through increased foreign competition and for state-owned companies, having to deal with privatisation.
General comments on foreign insurers
The main challenge for foreign companies is to establish appropriate distribution expertise in order to gain market share in a profitable manner, particularly compared to the larger domestic competitors that have much stronger distribution networks.
While gross written premium from foreign companies currently makes up only around 7% of the total general insurance market, we expect that the government’s plans for international integration will increase competitiveness in the market, thus reducing the dominance of domestic companies.
In addition, a number of opportunities are expected to emerge for foreign companies to take equity positions in previous state-owned companies as per the recent example with HSBC and Bao Viet mentioned earlier.
5.7 Business mix
The following chart shows the breakdown of 2006 gross written premium in Vietnam by line of business.
Vietnam general insurance business mix in 2006
Motor 27%
Engineering 13%
Property 10%
PA & Health 15%
MAT 30%
Miscellaneous 3%
Liability 2%
Source: Association of Vietnamese Insurers
In comparison to many other developing countries in Asia, general insurance business is relatively well diversified by line of business and is not dominated by motor business. This is mainly due to the present situation where there are significantly more motorcycles than cars on Vietnam roads.
Although motor business is an important line of business, other dominant lines of business include Marine, Aviation and Transit as well as property and engineering. These lines of business are predominantly from the commercial sector and are usually written with significant support from reinsurers due to the larger and more sophisticated nature of the risks.
The volume of personal lines of insurance other than motor business is very small due to the low levels of private home ownership and a general lack of community awareness of insurance. While the volume of personal accident and health insurance business written is significant at 15%, this business is predominantly sold on a group basis to corporations on behalf of employees.