Jurisdiction update: Vietnam's insurance market · Vietnam's insurance market has grown rapidly in...

UL

Y

Jurisdiction update:

Vietnam's insurance market

J

Further information

If you would like further information on any aspect of this note, please contact:

Samantha CampbellManaging Partner, Hanoi/Ho Chi Minh CityT +848 3829 [email protected]

Jeff OlsonPartner, Ho Chi Minh CityT +848 3829 [email protected]

Long HuynhSenior Associate, Ho Chi Minh CityT +848 3829 [email protected]

Chau NguyenAssociate, Ho Chi Minh CityT +848 3829 [email protected]

This note is written as a general guide only. It should not be relied upon as a substitute for specific legal advice.

Jurisdiction update: Vietnam's Insurance Market July 2015 1

INTRODUCTION

Vietnam's insurance market has grown rapidly in recentyears and continues to be considered a promisingmarket. In particular, the country’s demographic andeconomic development is expected to fuel furtherdemand for insurance services both in the non-life andlife sectors. In the last decade, Vietnam’s insurancesector has been transformed from a State-ownedmonopolist sector to a more open industry with bothdomestic and foreign insurers as new entrants.Vietnam’s international commitments, including itscommitments under WTO accession concessions andbilateral and multilateral market access arrangementssuch as the ASEAN Framework Agreement on Servicesand the Bilateral Trade Agreement with the US, havehelped to gradually liberalise this sector of the economyfurther. Notably, pursuant to the amended Law onInsurance Business, from 1 July 2011, foreign insurersare permitted to provide cross-border insuranceservices to the Vietnamese market. Also from 1 July2011, non-life foreign insurers are permitted to set upbranches in Vietnam.

MARKET OVERVIEW

The liberalisation of the country's insurance industryhas offered numerous investment opportunities toforeign insurers. Currently about 61 insurers areoperating in Vietnam, among these 29 non-lifeinsurance companies, 17 life insurance companies, 12insurance brokers, 2 re-insurance companies and onebranch of a foreign non-life insurer. The non-lifeinsurance market is still largely dominated by domesticinsurers. There are about 11 foreign-invested non-lifeinsurers out of a total of 29. With respect to lifeinsurance, foreign-invested insurers make up 15 of the17 life insurers, clearly dominating the market.Regarding brokerage services, seven domestic and fiveforeign-invested companies are operating in this area,with foreign firms making up more than 80% of themarket for brokerage services. BIDV Metlife, a lifeinsurance joint-venture company between the USMetLife and Vietnamese Bank for Investment andDevelopment of Vietnam (BIDV) was licensed in July2014 and started its operations from November of thesame year. The number of Vietnamese reinsurancecompanies increased to two reinsurers in 2011 with a

new player - PVI Re (PetroVietnam Reinsurance) - inaddition to Vietnam National Reinsurance Corporation(VinaRe), both of which are domestic companies.Korean insurer Seoul Guarantee Insurance (SGI), whowas licensed in August 2014, became the first foreignfirm to open a non-life branch office as well as the firstplayer to focus on guarantee insurance.

However foreign participation in the Vietnameseinsurance market still faces various regulatorychallenges. For example, the requirement that theforeign applicant must demonstrate USD2 billion inasset backing limits smaller (and, possibly, newer)entrants. In addition, Vietnamese law also requires thata foreign investor setting up a presence in Vietnam bean actual operator of insurance business when theforeign investor may prefer to hold the investment undera holding company.

INSURANCE REGULATORY FRAMEWORK

Vietnam’s insurance sector and the establishment andoperations of insurance companies and insurancebrokers are governed by a wide range of regulations,including the following:

• Law on Insurance Business No. 24/2000/QH10dated 9 December 2000 (as amended by Law No.61/2010/QH12 dated 24 November 2010) (“Law onInsurance Business”);

• Decree No. 45/2007/ND-CP by the Governmentdated 27 March 2007 providing guidelines for theimplementation of a number of articles of the Law onInsurance Business (“Decree 45”), as amended byDecree No. 68/2014/ND-CP by the Governmentdated 9 July 2014 (“Decree 68”);

• Decree No. 46/2007/ND-CP by the Governmentdated 27 March 2007 on the financial regime forinsurers and insurance brokers (“Decree 46”);

• Decree No. 123/2011/ND-CP by the Governmentdated 28 December 2011 providing regulations forthe implementation of the Law on InsuranceBusiness and amending Decree 45 ("Decree 123");

• Decree No. 98/2013/ND-CP by the Governmentdated 28 August 2013 on penalties for administrative

Jurisdiction update: Vietnam's Insurance Market

2 Jurisdiction update: Vietnam's Insurance Market July 2015

breaches in the insurance and lottery businesssectors (“Decree 98”);

• Decision No. 96/2007/QD-BTC by the Ministry ofFinance (“MoF”) dated 23 November 2007 issuingregulations on underwriting universal life insurance(“Decision 96”);

• Decision No. 193/QD-TTg by the Prime Ministerdated 15 February 2012 on the strategy fordevelopment of Vietnam's insurance market in theperiod 2011 – 2020 ("Decision 193");

• Decision No.1826/QD-TTg by the Prime Ministerdated 6 December 2012 approving the scheme onrestructuring of insurance companies together withrestructuring of securities market ("Decision1826");

• Circular No. 124/2012/TT-BTC by the MoF dated 30July 2012 providing guidelines for theimplementation of Decree 45 and Decree 123(“Circular 124”);

• Circular No. 125/2012/TT-BTC by the MoF dated 30July 2012 on the financial regime applicable toinsurers, reinsurers, insurance brokers andbranches of foreign non-life insurers (“Circular125”);

• Circular No. 194/2014/TT-BTC by the MoF dated 17December 2014 amending Circular 124 and Circular125 ("Circular 194");

• Circular No. 101/2013/TT-BTC by the MoF dated 30July 2013 providing guidance on the fund forprotection of policyholders ("Circular 101");

• Circular No. 135/2012/TT-BTC by the MoF dated 15August 2012 guiding the provision of unit-linkedinsurance products (“Circular 135”);

• Circular No. 115/2013/TT-BTC by the MoF dated 20August 2013 guiding pension insurance and fund ofvoluntary pension ("Circular 115");

• Circular No. 195/2014/TT-BTC by the MoF dated 17December 2014 on ranking, reviewing andclassifying insurance companies (“Circular 195”);and

• Joint Circular No. 86/2014/TTLT-BTC-NHNNVN ofthe MoF and the State Bank of Vietnam dated 2 July2014 guiding the insurance agent activities of creditinstitutions, branches of foreign banks for lifeinsurance companies (“Joint Circular 86”).

The MoF is the regulator of the insurance industry andits authority includes the issuance of establishment andoperating licences for insurers and insurance brokers

as well as the supervision of their operations. TheInsurance Supervisory Authority (“ISA”, which is part ofMoF) assists the MoF in supervising the insurancebusiness and market in Vietnam. The MoF and ISAhave been instructed under Decision 193 of the PrimeMinister to comply with all principles on insurancemanagement and supervision issued by theInternational Association of Insurance Supervisors(“IAIS”).

TYPES OF INSURANCE PRODUCTS

Vietnam’s Law on Insurance Business generally dividesinsurance business into three (3) categories: (i) lifeinsurance, (ii) non-life insurance and (iii) healthinsurance. An insurer is not permitted to simultaneouslycarry out life and non-life insurance business. However,a life insurer may concurrently provide personalaccident and health care insurance as a supplement toits life insurance operations. In addition, an insurancecompany is required to operate within the scope ofactivities set out in its establishment and operationlicence as granted by the MoF.

Life insurance

Permitted life insurance products include whole lifeinsurance, pure endowment insurance, term lifeinsurance, endowment insurance, annuity insurance,investment linked insurance and pension insurance.Life insurers must comply with insurance regulations,clauses and premium scales ratified by the MoF whenproviding life insurance products and personal accidentand health care insurance ancillary to life insuranceproducts.

In addition to traditional life insurance protection,investment linked insurance is a new field in theVietnamese insurance industry allowed by the MoFsince 2007. Investment linked insurance combinesbasic life insurance protection with an investment


vehicle. Under Vietnamese law, there are two policytypes of investment linked insurance, namely universallife insurance and unit-linked insurance.

• Put simply, with universal life insurance, premiumsfrom policy-owners form an indivisible universal lifefund and policy-owners share in the results frominvestments made from such fund, provided that thereturn must not be less than the minimuminvestment rate which the insurer undertakes in theinsurance contract.

• With respect to unit-linked insurance, premiums frompolicy-owners may be separated into different unit-linked funds with different investment targets. Unit-linked funds are divided into equal units. Policy-owners of unit-linked insurance may decide to investtheir insurance premiums to purchase certain unitsof the unit-linked funds and enjoy the investmentbenefits as well as incur the investment risk from theunit-linked funds chosen.

Different from traditional life insurance products wherecustomers' premiums are invested in safe channelssuch as treasury bonds, premiums from investment-linked insurance are funnelled into possibly moreprofitable (and riskier) channels such as the securitiesmarket or real estate. Therefore, the development ofinvestment-linked products tends to follows closely thegrowth of available investment channels. With itsintroduction of legislation on open-ended funds effectivefrom 1 March 2012, Vietnam attempts to provideadditional channels to grow the securities market. Anumber of life insurers have launched investment-linkedinsurance products (e.g. Prudential, Manulife, AIA etc.)and investment-linked insurance may continue to growas the Vietnamese become more familiar with thecombination between insurance and investment andmore confident in the sustainability and sustainablegrowth of investment channels (securities, real estate,etc.) while, at the same time, becoming more willing toaccept additional risks and volatility for theirinvestments.

In August 2013, the MoF issued Circular 115, its first-ever specific regulations on pension insurance andvoluntary pension funds. In addition to Vietnam’scompulsory social insurance scheme which providespension benefits, pension insurance is a voluntary formof savings to fund retirement and may be in the form ofindividual insurance or group insurance. Group pensioninsurance is maintained by companies and providesinsurance benefits to the companies’ coveredemployees on retirement.

Non-life insurance

Non-life insurance products include property insuranceand damage insurance, insurance for goods in transitby road, sea, river, rail and air, aviation insurance,motor vehicle insurance, fire and explosion insurance,marine hull and ship owner’s civil liability insurance,public liability insurance, credit and financial risksinsurance, business loss insurance, agricultureinsurance and guarantee insurance, which was addedas a new non-life product by Decree 68 effective from25 August 2014.

Vietnamese law sets out certain forms of compulsoryinsurance in respect of which (i) the MoF promulgatesthe applicable insurance regulations, clauses, premiumscales and minimum sums insured and (ii) a licensedinsurer must not refuse to underwrite.

Current compulsory insurance includes:

a) Civil liability insurance for motor vehicle owners;

b) Civil liability insurance for aviation carriers topassengers;

c) Professional indemnity insurance for legalconsultancy activities;

d) Professional indemnity insurance for insurancebrokers; and

e) Fire and explosion insurance.

Although Vietnamese law provides for certain othermandatory professional liability insurance in certainindustries (e.g. construction, securities, fundmanagement, auditing, asset evaluation, notary etc.),those are not categorised as compulsory insurance asthe MoF does not control the standard terms andconditions as well as premium scales and minimumsums insured of these insurances and a licensedinsurer is not obliged to accept underwriting them.

For non-compulsory products, non-life insurers mayadopt and implement their own insurance regulations,clauses and premium scales and are not required toobtain prior MoF approval for these. However, the MoFmay also request a non-life insurer to ceaseunderwriting products, where their rules, terms andconditions and premium rates fail to ensure the financialsafety of a non-life insurer or the rights of policy-owners, and request the insurer to make specificamendments to such policies and their terms.

Health insurance

Effective from 1 July 2011, Vietnam's Law on InsuranceBusiness recognises health insurance as a new subsetof insurance products which includes: personal accident


insurance, medical expenses insurance and health careinsurance. Insurance regulations, clauses and premiumscales of health care insurance products must beratified by the MoF. Prior to 1 July 2011, these werecategorised as non-life insurance generally and couldtherefore be provided separately either by non-lifeinsurers or by life insurers as part of a life insurancepackage. In the latter scenario, the life insurers aim toprovide a comprehensive insurance coverage thatincludes a main insurance product, such as whole lifeinsurance, plus a rider such as accident insurance ordependent support. This continues to be permittedunder the new classification.

REINSURANCE

In Vietnam, an insurer is only permitted to retain amaximum liability on each risk or on each loss at nomore than 5% of its equity. The maximum level ofretention of liability applicable to a reinsurer is 10% ofits equity. An insurer or reinsurer must therefore cedethe portion of liability exceeding the applicablethresholds to other insurers or reinsurers. Having saidthis, insurers may only transfer part of the liability whichthey have insured to one or more “reinsurers”, includingto other insurers or overseas (re-)insurers. This is toavoid potential abuse by reinsurers to earn reinsurancecommission while the original insurers are actuallyincapable of underwriting the direct insurance. Anyregular insurer may accept to reinsure part of the

liability for which another insurer has acceptedinsurance, as may proper reinsurers.

Foreign insurers are permitted to provide unrestrictedcross-border reinsurance services. However, cedingreinsurance to overseas reinsurers may not beimplemented on more favourable conditions than thosefor ceding reinsurance to domestic reinsurers. Whenaccepting to reinsure liability of a Vietnamese insurer, aforeign leading reinsurer and foreign reinsurers of morethan 10% of the total liability under the policy must haveat least a “BBB+” rating by S&P or Fitch, a “B++” ratingby A.M.Best, or a “Baa1” rating by Moody’s, or theymust have been granted equivalent ratings in the mostrecent fiscal year. If an insurer is reinsured by anoverseas company of the same group which does nothave any of the above mentioned credit ratings, theinsurer must submit to the MoF a written confirmationby the insurance regulator of the home country of suchreinsuring group company certifying that suchreinsuring group company ensures its solvency in thefiscal year preceding the year of receiving reinsurance.

DISTRIBUTION CHANNELS

Insurers may distribute their products directly, viainsurance agents and insurance brokers, via tenderingor other channels consistent with the law. Insurers inVietnam tend to use multichannel distribution strategies,including agents, bancassurance, and telemarketing.


Bancassurance has developed rapidly in Vietnam since2007 and more insurance companies are usingbancassurance to expand their market share.

Agents

The agency model has been and will continue to be amajor distribution channel in Vietnam especially giventhe distribution challenges posed by the country’sgeography and infrastructure.

Under authorisation granted by an insurance company,insurance agents may offer and sell insurance, arrangefor the conclusion of insurance contracts, collectpremiums, deal with claims for indemnity and payinsurance proceeds upon occurrence of insured eventsand undertake other activities related to theperformance of an insurance contract. Agentscomprise corporate agents and individual agents.

• An individual agent is required to have a practisingcertificate issued by a training establishment (e.g.the Association of Vietnam Insurers, insurancecompanies or training entities) approved by the MoF.The MoF also provides mandatory guidelines for thenecessary program, contents and form of trainingrequired to obtain these certificates.

• Corporate agents are duly incorporated companiesunder Vietnamese law and must employ dulylicensed individual agents who directly performagency services.

Vietnamese law prohibits officers and staff of an insurerfrom acting as insurance agents for the same insurer. Inaddition, insurance agents tend to be exclusive agentsas agents (both corporate and individual) of one insurerand may not simultaneously act as agents for otherinsurers, unless their principal approves.

Insurers operating in Vietnam must comply with themaximum permissible rates of insurance agencycommissions set out by the MoF, for example: 0.5% -20% for non-life insurance, 5%-50% for life insurance,20% for health insurance and 10% for guaranteeinsurance depending on specific scenarios.

In accordance with Joint Circular 86 regulatingbancassurance activities, from 1 September 2014,credit institutions and branches of foreign banks maycarry out activities as insurance agents for lifeinsurance companies if so approved in their operationallicence. Credit institutions and branches of foreignbanks cannot concurrently act as agents for another lifeinsurance company unless the current life insurancecompany approves so in writing.

Brokers

Insurance brokers must be licensed by the MoF andonly enterprises may act as brokers. Brokers provideinformation on types of insurance, policy terms andpremiums, and general information on insuranceenterprises to insurance buyers. Brokers may also helpthe insurance buyers to assess and manage risk, selectsuitable insurance products, and negotiate and enterinto insurance contracts. Normally a broker representsthe insurance buyer but receives its commissionpayment from the insurance company. Brokerageservices are most commonly utilised in non-lifeinsurance such as liability insurance, personal accidentand health insurance, property insurance, or generalliability insurance. In practice, local insurance buyerstend to be not fully aware of the role of insurancebrokers. In particular, small and medium-sizedbusinesses in Vietnam tend to contact insurancecompanies directly.

The maximum insurance brokerage commission foreach insurance service arranged by a broker must notexceed 15% of the actual insurance premium collectibleby the insurance company.

FOREIGN INVESTMENT IN THE INSURANCESECTOR

Under Vietnam’s current WTO commitments (and otherinternational agreements providing for most-favourednation status), Vietnam is more clearly required topermit foreign-invested insurance companies to operatein Vietnam and the pace of approvals has picked up(although it can still take from 2-3 years before the MoFissues the relevant approval for foreign-investedinsurers). Since 1 January 2008, 100% foreign-investedgeneral insurers may apply to engage in statutoryinsurance business, including motor vehicle third partyliability, insurance in construction and installation,insurance for oil and gas projects, and insurance forprojects and construction works of high danger to publicsecurity and the environment. With an aim to fulfilVietnam’s international undertakings in the insurancesector, a number of legal instruments guiding the Lawon Insurance Business have been amended or issuedin order to simplify and reduce administrativeprocedures and to make these legal instrumentsconsistent with the developmental status of theinsurance market and with international standards oninsurance management and supervision, ensuringpublicity, transparency and equality for all entitiesparticipating in the market.


Forms of business

Legal entities

Foreign insurers and brokers may establish a 100%foreign-owned insurance company or cooperate with alocal insurer in the form of a joint venture enterprise. Ina number of instances, foreign investors haveestablished joint ventures with local partners as ameans to significantly reduce red tape for theestablishment and to facilitate the distribution of theirproducts. As noted above, there are currently 15foreign-invested life insurance companies (including 4joint ventures and 11 wholly foreign-owned companies),11 foreign-invested non-life insurance companies(including 3 joint ventures and 8 wholly foreign-ownedcompanies), and 5 wholly foreign-invested insurancebrokerage companies operating in Vietnam.

Representative offices or branches

An alternative way of achieving a presence in Vietnamis the establishment of a representative office or abranch. Under local law, a representative office doesnot constitute a "business" entity, which means that it isprohibited from engaging in profit-generating activities.Accordingly, foreign insurers have usually not shownmuch interest in setting up a representative office if theywish to expand their activities in Vietnam, althoughrepresentative offices have proved useful during thelicensing process. As mentioned earlier, underVietnam's WTO commitments, foreign insurers havebeen permitted to establish in Vietnam as a branch ofan overseas insurer for non-life insurance businessfrom 2012 onward. This commitment was reflected inthe amendments to the Law on Insurance Business in2010 which have already anticipated this requirementso that, starting 1 July 2011, non-life foreign insurersare permitted to set up branches in Vietnam. Onlyrecently, a branch office of a foreign insurer wasestablished for guarantee insurance activities following

the permission of this new insurance product providedin Decree 68. As no commitment on life insurancebranches has been made, the establishment of lifeinsurance branches is subject to local legislation only.There is no explicit prohibition on the establishment of alife insurance branch by a foreign insurer; however, asfar as reported, no branches of foreign life insurancecompanies have been established to date.

Cross-border supply

Foreign insurance enterprises may provide insurance toenterprises incorporated in Vietnam with more than49% foreign-owned capital and foreigners working inVietnam. In order for an insurer or an insurance brokerto provide cross-border insurance or insurancebrokerage services, it must satisfy certain conditionssuch as:

• Its head office must be in a country with whichVietnam has already signed international tradeagreements regarding the supply of cross-borderinsurance into Vietnam (e.g. a WTO member);

• Having lawfully operated for at least 10 years andnot violated insurance regulations for at least threeyears before providing cross-border service intoVietnam;

• Being licensed by the insurance regulator of itshome country to provide such services;

• Providing cross-border insurance services inVietnam through an insurance brokerage enterpriselicensed in Vietnam; and

• Other conditions regarding the minimal assetbacking (USD2 billion applicable to offshore insurersor USD100 million applicable to offshore brokers),credit rating (at least a “BBB+” rating by S&P orFitch, a “B++” rating by A.M.Best, or a “Baa1” ratingby Moody’s or equivalent ratings), profitableoperations in the last three years, security deposit ofat least VND100 billion (about USD5 million) with aVietnam-incorporated bank, etc.

Investment conditions

A foreign insurer establishing an insurance company oran insurance brokerage company must satisfy certainconditions: notably, (i) have 10 years' experience ininsurance operations; (ii) have assets of at least USD2billion in the year prior to the year of lodging theapplication file (for an insurance company); (iii) havebeen profitable for a period of three consecutive yearsprior to the year of lodging the application file and (iv)receive the approval of the insurance regulator of thehome country of the foreign insurer.


In addition to these, to set up a non-life branch, aforeign insurer must satisfy a number of additionalconditions, such as (i) such insurer must be head-quartered in a jurisdiction with which Vietnam hassigned commercial treaties that allow the establishmentof branches of foreign non-life insurance businesses inVietnam and (ii) the insurance regulator of the homecountry of the foreign insurer has signed a cooperationagreement with the MoF in relation to the managementand supervision of the activities of branches of foreignnon-life insurance businesses in Vietnam.

Capital and solvency requirements

The minimum levels of “legal capital” applicable tovarious insurance activities are set out below:

Activities Legal capital

Non-life insurance (excludingaviation and satelliteinsurance) and/or healthinsurance

VND300 billion(approximately USD15million)

Additional capital required foraviation insurance andsatellite insurance

plus VND50 billion(approximately USD2.5million) for each type ofinsurance

Life insurance (includinghealth insurance, butexcluding investment linkedinsurance and pensioninsurance)


Additional capital required forunit-linked insurance

plus VND200 billion(approximately USD10million)

Additional capital required forpension insurance

owner’s equity of at leastVND1 trillion (approximatelyUSD50 million)

Reinsurance (non-life and/orhealth insurance)


Reinsurance (life or life andhealth insurance)


Reinsurance (all types ofinsurance)

VND1,100 billion(approximately USD55million)

Non-life branches VND200 billion(approximately USD10million)

Activities Legal capital

Insurance brokerage (directinsurance or reinsurance)

VND4 billion (approximatelyUSD200,000)

Insurance brokerage (directinsurance and reinsurance)

VND8 billion (approximatelyUSD400,000)

Additional capital required forinsurance companies withmore than 20 branches andrepresentative offices

plus VND10 billion(approximatelyUSD500,000) for eachadditional branch orrepresentative office

*Note: USD-equivalent is converted based on exchange rate of USD1= VND20,000 for ease of reference. Actual exchange rate is differentand may change from time to time. The current market exchangerate is USD1 = VND21,850 as of 1 July 2015.

In Vietnam’s context, the term “legal capital” refers tothe minimum amount of registered and paid-up capitalthat the investors (members in a limited liabilitycompany and shareholders in a joint stock company)are required to contribute as owner’s equity to thecompany before such company may commencecommercial operations. Depending on the insurer’srequirements, the charter capital may be furtherincreased and/or its operations may additionally befunded by debt.

In addition to the legal capital requirement, insurersmust use a part of their paid-up charter capital to pay asecurity deposit into a commercial bank operating inVietnam at 2% of the applicable legal capital. An insurermay only use its security deposit to meet undertakingsto policy-owners when it is insolvent and upon writtenapproval of the MoF. Once used, the insurer is obligedto pay an additional security deposit equivalent to theamount used within 90 days.

With respect to pension insurance, insurers mustmaintain a voluntary pension fund, the assets of whichconsist of (i) at least VND200 billion (approximatelyUSD10 million) contributed by the insurance companyfrom its owner’s funds and maintained throughout theoperation of the fund, (ii) insurance premium and (iii)assets generated from investment activities using theforegoing sources. Pension fund must not be used topay for administrative fines, debts and any other

purposes not relating to such pension fund. All assetsformed from premium paid belong to the insured.

In general, an insurer operating in Vietnam is requiredto:

• Continuously maintain its paid-up charter capital(owner’s capital) at no less than the legal capital;


• Set up premium reserves (for paying out itsinsurance liabilities determined in advance andarising from insurance contracts which it has enteredinto);

• Always maintain its solvency at no less than theminimum solvency margins set out by law. Inparticular, life insurers that provide unit-linkedinsurance or pension insurance must respectivelymaintain their solvency margins at least VND200billion (approximately USD10 million) or VND300million (approximately USD15 million) higher thanthe minimum solvency margins;

• Contribute 5% of after-tax profits annually toestablish its compulsory reserve fund (to bemaintained up to 10% of the charter capital); and

• Make contributions to the policy-owner protectionfund maintained centrally at the Association ofVietnamese Insurers ("AVI"). The fund is to protectinsured persons in the event that the insurerbecomes insolvent or bankrupt. Contribution for thisfund is announced by the MoF annually but currentlydoes not exceed 0.3% of total premium revenuefrom primary insurance contracts of an insurer.Contributions are made until the accumulated fundamounts to 5% of total assets of a general insurer or3% in the case of a life insurer.

As mentioned above, whether a life insurer is permittedto underwrite unit-linked insurance or pension insurancedepends on its solvency margin. Therefore, it is unlikelythat the MoF would approve for newly-establishedinsurance companies to provide those types ofinsurance products. Rather, the MoF would need toreview the solvency margins of a life insurancecompany throughout some years of operation beforeratifying for a life insurance company to provide theseproducts.

It should also be noted that Vietnam has implementedanti-money laundering legislation, under whichinsurance companies are obliged to establish internalregulations on anti-money laundering, collect, verify andmonitor information about their clients, report to theState Bank of Vietnam and take particular measures(e.g. postponement of transactions or freezing ofaccounts, sealing or seizing assets based on decisionsof state authorities) where transactions are suspicious,of a high value or carried out by 'risky' clients.

Possible channel of investments

An insurer may make investments from its (i) equity, (ii)so-called “idle capital” (akin to premium reserves minusfunds for regular pay-outs), and (iii) any other lawfulsources of funds. Vietnamese law requires thatinvestments from each source be accounted forseparately. An insurer is expressly prohibited from:


• Borrowing loans for direct investments or entrustedinvestments in securities, real estate or capitalcontribution to other enterprises; and

• Reinvesting in any form in its shareholders or itsaffiliated persons/entities, except for deposits withshareholders being credit institutions.

Investments from owner's capital

Subject to the MoF's prior approval, insurers areallowed to make offshore investments from its equitywhich exceeds the legal capital level or the minimumsolvency margin. At present, such offshore investmentcan only be made to set up offshore insurancecompanies or an offshore insurance branch. SomeVietnamese non-life insurers have initiated the trend ofinvesting offshore, like Post and TelecommunicationsJoint Stock Insurance Corporation (“PTI”), whichinvested in the Laos insurer Lane Xang AssurancePublic Insurance Joint Stock Company in 2011) orBIDV's Insurance Company (“BIC”), which invested inthe Laos-based Laos-Vietnam Insurance Joint Venturein 2008 and in the Cambodia-based Cambodia-VietnamInsurance Company Plc in 2009.

With respect to domestic investment, insurers mayinvest their surplus equity (i.e. after ensuring theirinfrastructure costs and operational expenses) asfollows:

Type of Transaction Limitation oninvestment

Non-lifeinsurers/healthinsurers/reinsurers/ brokers/non-lifebranches

1) Purchase of Governmentbonds or Government-guaranteed bonds ofenterprises, or depositswith credit institutions

Unlimited

2) Purchase of shares,unsecured bonds ofenterprises, and capitalcontribution in otherenterprises

Not to exceed 35% ofidle capital frominsurance reserves

3) Real estate business andlending


Lifeinsurers


Unlimited






Premium investment

As seen in other emerging markets, for example China,restrictions on premium investments can present amajor challenge. Due to foreign exchange restrictions,insurers are in practice limited to investing theirpremiums onshore. Insurers may only invest their “idlecapital” (akin to premium reserves minus funds forregular pay-outs) as follows:

Type of Transaction Limitation oninvestment

Non-lifeinsurers/healthinsurers/reinsurers/brokers/non-lifebranches


Unlimited


Not to exceed 35%of idle capital frominsurance reserves



Lifeinsurers


Unlimited





Reinsurance companies conducting business in lifereinsurance, non-life reinsurance and healthreinsurance must conduct separate cost accounting forinvestments made from idle capital from insurancereserves for each type of reinsurance. Idle capital frominsurance reserves of reinsurers may be investedseparately and subject to the same limitationsapplicable to each type of life reinsurance, non-lifereinsurance and health reinsurance. Presently, the twomain investment channels include deposits at local orforeign-invested banks and trading in governmentbonds. Although the private bond market has recentlyseen increased activity, Vietnam’s stock market and

real estate markets remain volatile. Of note, a numberof (both local and foreign-invested) insurancecompanies have established their own fundmanagement arms.

Despite the foregoing, it should be noted that the MoFis to adopt specific prohibitions, channels andthresholds applicable to investments made from theassets of unit-linked funds and pension funds.

M&A challenges

As an alternative (or in addition, for that matter) tosetting up a new company, foreign insurers may acquireshares/equity in existing insurance companies inVietnam. Foreign investors can also purchase shares ina listed/unlisted company or in an “equitised” (akin toprivatised) State-owned insurer. Under local law, everytransaction that involves the transfer of 10% or more ofthe charter capital of a target insurance company, aswell as every transaction (a) that would result in ashareholder with a shareholding of less than 10%owning 10% or more of the charter capital of a targetinsurance company, or (b) following which ashareholder with a shareholding of more than 10% ofthe charter capital of a target insurance company wouldhold less than 10%, is subject to the prior approval ofthe MoF.

If acquiring capital contributions in an existing insurerwhich operates in the form of a limited liability company,foreign investors can acquire up to 100% of an existinginsurance company. For example, in late 2005,Australia's QBE Insurance Group Ltd. bought AllianzGeneral Insurance (Vietnam) Co. Ltd. from Germaninsurer Allianz AG and from the International FinanceCorporation to convert the company into QBEInsurance (Vietnam) Co. Ltd. In 2007, Japanese Dai-ichi Life Insurance successfully acquired the entirecapital contributions in Bao Minh CMG, a joint venturebetween local Bao Minh Joint Stock Company andAustralian Colonial Mutual Life, converting it into awholly foreign-owned life insurance company.

If acquiring shares in an existing shareholdinginsurance company, the following foreign ownershipcaps will apply:

• The maximum shareholding by an individualshareholder is limited to 10% of the charter capital ofthe target company;

• The maximum shareholding by an institutionalshareholder is limited to 20% of the charter capital ofthe target company; and

• The maximum shareholding owned by a shareholderand related persons/affiliates in aggregate is limitedto 20% of the charter capital of the target company.


An institutional shareholder may own more than 20% ofthe shares of a shareholding insurance company in thefollowing cases:

a) Ownership of shares for the purpose of restoringthe solvency of an insurer and reinsurer in case ofinsolvency;

b) Ownership of shares by the State in an insurer orreinsurer in accordance with a restructuring plan; or

c) Ownership of shares by a strategic institutionalshareholder subject to the MoF's approval. Suchapproval is subject to the following conditions:

i. An asset base of at least USD2 billion;

ii. Profitable operations (without accumulatedlosses) during the last three years precedingthe application;

iii. Operating experience in the finance, bankingor insurance sector of at least five years; and

iv. Committing not to withdraw capital from thetarget company for three years.

If acquiring shares in a public company1, foreign

shareholding in such companies are currently limited at49% in the aggregate. However, new Decree60/2015/ND-CP which was issued on 26 June 2015 andcomes into effect on 1 September 2015 will allow formajority control of public companies by foreigninvestors in the insurance sector.

In the last decade, Vietnam has privatised its majorState-owned insurers by converting them into joint stockcompanies (including the privatisation of Bao VietInsurance Corporation, the country’s largest life andnon-life insurance corporation, in 2005 and Bao MinhInsurance Corporation, the country’s second largestinsurer, in 2004). Whilst the State remains the majorityshareholder in Bao Viet and Bao Minh, Sumitomo LifeInsurance has acquired an 18% shareholding in BaoViet Holdings and AXA became a foreign strategicinvestor with the holding of its 16.65% stake in BaoMinh. Another financial and insurance group ofVietnam, PVI Holdings also has Funderburk LighthouseLimited and Germany’s HDI-Gerling Versicherungs AG(part of the Talanx Group) as shareholders with a 12%

1 Under the Law on Securities, a joint stock company is a public company ifit: (i) has made a public offer of shares; (ii) has shares listed on a stockexchange; or (iii) has shares owned by at least 100 investors (excludingprofessional securities investors) and paid-up charter capital of VND 10billion or more (USD 500,000). A professional securities investor can be acommercial bank, financial institution, finance leasing company, insurancebusiness organisation or securities business organisation.

and 25% stake respectively. In 2008, SwissRe acquired25% of the Vietnam National Reinsurance Corporation(Vinare), after Vietnam’s main State-owned reinsurerwas privatised.

OTHER CONSIDERATIONS AND OUTLOOK

Vietnam’s insurance market is often viewed as apromising growth market. For example, with apopulation of more than 90 million and a penetrationlevel of below 10%, the life insurance sector hasimmense growth potential in this market. Premiumdevelopment in recent years also shows strong growthin the non-life sector, possibly supported by the sectorfor statutory insurance having been opened to foreign-invested insurers.

At the same time, Vietnam's economic challengescontinue to create uncertainty for insurers andVietnam’s risk-rating remains high pursuant to A.M.Best's CRT-5 (Country Risk Tier 5) category rating forVietnam – the highest tier for countries considered topresent the most risk.

However, with its high premium growth and a steadilygrowing insurance customer base, Vietnam’s insurancemarket appears promising and its development shouldbe further supported with the country adoptinginternational insurance business best practices andstandards.


INTRODUCTION 1

MARKET OVERVIEW 1

INSURANCE REGULATORY FRAMEWORK 1

TYPES OF INSURANCE PRODUCTS 2

Life insurance 2

Non-life insurance 3

Health insurance 3

REINSURANCE 4

DISTRIBUTION CHANNELS 4

Brokers 5

FOREIGN INVESTMENT IN THE INSURANCE SECTOR 5

Forms of business 6

Legal entities 6

Representative offices or branches 6

Cross-border supply 6

Investment conditions 6

Capital and solvency requirements 7

Possible channel of investments 8

Investments from owner's capital 9

Premium investment 10

M&A challenges 10

OTHER CONSIDERATIONS AND OUTLOOK 11

Contents

www.hoganlovells.com

Hogan Lovells has offices in:

AlicanteAmsterdamBaltimoreBeijingBrusselsBudapest*CaracasColorado SpringsDenverDubai

DusseldorfFrankfurtHamburgHanoiHo Chi Minh CityHong KongHoustonJakarta*Jeddah*Johannesburg

LondonLos AngelesLuxembourgMadridMexico CityMiamiMilanMonterreyMoscowMunich

New YorkNorthern VirginiaParisPerthPhiladelphiaRio de JaneiroRiyadh*RomeSan FranciscoSão Paulo

ShanghaiSilicon ValleySingaporeSydneyTokyoUlaanbaatarWarsawWashington DCZagreb*

"Hogan Lovells" or the "firm" is an international legal practice that includes Hogan Lovells International LLP, Hogan Lovells US LLP and their affiliated businesses.The word "partner" is used to describe a partner or member of Hogan Lovells International LLP, Hogan Lovells US LLP or any of their affiliated entities or any employee or consultantwith equivalent standing. Certain individuals, who are designated as partners, but who are not members of Hogan Lovells International LLP, do not hold qualifications equivalent tomembers.For more information about Hogan Lovells, see www.hoganlovells.com.Where case studies are included, results achieved do not guarantee similar outcomes for other clients. Attorney Advertising.

©Hogan Lovells 2015. All rights reserved. HKGLIB01#1440616

*Associated offices

Jurisdiction update: Vietnam's insurance market · Vietnam's insurance market has grown rapidly in...

Documents

Transcript of Jurisdiction update: Vietnam's insurance market · Vietnam's insurance market has grown rapidly in...