Jun
14
Vietnam Insurance Industry to Grow
By Marius | Published June 14, 2011
A new report published by worldwide insurance rating and information agency A.M Best Co predicts substantial change will occur within the Vietnamese insurance industry as the country’s regulatory framework evolves, allowing the market to open up further for foreign companies to share their capital and technical expertise.
In the special report, titled “Vietnam’s Insurance Market Awakening to Further Change,” AM Best reveals that the country’s insurance market has been growing at a brisk pace in recent years, with total direct written premiums increasing 20 percent annually since moves were first made to liberalize the industry in 2008. However, when considering its’ true size, the insurance market remains underdeveloped and small in comparison to many of its Southeast Asian neighbors. According to the Association of Vietnamese Insurers, total premiums for 2010 amounted to VND 30.8 trillion (US$ 1.57 billion), a paltry figure for a country of almost 90 million people.
Vietnam’s continued demographic and economic development will fuel further demand for insurance. The country’s promising trade and industry sector has bolstered economic growth, with gross domestic product (GDP) rising 6.8 percent in 2010. The burgeoning economy, with an emerging middle class that is aware of insurance services, has already had a profound effect on the non-life insurance sector. As per capita wealth increases, AM Best notes that more people move from owning bicycles up to mopeds and cars. Similar to other Southeast Asian insurance markets, compulsory motor third-party liability coverage has been a critical growth component to the overall insurance market. Motor insurance represents the largest segment of Vietnam’s non-life sector, with motor insurance comprising 31 percent of Vietnam’s direct written premiums for 2010.
There are currently 29 insurance companies operating in Vietnam’s non-life market, with more expected to follow due to the potential for growth. The intense competition has however made profitable underwriting difficult to achieve in the current environment, especially in personal and small commercial lines. As the market has opened up, the 4 big, partially state-owned non-life insurers have been losing market share to smaller largely-foreign competitors who have implemented aggressive growth strategies at the expense of cost-effective underwriting. While local insurers have controlled the market in personal lines, most lack the sufficient capacity and expertise to establish a presence in commercial lines. AM Best notes that foreign firms will be better placed to provide both personal and commercial non-life insurance in Vietnam.
Speaking at the release for the study, Arina Tek, financial analyst for A.M. Best, further commented: “The operating environment is expected to remain competitive in the near term and stronger players are expected to emerge as a tougher regulatory framework is rolled out. Some insurers are expected to unveil plans to list on domestic stock exchanges and to become financial holding companies.”
In the report, AM Best explains that in addition to competition, underwriting losses in the non-life sector have been attributed to high operating costs, an increased frequency and severity of insured losses, difficulties policing fraudulent claims and in collecting sufficient data to price certain risks accordingly. Vietnam’s insurance companies have also suffered staffing challenges common to a rapidly emerging market (small existing talent pool, high turnover) and will need to bolster their recruitment efforts to ensure the industry can grow both larger and smarter.
Non-life insurers in Vietnam are expected to continue relying comprehensively on reinsurance services to meet regulatory demands and support their large-risk portfolios. Current rules stipulate that local insurers are not permitted to retain risks exceeding 10 percent of their paid-in capital. The pronounced potential catastrophe risks in Vietnam including threats of heavy typhoons and floods are also driving a need to purchase reinsurance.
Towards the end of the report, Vietnam’s evolving life insurance market is also examined. The life insurance industry in Vietnam is less crowded than the non-life sector, with only 12 registered insurers operating in the country and direct life premiums written amounting to VND 13.79 trillion in 2010 (US$ 673 million). Foreign insurers have dominated the market thus far, and have brought with them substantial capital, expertise and innovative distribution platforms to sell a largely unknown product to the Vietnamese people.
AM Best head of market analysis, Yvette Essen, felt that the impact of international insurers on the life insurance market had been positive. “The life market is evolving, with insurers offering more diverse products through a variety of distribution channels. Foreign insurers have built a presence in a relatively short space of time and are expected to continue to dominate the life market,” she said.
While, Vietnam’s life insurance market will continue attracting international companies, AM Best worries that existing stringent regulations that require overseas companies have US$ 2 billion in asset backing will mean that only international conglomerates are able to enter the market, with smaller insurers from Southeast Asia left untested.
The report concludes that while awareness of life insurance protection is improving gradually in Vietnam, the youth-leaning demographics of the population means many citizens are not actively seeking such coverage. AM Best advises insurers that: as the affordability of conventional insurance products for most of the populace remains the key impediment to the overall growth of the market, innovation in services such as microinsurance will be essential. This is a challenge insurers like Manulife Vietnam appear eager to respond to.
Companies Mentioned
A.M Best
A.M Best Company was founded in 1899 and is a full-service credit rating organization dedicated to servicing the financial services industries, including the banking and insurance sectors.
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