Vietnam Insurance Market Reform Underway
By Marius | Published February 08, 2012
Vietnam’s Ministry of Finance has announced that they will begin to restructure the country’s insurance sector this year. The move comes as part of the Vietnamese government’s 2012-2015 economic plan, which intends to revamp the Southeast Asian country’s credit institutions and securities sector in order to further develop the domestic capital market and open up to greater foreign investment.
The Saigon Times reported on Sunday that the overall goal of these insurance market reforms would be to promote financial market stability in Vietnam by supporting healthy insurers and encouraging weaker firms to either consolidate or leave the market all together. The Vietnamese government has come to accept the need to restructure some of their large state-owned enterprises, many of which have been blamed by economists for recent economic stagnantion. In addition to insurance market reform, the country’s securities sector and stock market are expected to undergo substantial restructuring over the next three years. The Ministry of Finance is currently developing a set of market criteria to assess and catalogue insurers operating in Vietnam into four separate categories, with plans to later design specific management and regulatory measures for each category.
According to the ministry’s initial proposal, the first group will comprise of insurance companies that are deemed profitable businesses and meet the guaranteed solvency rules. Insurance companies in this first category will be supported and given greater leeway to expand their operations across Vietnam if they can maintain their efficient business schemes. Group two meanwhile will focus on insurance companies that have met the prescribed solvency ratios but are otherwise struggling to run their businesses and improve their margins. Vietnamese insurance companies that cannot show a profit for two consecutive years due to high operational costs, heavy compensation rates or other factors will be dropped into the second group. Management agencies could then be brought in to evaluate the efficiency of these companies and work to reduce prohibitive operational expenses.
Insurance companies with solvency margins approaching or below the minimum threshold will be classified into group three. According to the ministry, these under-fire firms will be subject to a comprehensive financial assessment, complete with investment restructuring and debt settlement procedures. The regulator warned as well that parts of these insurance companies, be it policies or agents, could be transferred to other more stable firms in Vietnam. The last group in the ministry’s proposal is reserved for insolvent insurance companies, which will then be placed under special control and subject to further judicial review. If the group four insurer fails to overcome its difficulties during the special control period it could be forced to consolidate with another Vietnamese insurer or declare bankruptcy and go into receivership.
This industry-wide categorization project is expected to be carried out later this year. The Vietnamese Finance Ministry is currently in the process of drafting the restructuring scheme for submission to the Prime Minister. The government is also looking at setting higher start-up requirements for insurance companies in Vietnam. Current rules stipulate that local insurers are not permitted to retain risks exceeding 10 percent of their paid-in capital. Insurers who start with equity lower that the statutory capital requirements will now be asked to supplement this capital through outside loans in order to meet regulatory requirements. If the details are ironed out and the insurance restructuring scheme is approved by the Vietnamese authorities, work could begin on implementing the reforms this quarter. The Insurance Authority meanwhile is looking to introduce additional changes to better police fraud and to improve their training and recruitment efforts to ensure that the domestic insurance industry grows both larger and smarter.
Vietnam’s insurance sector has been experiencing rapid growth and development in recent years. Total written premiums have increased by around 20 percent per annum since moves were made to break-up monopolies and liberalize the Vietnamese insurance market after the country’s entrance into the World Trade Organization (WTO) in 2007. Despite this considerable progress however, the insurance market in Vietnam remains underdeveloped and small in comparison to many of its Southeast Asian neighbors, with penetration rates under 0.4 percent of GDP.
According to Finance Ministry, there are currently 39 insurance companies active in Vietnam, including 28 non-life insurance companies, 11 life insurance companies and 12 insurance brokers, with more expected to enter due to the market’s potential for growth. In the country’s non-life sector, intense competition, high operating costs and a claims-heavy environment (particularly in motor lines) have all made profitable underwriting difficult to achieve at the moment. The four big state-owned general insurers have gradually been losing market share as the market opened up to smaller largely-foreign competitors, who have been pursuing aggressive business development strategies at the expense of disciplined underwriting. The substantial catastrophe risks in Vietnam including threats of heavy typhoons and floods are also driving a demand to purchase reinsurance.
The Vietnamese life insurance sector meanwhile is less crowded than it’s non-life counterpart, with only 14 registered insurers currently operating in the country. Multinational insurers have come to dominate this market, bringing with them substantial capital and expertise to sell a product still largely unknown to the Vietnamese populace. Due to the country’s youth-leaning demographics and low per-capita income however , demand for life and other conventional insurance products remains subdued. Microinsurance is a way of accessing this large market segment, with Manulife Vietnam, for instance, providing products in an alliance with the Vietnam Women’s Union.
Overall, Vietnam’s continued demographic and economic development is expected to generate further awareness and a demand for insurance. Insurance companies looking to prosper in the Southeast Asian country will need to comply with new industry regulations, strong competition and the considerable operating challenges.