Vietnam Sets Insurance Development Targets

Posted on Feb 23, 2012 by Sergio Ulloa (G+)

The Vietnamese government passed through the insurance market development strategy for 2012-2020 this past week. The initiative aims to gradually spur the domestic insurance market from a base of 1.6 percent of Vietnam's GDP in 2010 to 2-3 percent of GDP by 2015 and then hopefully up to 3 or 4 percent of national GDP by 2020. The Vietnamese insurance industry has grown at a brisk pace in recent years, with total written premiums increasing by around 20 percent annually since moves were made to liberalize the country's financial markets following Vietnam's ascension to the World Trade Organization in 2007. Despite this considerable progress however, Vietnam's insurance sector remains small and underdeveloped in comparison to many of its Southeast Asia neighbors. The industry is cautious about their 2012 forecast, with many insurers indicating expecting a modest increase in growth of around 5-10 percent, with inflation control and macroeconomic stability seen as the key concerns in the coming year. The government strategy outlines several specific industry targets for Vietnamese insurers to strive for in the coming years in order to achieve the market's overall growth objectives. According to an article in Vietnam Business News, local insurance companies will be required to gradually improve their capital positions over the next few years to meet compensation and insurance payment obligations to local policyholders. In 2010, the Vietnamese insurance industry paid out an estimated VND11.58 trillion (US$556 million) in compensation and additional insurance payments, which was already up by 19 percent on the previous year's total amount. Insurers must keep pace with their risk portfolio and customer obligations as the Vietnamese insurance market continues to grow. Because of this, the government plan dictates that the scale of standby funds required by domestic insurers will double by 2015 and increase 4 and a half times by 2020. From 2012 to 2015, the priority goal is to make the Vietnamese insurance market safer, more sustainable and efficient, in order to meet the Southeast Asian country's increasingly diverse coverage demands - most notably rising catastrophe, property and global supply chain risk. According to the strategy, the Vietnamese government plans to gradually restructure the country's insurance sector over the next three years, by consolidating the operations of inefficient, often state-backed, insurers and improving the management and services standards of the domestic sector in line with best international practices. In addition to this restructuring effort, new products and services will be introduced to the market, including export credit insurance and agricultural micro insurance schemes, which will be piloted over the next two years. For the later 2016-2020 period, the Vietnamese central government want the country's insurance authorities and key private-sector players to work together to develop specific industry mechanisms and policies which will strengthen the management and operations capacity of insurers. The government outlined three key areas in its development strategy proposal that it wants to see improvement in: improved capital adequacy, risk management practices and greater fairness and information transparency amongst Vietnam insurers. In addition to improving their capital levels and business practices, Vietnam's insurance industry is also expected to double its contribution to the state budget by 2015 and increase their tax contribution by four times by 2020. Vietnam's central government has come to accept the need to restructure some of its largest state-owned enterprises, securities and insurance firms, which have often been blamed by economists for the country's recent economic stagnation. According to their development strategy, addressing the country's fragmented insurance market, which is largely composed of inefficient public monopolies and ineffectual tiny companies, will be one of the first items on the government's agenda in 2012 and 2013. Vietnam's Ministry of Finance is already taking the first steps to address this problem, by developing a set of market criteria to assess and catalog Vietnamese insurers in a bid to stabilize the market. Starting this year, the ministry will categorize insurers into four different groups and apply specific management and regulatory measures for each category, from good businesses that need support to loss-making insurers that need to consolidate or fold entirely. There are currently 43 insurance companies active in Vietnam, including 29 non-life insurance companies and 14 life insurance companies, with more expected to enter to market soon due to the sector's potential for sustainable premium growth. The Vietnamese non-life sector is dogged by intense competition and a claims-heavy market (particularly in motor insurance), with high operating costs that have made profitable underwriting difficult for local insures to achieve at present. The country's four largest non-life insurers are gradually losing their market share to smaller, largely foreign-backed competitors, who have been expanding aggressively perhaps at the expense of disciplined underwriting. Vietnam's substantial catastrophe risks, which include threats of heavy typhoons, fires and flood damage, are also driving a demand to purchase non-life reinsurance. While Vietnam's life insurance industry is less crowded than the non-life market, the country's demographics which skew towards the young as well as low income per-capita have reduced demand for life and other conventional insurance and savings products thus far. In the past 10 years however, foreign insurers have been allowed to enter the market and bring with them substantial capital and expertise in order to sell these insurance products which are still largely unknown to the local population. With less than 10 percent of the population having some form of insurance coverage, the potential for growth is clearly one of the best in the Asia Pacific region going forward. Insurance companies looking to succeed in Vietnam will now need to comply with new industry guidelines, growing competition and the considerable operating challenges common in emerging economies.