Euro insurers on the prowl for new tie-ups

The EU insurance regulator asked insurers to suspend bonuses amid the pandemic

The EU-Vietnam Free Trade Agreement (EVFTA), ratified by Vietnam’s National Assembly last week and by the European Parliament in February, is expected to speed up strategic tie-ups, as well as promote Vietnam as a trading gateway to the ASEAN. Notably, door will be opened wider for EU insurance firms.

“Compared to the World Trade Organization, insurance will be more open thanks to the EVFTA. Foreign insuers can set up reinsurer branches in Vietnam three years after the EVFTA comes into effect,” said Nguyen Thi Thanh Huyen from the International Co-operation Department of the Ministry of Finance.

Under the EVFTA, Vietnam allows foreigners to form joint-venture insurance businesses, thereby opening the doors for fully EU-owned insurers with products such as original insurance, reinsurance and retrocession reinsurance, insurance intermediaries, and insurance support services.

This move is expected to facilitate the onshoring of international insurance transactions by overseas reinsurers, thus enhancing the ease of doing business in Vietnam. Additionally, it is estimated that the EVFTA will generate 146,000 more jobs each year in Vietnam.

Notwithstanding, the economic fallout stemming from the COVID-19 pandemic has dealt a crippling blow to almost all industries, including insurers across the globe.

The EU’s insurance regulator has asked insurers and reinsurers in the region to temporarily suspend dividends and consider postponing bonuses amid the ongoing pandemic.

British insurer Prudential PLC said its Asia insurance sales fell by 24 per cent on-year on an annualised premium equivalent basis in the first quarter to $986 million. The insurer said it is still seeing a “challenging sales environment” in the second quarter.

German reinsurance company Munich Re AG had notched $979 million in claims related to the virus, with its first-quarter profit falling 65 per cent on-year worldwide.

Germany’s Allianz suffered an on-year $794 million loss from the outbreak in the first quarter, while French insurer AXA planned to cut dividends by 50 per cent to preserve cash, according to the Wall Street Journal.

Other firms, such as Chubb Ltd., and American International Group, said the pandemic will likely be the largest catastrophe in the history of insurance.

European governments have also been forced to back-up the credit insurance market with Germany, the UK, and Belgium stumping up billions of US dollars to protect firms against supplier defaults.

Truong Vinh Phuc, partner of audit services at KPMG Vietnam expressed concern that this year’s growth target of the domestic insurance industry may not be achieved because performance will depend on how the Vietnamese economy and businesses recover.

Meanwhile, Vietnam’s government bond yield has steadily decreased since the beginning of 2020, especially for bonds with terms of more than 10 years – a trend that is expected to remain in the near future. Low market interest rates can result in solvency margin challenges for life insurers because of potential increased insurance reserves.

“Generally, insurers may need to reassess their investment portfolio to mitigate potentially reduced investment earnings, as well as closely monitor solvency ratios in order to meet economic and regulatory capital requirements,” said Phuc.

Volatile financial markets and the global economic downturn have had a large impact on insurers, particularly life insurers, due to their large holdings of fixed income securities and, correspondingly, exposure to interest rate movements. The ultra-low interest rate environment could depress the solvency position of insurers, particularly those with mismatched asset-liability profiles, said economists at Bank for International Settlements.

Experts at SSI Securities Corporation also cautioned that lower interest rates could adversely affect insurers, especially, firms with significant annuity business.

The concept is simple: some long-term life insurance products sold many years ago offered guaranteed returns at what are now unsustainably high rates. With the current persistently low interest rates, life insurers are struggling to meet these returns.

Data from the General Statistics Office has painted a lively picture. Insurance-related activities in Vietnam reached a record high in the first quarter, with an estimated increase of 16 per cent compared to the same period last year. Life insurance premium revenue rallied by 21 per cent on-year, while non-life insurance rose by 8 per cent on-year.

In the long term, the local insurance sector remains attractive for investors, especially foreigners in the context of low penetration rates and an emerging middle.

German HDI Global SE raised its stake in PetroVietnam Insurance (PVI) last December from 41.05 to 42.78 per cent. Funderburk Lighthouse Ltd., is another major foreign shareholder with 11.73 per cent. “We are the clear winners of the industrial insurance race in Vietnam, which will contribute to our expansion to the non-life insurance sector,” said Jens H. Wohlthat, chairman of the board at PVI Holdings cum member of HDI Global SE’s board of directors. “Investing in PVI is our trump card to keep one step ahead of competitors in Southeast Asia as well as other countries,” he added.

Recently, State Capital Investment Corporation reaffirmed its ambition of divesting 85 state-owned enterprises, including local insurers such as Bao Viet Holdings and Bao Minh Insurance.