Government puts a leash on foreign reinsurance

illustration photo

The newly issued Decree No.73/2016/ND-CP guiding the implementation of the Vietnamese Law on Insurance, dated July 1, 2016, proclaims that foreign firms can now only reinsure up to 90 per cent of their total insurance liability.

This is in accordance with Article 42 of Decree 73. Earlier, there was no ceiling rate on reinsurance liability.

This adjustment was proposed by Vietnam Insurance Supervisory Authority (ISA) under the Ministry of Finance (MoF), due to “certain issues with overseas reinsurance,” including the amount of foreign currency that local insurers transfer to their partners abroad in such contracts.

According to the Association of Vietnam Insurance (AVI), overseas reinsurance in 2015 was equal to a third of the domestic market’s total revenue, meaning one third of all insurance revenues was sent outside Vietnam.

Former regulations set the compulsory level of retention at a maximum of 10 per cent of insurance firms’ equity on each risk or each separate loss. This requirement aimed to reduce risk in large construction projects, such as satellites, hydropower, or nuclear power plants, but fails to restrict money transferred abroad.

“The move is to control enterprises which reinsure up to a massive 99.5 per cent of their insurance liability with their overseas-based mother companies,” AVI’s general secretary Phung Dac Loc told VIR.

He pointed out that excepting life and motor vehicle insurance policies, enterprises re-insured over 50 per cent of contract values overseas on average.

Loc further noted that the MoF also aimed to keep financial resources within the country’s borders for reinvestment in the economy, while at the same time preventing the country’s foreign currency reserves from being sent overseas.

He praised the ISA’s initiative to control overseas reinsurance, adding that the capacity of domestic firms should be utilised to the utmost before finding reinsurers abroad.

“Currently, the financial capacity of locally-based enterprises is good enough to take over reinsurance contracts that used to be dominated by overseas insurers. The market’s total equity and insurance reserves significantly rose by 9 per cent and 21 per cent, to VND45 trillion ($2.06 billion) and VND130 trillion ($5.96 billion), respectively,” Loc said.