Insurance draft to aid standardisation

September 29, 2021 | 08:00
Amid evolving consumer trends and digital transformation, the Ministry of Finance has issued draft changes to the Law on Insurance Business to bring regulations up to speed with modern times by opening them up to technology while also making it safer by restricting investment by local and foreign insurers.
1563 Insurance draft to aid standardisation
Insurance draft to aid standardisation, Illustration photo

The Ministry of Finance (MoF) has just submitted to the Vietnamese government a draft revision to the Law on Insurance Business, which is expected to take effect from 2023.

In general, the revision will allow insurers greater autonomy, with regulators not interceding in their operations as much as before. Instead, the draft prioritises monitoring, promoting transparency, and the healthy development of the insurance sector.

Minister of Finance Ho Duc Phoc said, “The Law on Insurance Business was first introduced nearly two decades ago when the insurance sector was at its infancy with a small market and a handful of products circulating through few distribution channels. There is an urgent need for a more detailed, comprehensive legal framework that is in line with international standards.”

“The Law on Insurance Business is no longer consistent with the amended and supplemented Civil Code. Furthermore, some contents have no basis for practical application, such as those on the handling of insurance companies experiencing financial hardships,” he added.

The minister also added that a complete suite of new capabilities should be afforded to supervisory authorities, along with requirements for internal control, internal audit, and independent audit. It would also be necessary to bring current laws in line with the current international standards such as regulations on prevention of insurance fraud, money laundering, terrorist financing while removing outdated financial management models.

According to Viet Dragon Securities, the draft changes show an open mind by authorities and promote transparency in insurance business, which would create many new opportunities for market participants. Material changes that can make a big impact on revenue, especially in life and health insurance, including forming a database for the whole market including customer information and insurance policies so that insurers can better assess risks, prevent fraud, and design products to better fit customer needs. Business efficiency will be enhanced by cutting operating costs, compensation costs, and legal costs.

Moreover, the microinsurance business is expected to take advantage of different implementation methods than commercial insurance, Viet Dragon Securities added. A proper regulatory framework could boost the revenue of microinsurance businesses while providing security to Vietnam’s large low-income population.

Tri Duong, analyst at KIS Securities, said the draft law would help standardise insurance contracts and minimise disputes related to insurance contracts.

“The draft by the MoF would lay the foundation for the mass application of technology in the insurance industry and support the development of insurtech enterprises,” he noted. “With the exclusion list of investment areas, insurers will actually have wider choices in investment as they are now allowed to invest overseas.”

SSI Research also pointed out that some sectors would no longer be open for investment for insurers, domestic or otherwise. “Surprisingly, investment in real estate is no longer allowed given its risky nature. Other restricted areas include securities, precious metals such as gold, derivatives investment, except for derivatives listed for the purpose of hedging risks from insurance contracts or reinsurance contracts,” the brokerage noted.

Prohibited areas in current draft Law on Insurance Business

1. Prohibition of borrowing to invest in securities, real estate, or contributed capital to other enterprises, except for the case of borrowing for the head office, working location, or warehouse;

2. Real estate investment, except for the following cases related thereto (and extraneous exceptions):

- Buying, investing in, and owning real estate to be used as a business office, a working place, or a warehouse facility directly serving the activities of the insurer;

- Leasing of unused business offices, owned by enterprises or branches; and

- Holding real estate due to the disposal of bonds secured by real estate;

3. Providing loans, except for lending under the Law on Credit Institutions, and providing margin loans to other insurance enterprises under the guidance of the Vietnamese government;

4. Investment in precious metals and member funds in accordance with the Law on Securities;

5. Investment in intangible fixed assets, except for insurance business activities of the enterprise; and

6. Investment in derivatives, except for derivatives listed for the purpose of hedging risks arising from insurance contracts or reinsurance contracts.

By Nhat Minh

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