Insurance rules brushed up in draft

November 18, 2021 | 15:33
The urgent demand for capital rise and the amended draft of the Law on Insurance Business threatens to pressure insurance companies to begin strengthening their financial and operational capacity as well as enhance customer expectations.
Only a few insurers are currently disclosing their solvency margins in their audited financial statements
Only a few insurers are currently disclosing their solvency margins in their audited financial statements

When presenting to the National Assembly the revised Law on Insurance Business, Minister of Finance Ho Duc Phoc last week emphasised, “Domestic insurers are still inefficient in their operation.”

According to the minister, there are still several domestic insurers with low competitiveness due to their relatively small capital size, weak corporate governance, and limited risk control capabilities. Furthermore, the quality of skilled human resources has not met the requirements of the market.

There are now 49 insurance firms in Vietnam, excluding two reinsurance companies, Vinare and PVI Re. Of those, 31 are non-life insurance firms and 18 sell life insurance. Except for Bao Viet Life, the life insurance industry is largely dominated by foreign institutions. In the non-life sector local firms dominate, with just a few international companies engaged in the market, such as Liberty and AIG.

According to the Ministry of Finance (MoF), by the end of 2020, there were only 10 non-life insurers with charter capital of $43.5 million and more, including Bao Viet, Liberty, and HD Insurance. Among the 21 companies with charter capital of less than $43.5 million, there are 12 with charter capital of $21.8 million or less.

Increasing charter capital and boosting financial capacity are prerequisites for many small-cap domestic insurers to expand their activities, particularly those with capital scales of $13-17.4 million.

HD Insurance – the insurer arm of HDBank – is a relatively new face in the market as it was only created in 2020. With a high charter capital in the non-life sector, the firm has revealed an intention to heavily incorporate digital technology into its operations, such as with the launch of a new online channel for the entire system.

In 2020, according to the MoF, there were still some non-life insurance companies that faced difficulties in immediate payments of insurance claims due to large-scale accumulation of risks, or the reinsurer has not yet recovered due to its low of liquid assets to short-term liabilities, such as VASS, Bao Viet, AAA, and GIC.

On the other hand, the draft revision requires greater transparency of the insurance sector. Accordingly, insurance enterprises are required to disclose their semi-annual and annual audited financial statements, as well as solvency and risk management reports on their and the MoF’s website. Financial statements, capital adequacy reports, and reports on the separation between the shareholder and policyholder funds must all be audited. Currently, only a few insurers disclose their solvency margins in their audited financial statements.

Furthermore, according to the amended draft, insurance companies would be required to use a risk-based capital (RBC) model. Businesses would require an appropriate capital buffer to deal with urgent situations.

The draft revision regulates solvency and intervention measures when the capital adequacy ratio falls to a certain level. It does not state which solvency framework would be applied in this case, but it is expected that it would be the RBC regime, regulated under sub-law documents.

“The RBC framework is in line with international standards. Currently, the level of required capital is based on technical reserves or the sum at risk for life insurers and premium for non-life insurers – both do not contemplate various levels and types of risk. Accordingly, the required capital would be greater if RBC is applied. Meanwhile, some changes to the amount of available capital will occur under RBC as well. For example, asset valuation would be calculated at market value, rather than book value,” noted Ha Nguyen, analyst at SSI.

“Insurers are recording real estate such as headquarters and branch buildings, to name a few, at book value. Meanwhile, the market value of these assets could have significantly changed over the past several decades. Hence, we await the subsequent sub-law documents to assess how the new solvency framework could impact insurers,” Nguyen added.

If passed, the draft supplementary law also states that the MoF would work with foreign insurance management agencies to coordinate management, supervision, inspection, and examination of insurance companies, as well as with branches of foreign insurance enterprises in Vietnam.

Moreover, the government would come up with a comprehensive framework for sharing management and supervisory information with the State Bank of Vietnam and other insurance-related ministries and departments.

Solvency margin levels with applicable classification in the amended Law on Insurance Business

- 175 per cent < CAR ≤ 200 per cent: Insurance and reinsurance enterprises review the processes, regulations, risk management, and business plan.

- 150 per cent < CAR ≤ 175 per cent: Insurance and reinsurance enterprises re-evaluate underwriting business activities and investment activities, ensuring safety and efficiency.

- 120 per cent < CAR ≤ 150 per cent: Insurance and reinsurance enterprises carry out measures to improve CAR.

- 100 per cent < CAR ≤ 120 per cent: Insurance and reinsurance enterprises carry out measures to improve CAR, and the MoF carries out early intervention measures.

- CAR < 100 per cent: Insurance and reinsurance enterprises are placed under supervision.

There are various financial improvement measures, such as increasing charter capital, cost management, and temporary suspension of the transfer of profit abroad, among others, as well as operational and management measures, as stated in Articles 104-106. These measures must be carried out for a maximum of six months in case insurers discover internal problems, and five months if the MoF detects a problem.

Details of the early intervention measures of the MoF as well as supervision conditions are stipulated in Articles 107-114.

By Nhat Minh

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