Insuring the insurance market gets in order

February 20, 2012 | 08:38
On February 15, 2012, new regulations on insurance sector business activities came into effect under Decree No. 123/2011/ND-CP (“Decree 123”) detailing the Law on Amendments to the Law on Insurance Business being effective from July 2011.

It is our opinion the modifications brought forth by the regulation will result in significant changes to the Vietnamese insurance market.

The Law on the Insurance Business promulgated in 2000 (“the Law on Insurance Business”) only stipulates two types of insurance specialties – non-life insurance and life insurance. In general, insurance enterprises (which can be collectively referred to as “insurers” or “insurance providers”) were not allowed to concurrently provide both types of insurance under the law. As a result, health insurance products were tacitly brought under the scope of non-life insurers, leaving life insurance providers without the option of tapping into this potential market.

More recently, the Law on Amendments to the Law on Insurance Business of 2011 separated the non-life insurance and health insurance specialities, allowing Decree 123 to officially open the health insurance sector to life insurance providers. As a result, after February15, three types of insurance providers will be permitted to operate in the country - (i) life insurance providers, (ii) non-life insurance providers and (iii) health insurance providers.

With considerable diversity among insurers, policyholders will have more to choose from among health insurance products. In the current market, policyholders may maintain concerns with their insurance policy, particularly lifetime or long-term policies, as the fate of their insurance premiums or payments may be unclear if their provider goes bankrupt or loses its capacity to pay on insurance claims. Under Decree 123, policyholders can have peace of mind with the establishment of a Protection Fund for the Insured (or, more accurately, a Protection Fund for policyholders).

The fund, which is financed by insurers and Vietnamese branches of foreign non-life insurers, requires applicable businesses to provide an annual amount to the fund. The amount will be promulgated by the Ministry of Finance (MoF) and may not exceed 0.3 per cent of revenue from annual premiums.

These annual payments will be collected until the size of the fund reaches a certain percentage of the total assets of insurance providers in the country (specifically, 5 per cent with regard to non-life insurers and branches of non-life insurers and three percent with regard to life insurers). It may be of note that the fund will be managed by the Vietnam Insurance Association and paid out under the direction and supervision of the MoF.  The question remains as to how such a large sum will be effectively managed by both the association and the MoF. As a result, this requirement may also be considered an additional responsibility, which insurance providers in Vietnam will have to bear.

Cross-border insurance services

Beyond opening the health insurance market in Vietnam, Decree 123 also allows for the provision of cross-border insurance and insurance brokerage services in Vietnam (i.e. the direct provision of services from other countries into Vietnam without an established commercial presence in the country).

The legality of this insurance service has been unclear since Vietnam joined the World Trade Organization (WTO), as under Section 7A of Vietnam’s Service Commitments, the Vietnamese government committed not to limit the provision of cross-border insurance services.  At the same time, applicable legal documents failed to set forth specific regulations on cross-border services, leaving insurance providers confused as to how to implement the WTO Commitments.

This ambiguity was resolved, however, with the issuance of Decree 123, which will allow for the seamless application of previous requirements. That being said, the decree sets forth an array of limitations on cross-border services among providers and policyholders. Specifically, insurance providers must fulfill a number of conditions before offering cross-border services in Vietnam.

Foreign providers may only offer cross-border insurance services through an insurance brokerage legally established and operational in Vietnam. Foreign insurance brokerages specialising in cross-border insurance services can only work on behalf of insurance providers or branches of foreign non-life insurance providers legally established and operational in Vietnam.
The scope of purchasers of cross-border insurance products is also limited.

Only foreigners working in Vietnam or enterprises established in Vietnam with at least 49 per cent foreign capital may utilise cross-border insurance services. Further, life insurance and health insurance products are not included among the insurance products, which may be offered through such cross-border services.

A new operational model – branches of foreign non-life insurance providers

Under the decree, foreign non-life insurers are offered an additional option to establish operations in Vietnam, as branches may be established for insurance companies that are not yet present in Vietnam. The conditions for such operations remain relatively strict, covering requirements for foreign non-life insurers looking to establish a branch in Vietnam with the aim of opening the market to reliable insurance providers.

Regardless of the severity of the requirements, branch establishment procedures may be considered relatively uncomplicated, as investors are not required to complete an in-principle approval stage, which can be fraught with difficulties for investors interested in obtaining a provider license in Vietnam.

The only limitation to this form of business is that operating branches of foreign providers may not establish sub-branches in Vietnam. However, established branches are permitted to engage in most of the operational matters provided to insurance providers, with lower statutory capital requirements (branches must have a statutory capital of VND200 billion, where non-life insurers must maintain statutory capital of VND300 billion).

On the basis of administrative procedures and capital requirements, establishing a branch in Vietnam under Decree 123 may be a preferred option for foreign insurance providers strongly considering investment in Vietnam.

Continuing on from Decree 123, we will continue to update readers on new regulations issued under the MoF to implement the Decree.

By Hoang Nguyen Ha Quyen, LLM – LCT Lawyers

What the stars mean:

★ Poor ★ ★ Promising ★★★ Good ★★★★ Very good ★★★★★ Exceptional