MoF restricts reinsurance

The draft decree is intended to stem the flow of insurance revenue from Vietnam to overseas firms
Photo: Le Toan

The Ministry of Finance (MoF) last week announced that it was drafting a decree to control the premiums re-insured by companies based outside Vietnam.

“With the draft decree, the MoF will propose to the government a minimum compulsory retention level applicable for reinsurance contracts made with companies over the border,” said Pham Thu Phuong, deputy head of Vietnam Insurance Supervisory Authority (ISA) under the MoF.

Phuong explained that the move was due to “certain issues with overseas reinsurance”, including the amount of foreign currency that local insurers transfer to their partners abroad in reinsurance premiums.

According to the Association of Vietnam Insurance (AVI), overseas reinsurance premiums currently account for a third of the domestic market’s total premiums collected, meaning one third of insurance revenues are sent outside Vietnam.

Policies that local insurers provide to customers are typically based on reinsurance contracts, which can be a constraint for businesses.

Under prevailing regulations, the compulsory level of retention is set at a maximum of 10 per cent of the equity on each risk or each separate loss.

This requirement aims to reduce risk in large construction projects such as satellites, hydropower, or nuclear power plants, but fails to restrict premiums transferred overseas.

“The move is to control enterprises which re-insure up to a massive 99.5 per cent of their insurance premiums with overseas firms,” AVI’s general secretary Phung Dac Loc told VIR. Loc did not name the enterprises in question.

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

Loc further noted that the MoF also aims to increase the use of VND for reinsurance premiums and reduce the number of premiums in foreign currencies, which would help save financial resources for re-investment within the country.

“Now the financial capacity of locally-based enterprises is good enough to take over reinsurance contracts that used to be dominated by overseas insurers,” Loc said.

Last year, 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.

He praised the ISA’s initiative to control reinsurance premiums transferred overseas, adding that the insurance capacity of domestic firms should be utilised to the utmost before finding re-insurers abroad.

Reinsurance contracts are not necessarily to be conducted by a registered re-insurer (Vietnam currently has only two reinsurance firms, Vietnam Reinsurance and PVI Reinsurance), but can be conducted by normal insurers with registration for reinsurance operations.

With 61 firms, Vietnam’s insurance market has experienced an impressive growth rate of 16 per cent each year over the past five years. Growth rates for the life insurance and the non-life insurance sectors are 24.6 per cent and 11.7 per cent for the period, respectively.

Last year, total market revenue peaked at a five-year high of approximately VND84.4 trillion ($3.87 billion), equal to 2 per cent of Vietnam’s GDP.