Vietnam: Opportunities from the New Insurance Business Law

In 2021, Vietnam’s insurance industry recorded VND 256 trillion (US$10.9 billion) in premiums, more than triple that was recorded in 2015. Furthermore, Vietnam’s current insurance market represented 3.96 per cent of GDP in 2021, according to the Ministry of Finance (MoF).[1] This is relatively low, compared to the global average of 7 per cent and suggests ample room for further growth. By comparison the UK’s insurance market represents around 11 per cent of the UK’s economy (see Table).

Table 1: Comparison of Vietnam and UK insurance markets

  United Kingdom Vietnam
Population 67 million 98 million
GDP per capita (2021) US$ 46,510 US$ 3,756
Insurance penetration (2021) 11.1% 3.96%
Total premiums US$ 380 billion US$ 10.9 billion

Source: UN, World Bank, Statista, OECDStat, MoF

As foreign insurance service suppliers eye this potential market, they should be aware of the most recent changes to the regulatory framework. The new Insurance Business Law, Law No. 08/2022/QH15, passed on 16 June 2022 and entered into force on 01 January 2023, provides some notable changes to the former law,[2] adding clarity to the marker access and operation conditions that are expected to contribute to further development of Vietnam’s insurance market. This article delves into the key conditions for foreign investors and suppliers.

Market access conditions for foreign investors

Among several changes, the new Law clarifies the licensing requirements to attract new investors. Specifically, the new Law affirmed that foreign investors can own shares and contribute capital up to 100% of the charter capital of insurance and reinsurance enterprises.[3] This threshold for foreign share in insurance sector aligned to Vietnam’s Specific Schedule of Commitments under the General Agreement on Trade in Services (GATS).

Under the European Union-Vietnam Free Trade Agreement (EUVFTA), branches of foreign reinsurance enterprises shall be permitted after three years from the date of entry into force of the Agreement (i.e., August 2023). Accordingly, the New Law allows reinsurers to set up reinsurance branches in Vietnam from entry into force of the law.

Conditions for licensing and establishment

The New Law expanded the coverage of foreign investors by allowing financial groups to join the insurance business and by streamlining and simplifying conditions for legal entities to establish a new insurance enterprise. The licensing conditions include general conditions and specific conditions applicable to the members (in case of limited liability company) or shareholders (in case of joint stock companies).

The general licensing conditions for establishing insurance or reinsurance companies cover the requirements concerning founding shareholders or members, capital, and personnel, in addition to other general establishment requirements.[4] Among other conditions, legal persons having at least 10% of capital contribution and insurers and reinsurers who already have licensed operations in Vietnam must ensure that they generate profits within 03 consecutive fiscal years immediately before the date of submission of license application and must meet financial conditions in accordance with the Government’s regulations.

The foreign investor category allowed to establish insurance and reinsurance business in Vietnam has been expanded to include foreign financial and insurance corporations.[5] That means the direct investors do not have to be an insurance company so long as they satisfy the specific conditions on the sound financial conditions, compliance, and asset specified by the New Law. Like the Old Law, the New Law also allows subsidiaries specialized in outbound investment of foreign finance and insurance corporations (e.g., offshore companies) to make a capital contribution or acquire shares of an insurance or reinsurance company in Vietnam.

Furthermore, the New Law adds new requirements that foreign investors must be committed to offering financial, technological, corporate management, risk management, governance and operational support for the insurance or reinsurance company to be incorporated in Vietnam.

Insurance Business Activities

Under the New Law, insurance products are divided into three distinct types: life insurance, health insurance, and non-life insurance. The New Law no longer details the specific insurance operations under each type, but gives the Government the responsibility to elaborate via guiding instruments. Similar to the Old Law, the New Law does not allow insurers to provide both life insurance and or non-life insurance. However, the New Law does allow flexibility for the bundling of insurance products under specific circumstances:[6]

  • life insurers provide health insurance products;
  • non-life insurers provide health insurance products having a term of up to one year and insurance products that only cover the mortality risk having a term of up to one year; and
  • health insurers provide insurance products that only cover the mortality risk having a term of up to one year.

Capital adequacy ratio

The New Law marks the shifting of the monitoring mechanism from the solvency margin[7] to the capital adequacy ratio[8] – a risk-based capital management model similar to the approach used in the banking and securities sub-sectors.

Specifically, the New Law requires that the insurers and reinsurers constantly maintain the minimum capital adequacy ratio as prescribed by law.

The risk-weighted capital is determined based on the size and quantitative assessment of the impacts of the four risk categories that might affect the business activities of the insurers and reinsurers,[9] including:

(i) Insurance risks, including risks arising from fluctuations in technical factors corresponding to types of insurance (i.e., life insurance, non-life insurance and health insurance).

(ii) Market risks, including risks arising from the market for investment activities of insurers and reinsurers.

(iii) Operational risks, including risks arising from operating processes, system, and governance of insurers and

(iv) Other risks, including risks arising from other partners or other factors that have not been taken into account under the above three risk categories.

There is a transitional period of 5 years for applying the capital adequacy ratio. In the meantime, the solvency margin shall remain the applicable monitoring mechanism until 31 December 2027. This 5-year period is considered to provide a buffer zone for the Government to make appropriate calculations, adjustments, impact assessments, and develop detailed implementation guidelines while allowing businesses time to adapt, thus avoiding any potentially abrupt changes to the industry’s short- and medium-term outlook.

Other notable changes in the New Law

In addition to the market access and licensing conditions, the new Insurance Business Law 2022 also introduces several changes to the insurance operation and activities; some of the notable ones are provided as follows:

  • Removal of the requirement for compulsory insurance on professional liabilities in the legal advisory and the insurance brokerage profession[10]
  • Allowing the outsourcing of specific procedures of activities of insurers and reinsurers, except for internal control; internal audit; risk management; consultation, introduction, offering of insurance products, and arranging the conclusion of an insurance contract. The New Law requires that the outsourced third party must perform at least 75% of the workload of outsourced activities. Meanwhile, insurers and reinsurers remain ultimately and solely responsible to the policyholder.[11]
  • Insurance sales via online channels are allowed, in addition to traditional channels of direct sale, via insurance agents or brokers or tendering.[12] The distribution of insurance products via an online channel will be further guided by the Minister of Finance.
  • Adding provisions on microinsurance products and organizations providing microinsurance.
  • Supplementing provisions on the principles of entering into and performing insurance contracts to be in line with fundamental principles in civil law; including provisions on the choice of forum for dispute resolution (i.e., negotiation, mediation, arbitration, or court).

What should businesses be mindful of?

The New Law entered into force on 01 January 2023, except for some provisions related to the capital adequacy ratio and intervention measures, which will take effect from 1 January 2028. This 5-year transitional period of 5 years is considered to provide a buffer zone for the Government to make appropriate calculations, adjustments, impact assessments, and develop detailed implementation guidelines. This gives businesses time to adapt the internal operational and governance processes, thus avoiding any potentially abrupt changes to the industry’s short- and medium-term outlook. The relaxation of some market access conditions for foreign financial and insurance corporations and product coverage can be expected to attract further investments to explore the untapped potential of Vietnam’s insurance market.

Authors:

Loan Le | Managing Director | +84 763 281 367 | le@tradeeconomics.com

Paul Baker | Chairman | +230 263 33 24 | baker@tradeeconomics.com

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about specific circumstances.

References: 

[1] Ministry of Finance (2021). The Annual Report of the Vietnam Insurance Market 2021.

[2] Law No. 24/2000/QH10 on Insurance Business dated 9 December 2000, as amended and supplemented by (i) Law No. 61/2010/QH12 on amendment and supplement of a number of articles of the Law on Insurance Business and (ii) Law No. 42/2019/QH14 on amending and supplementing a number of articles of the Law on Insurance Business and the Law on Intellectual Property.

[3] Article 68, Law No. 08/2022/QH15 on Insurance Business.

[4] Article 64, Law No. 08/2022/QH15 on Insurance Business.

[5] Article 65.1, Law No. 08/2022/QH15 on Insurance Business.

[6] Article 63.3, Law No. 08/2022/QH15 on Insurance Business.

[7] The solvency margin of an insurance enterprise is calculated as the difference between the value of assets and liabilities of that insurance enterprise at the time of calculation.

[8] Capital adequacy ratio is the ratio of available capital to risk-weighted capital.

[9] Article 94.5, Law No. 08/2022/QH15 on Insurance Business.

[10] Previously mandatory under Article 8.2(b) and 8.2(c) of the Law No. 24/2000/QH10 on Insurance Business (as amended).

[11] Article 90, Law No. 08/2022/QH15 on Insurance Business.

[12] Article 87.4, Law No. 08/2022/QH15 on Insurance Business.

This article has also been published on the Mondaq website

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