Effective from 15 April 2018, Decree No. 23 provides for new regulations on compulsory fire and explosion insurance products, and replaces the previous regulations under Decree No. 130 and Circular No. 220.
Decree No. 23 has revised many aspects of compulsory fire and explosion insurance regulations, including the sums insured, exclusion of insurance liabilities, insurance premiums, deductibles, payment of insurance proceeds and insurers' compulsory contribution to the budget maintained by the relevant public security authority for fire prevention and fighting purposes.
Specific amendments under Decree No. 23
A. Determination of sums insured
Under Decree No. 130 previously, the concept "minimum sums insured" was used to refer to a monetary value equal to the "market value" of the insured property at the time of insurance participation/inception. If such market value cannot be determined, the minimum sums insured will be subject to an agreement between the insurer and the policyholder.
In this respect, Decree No. 23 provides a new guideline that if the "market value" of the property cannot be determined, the sums insured will be agreed upon by the insurer and the policyholder as follows:
- For insured properties that are houses, construction works and/or attached properties or machinery and equipment, the sum insured shall be the monetary value of the properties based on the remaining value or the replacement value of the insured properties at the time of execution of the insurance policy contract; and
- For other insured properties that are goods and supplies (including materials, semi-finished products and finished products), the sum insured shall be the monetary value of the insured properties based on valid invoices and other relevant supporting documents. On this point, as laid out previously under Circular No. 220, the sum insured was determined as the monetary value based on the declaration of the policyholder.
Compared to Decree No. 130, Decree No. 23 also specifies other goods and supplies that customers can request for purchase of compulsory fire and explosion insurance, including: materials, semi-finished products and finished products. That is to reinstate the previous guideline of Circular No. 220 up to the decree level for consistency.
B. Exclusions of insurance liabilities
In comparison with Decree No. 130 and Circular No. 220, while Decree No. 23 has added a few new exclusions, it has also removed a number of exclusions in which the insurer is not responsible for indemnification, including:
- Goods under entrustment or consignment, unless those goods are certified to be insured in the insurance certificate and the insured pay extra insurance premiums pursuant to relevant regulations;
- Money, precious metals, gemstones, securities, letters of guarantee, documents, scripts, business books, computer files, diplomas, molds, drawings or blueprints, unless those items are certified in the insurance certificate;
- Explosives, unless they are certified to be insured in the insurance certificate;
- Assets which, at the time damage is caused, are insured under the marine insurance policy or fall within the insurance liability under the marine insurance policy, excluding the part of damage which is beyond the indemnification liability under the marine insurance policy;
- Damage a fire or explosion caused by a third party; and
- Other exclusions of insurance policies in accordance with Vietnamese regulations or as agreed between the parties to the insurance policy contract.
That Decree No. 23 removes said exclusions can create certain issues and concerns for local non-life insurers over their allocation of relevant risks under re-insurance arrangements with offshore insurers.
For nuclear establishments, Decree No. 23 provides that local insurers can agree with their customers on specific cases of exclusions of insurance liabilities based on the basis that is accepted by the relevant re-insurers. However, this applies to nuclear establishments only.
C. Insurance premiums
Under Circular No. 220, the insurer and policyholder may agree to increase or decrease the insurance premiums within a band of 25%, at maximum, of the premium rates as prescribed by the law for each type of property.
Decree No. 23 has introduced a new regulation on insurance premiums as follows:
i. For insured establishments (except for nuclear generation stations) having the total sums insured of all properties at one location of less than VND1,000 billion (approx., USD44 million), the insurer and policyholder may agree on the rates of premiums of no less than the minimum rates prescribed under Annex II of Decree No. 23, based on the risk level of the relevant establishment;
ii. For insured establishments that exceed the above threshold and for nuclear generation stations, the rate of premiums are subject to the insurer's agreement with their customers on the basis that it is accepted by the relevant reinsurer.
Decree No. 23 provides for a new regulation on deductibles. In particular, Decree No. 23 classifies insured establishments under two separate deductibles regimes as follows:
i. For insured establishments (except for nuclear generation stations) having total sums insured of all properties at one location of less than VND1,000 billion (approx., USD44 million), the maximum deductible rates shall be: 1% of the sums insured (for establishments classified under Type A deductibles regimes); and 10% of the sums insured (for other establishments classified under Type B deductibles regimes). In addition, the deductibles are subject to minimum levels depending on the amount of sum insured.
ii. For insured establishments that exceed the above threshold and for nuclear generation stations, the rate of deductibles are subject to the insurer's agreement with their customers on the basis that it is accepted by the relevant reinsurer.
E. Indemnification and payment of insurance proceeds
Decree No. 23 sets out the following principles for payment of insurance proceeds:
- The insurance proceeds for a damaged property may not exceed the sums insured for that property (as agreed and stipulated under the insurance policy contract and the insurance certificate) minus the deductibles.
- The insurers may deduct at most 10% of the insurance proceeds, if the fire or the explosion was due to the insured establishment's failure to comply, fully and in a timely manner, with the recommendations of the public security authorities under the minutes of safety inspection on fire prevention and fighting. This regulation can create issues and concerns for local insurers given that the maximum rate of 10% can be considered low for the risks in this case.
- The insurers are not obligated to indemnify for payments arising and/or increasing as a result of insurance frauds that are subject to the Penal Code of Vietnam.
F. Insurers' compulsory contribution for fire prevention and fighting purposes
Under Decree No. 130, local non-life insurers must contribute 5% of the total amount of their collected insurance premiums to a budget maintained by the relevant public security authority for fire prevention and fighting purposes. However, taking into account the losses of fire and explosion insurance businesses in recent years, Decree No. 23 has reduced this compulsory contribution.
In particular, under Decree No. 23, the compulsory contribution rate within a fiscal year is reduced to 1% of the total premiums for compulsory fire and explosion insurance products that insurers have actually collected from their original insurance policies with their clients in the preceding fiscal year.
Actions to consider
In light of the above developments, local non-life insurers that sell compulsory fire and explosion insurance products may need to review their relevant policy document forms and templates to prepare for Decree No. 23 imminently coming into force on 15 April 2018.