On July 1, 2016, the Vietnam government enacted with immediate effect Decree No. 73/2016/ND-CP guiding the Law on Insurance Business 2000, as amended in 2010 (Decree 73). Decree 73 replaces Decree No. 45/2007/ND-CP (and its amendments) and Decree No. 46/2007/ND-CP.
Decree 73 introduces the following key changes to the reinsurance business in Vietnam:
- Compulsory level of retention. The level of retained obligations on each single risk or loss of an insurer must not exceed 10 percent of the owner’s equity on each risk or each separate loss. This is an increase from 5 percent under the previous law.
- Limit on overseas reinsurance placement. If an insurer cedes insurance in accordance with the designation of the insured, also known as fronting, the level of reinsurance to be designated must not exceed 90 percent of the insurance liability. This is a newly introduced requirement.
- Reinsurance commission. A local insurer must collect reinsurance commissions to cover costs and expenses of their arrangement and corporate management. The minimum rate of reinsurance commission will be prescribed by the Ministry of Finance.
As a result, foreign insurers operating in Vietnam are now more restricted in transferring the premium collected in a country to associated/parent insurers through overseas reinsurance placements. It is also anticipated that the cap of 90 percent could then force domestic capacity to be utilized more. This should also make insurers more liable to insureds.
Although this could be a positive step forward to the local industry, some local insurers have criticized the changes for limiting their liquidity. The Ministry of Finance, however, is allowed to issue guiding circulars on reinsurance business, and so further changes may be introduced in the future.