Vietnam’s life insurance sector appears poised for growth and development, in particular as the market evolves to incorporate new distribution structures such as bancassurance. This legal update provides an overview of the following updates related to the life insurance business in Vietnam: 1) required reserves for insurers; 2) solvency regulations; 3) product sales regulations; and 4) foreign ownership limits.
Businesses in the insurance sector in Vietnam must establish the following reserves for each kind of insurance contract (Article 54, Decree 73/2016/ ND-CP dated 1 July 2016 on insurance business (“Decree 73”):
a. Mathematical Reserve to be used for payment of insurance proceeds in respect of liabilities undertaken upon occurrence of an insured event;
b. Unearned Premium Reserve to be used to pay insurance proceeds arising in subsequent years during the effective period of an insurance contract;
c. Indemnity Reserve to be used for payment of insurance upon the occurrence of insured events which remain unsettled at the expiry of the financial year, irrespective of whether a claim has been lodged or not;
d. Interest Sharing Reserve to be used for payment of profits agreed by the insurance enterprise with purchasers of insurance in the relevant contracts;
e. Committed Interest Rate Reserve to be used for the interest rate guarantee committed by the enterprise to its clients as agreed in the contracts of insurance; and
f. Balance Reserve to be used for payment of insurance proceeds upon occurrence of an insured event resulting from a material increase in the mortality rate or technical interest rate.
Circular 125/2012/TT-BTC dated 30 July 2012 provides the calculation methodology for each Reserve (per Article 8).
The minimum solvency margins of life insurers measure the difference between liquid assets and debts, and are as set out below (per Article 64.2, Decree 73):
a. In the case of unit linked contracts, 1.5% of the insurance reserves plus 0.3% of the sums insured which carry risks;
b. In the case of universal life contracts and retirement insurance contracts, 4% of the insurance reserves plus 0.3% of the sums insured which carry risks; and
c. In the case of other life insurance contracts:
• Contracts with a term of five years or less, 4% of the insurance reserves plus 0.1% of the sums insured which carry risks; and
• Contracts with a term of more than five years, 4% of the insurance reserves plus 0.3% of the sums insured which carry risks.
Solvency for insurance enterprises providing universal life insurance must be at least VND100 billion more than the minimum solvency (per Article 4.1, Circular 52/2016/TT-BTC dated 21 March 2016).
Solvency for insurance enterprises providing unitlinked insurance must be at least VND200 billion more than the minimum solvency margin (per Article 4.1, Circular 135/2012/TT-BTC). The contributed charter capital (charter capital is the Vietnamese equivalent of paid-up capital) must be at least VND200 billion more than the legal capital (per Article 4.1, Circular 135/2012/TT-BTC dated 15 August 2012).
Life Insurance Product Sale Regulations
Insurance enterprises in Vietnam may sell the following types of life insurance products:
a. Whole life insurance; Bảo hiểm trọn đời
b. Pure endowment insurance; Bảo hiểm sinh kỳ
c. Term life insurance; Bảo hiểm tử kỳ
d. Endowment insurance; Bảo hiểm hỗn hợp
e. Annuity insurance; Bảo hiểm trả tiền định kỳ
f. Investment universal insurance; Bảo hiểm liên kết đầu tư
g. Pension insurance. Bảo hiểm hưu trí
Insurers may sell their products through the following channels:
• Through intermediaries – that is insurance agents and insurance brokers;
• Through tendering;
• Through electronic transaction; and
• Any other way permitted by law. We note the recent trend of commercial banks and insurers to collaborate on bancassurance as a distribution channel.
Specific requirements for insurance brokers and enterprises are as set out below:
Click here to view table.
Foreign Ownership Restrictions
Under Vietnam’s commitments to the World Trade Organisation, foreign investors are eligible to establish a 100% foreign-owned entity engaged in the insurance business in Vietnam (“Legal Entity”). The Legal Entity may be set up in the form of a limited liability company (“LLC”) or joint stock company (“JSC”).
The foreign parent of the LLC must satisfy the following conditions:
i. being a foreign insurance enterprise permitted by the relevant foreign competent authority to conduct insurance business in Vietnam;
ii. an entity contributing 10% or more of the charter capital must have conducted a profitable business for three years immediately preceding the year that the application filed is lodged, and must not have accumulated losses as at such time; and
iii. having total assets equivalent to a minimum of US$2 billion.
Regarding JSCs, there must be at least two founding shareholders being organisations satisfying the conditions set out above, and these two shareholders must together own at least 20% of the number of shares in the shareholding insurance company to be established. In addition, founding shareholders must together own at least 50% of the number of ordinary shares which may be offered for sale within three years from the date of license issuance (per Article 7.2, Decree 73).
INSURANCE BROKERAGE BUSINESS
Insurance Brokers may be 100% foreign-owned. The Legal Entity may be established in the form of a LLC or JSC. Vietnamese laws do not restrict the percentage of foreign ownership in either a LLC or JSC. The offshore investors in the Legal Entity must satisfy the following conditions:
i. being a foreign insurance broker permitted by the relevant foreign competent agency to conduct insurance broking business in Vietnam; and
ii. an entity contributing 10% or more of the charter capital to the Legal Entity must have conducted a profitable business for three years immediately preceding the year that the application file is lodged, and must not have accumulated losses at such time.
Regulatory Approval Process
Under applicable laws, a foreign-invested insurance business or broker is required to satisfy the following conditions after the license is issued:
a. to publish an announcement in five consecutive issues of a daily newspaper within 30 days from the date of license;
b. to lodge a security deposit equal to 2% of legal capital with a commercial bank operating in Vietnam within 60 days of the date of license;
c. to complete the following procedures in order to officially commence operation within 12 months from the date of license issuance:
• establishing an infrastructure system and equipment and information technology software;
• obtaining approval for the method of establishing professional reserves, insurance products; and
• promulgating rules on underwriting, assessment, paying compensation, internal control, financial and investment management and reinsurance programme management.
Within 12 months from the date of license issuance, if insurance businesses and brokers do not satisfy the conditions set out above, the license may be revoked.