The Ministry of Finance of Vietnam and its Insurance Supervisory Authority (MOF) recently released a new draft version of the Insurance Business Law ("Draft 2.6") and is in the process of updating the draft law. Draft 2.6 proposes significant changes to the current Law on Insurance Business and will have a major impact on the development of Vietnam's insurance market.
Draft 2.6 is proposed to be submitted to the National Assembly for discussion within the second half of 2021. Then, the authorities in charge will continue updating and finalizing the draft law and will tentatively submit the final version to the National Assembly for enactment in 2022 so that the proposed new law can take effect on 1 January 2023.
Draft 2.6 introduces various changes, with the following highlights:
• The applicable scope of Draft 2.6 is clearer than that of the current regulations.
• There will be changes to the scope of compulsory insurance products: Draft 2.6 will remove insurance on professional liability in the legal advisory activity and the insurance brokerage activity and provides that compulsory insurances under other laws will be included in the scope of compulsory insurances in the draft law. Draft 2.6 does not allow insurers to refuse policyholders who are qualified to purchase compulsory insurance.
• Parties will be more flexible when negotiating terms and conditions of insurance policies. Draft 2.6 no longer requires must-have contents in the insurance policy and only provides a recommended list.
• There is a new provision on temporary life insurance, allowing the insurer to provide temporary insurance to a policyholder when the insurer has received an insurance application and the policyholder has paid the estimated insurance premium.
• There is a new proposed change to the operation of the insurers (i.e., provision of insurance auxiliary services and other activities directly related to the insurance business) and Draft 2.6 expands the cases where an insurer is allowed to concurrently sell different insurance products.
• Changes to the charter of insurers or changes in the individuals who hold directly or indirectly 25% charter capital of insurer will need to be notified to the MOF.
• This will be the first time a regulation on insurance business provides outsourcing activities in the insurance sector.
• It will provide a mechanism for insurers to sell insurance via online channels.
• New proposed changes applicable to the insurance agency activities will (i) no longer require mandatory contents in the insurance agency contract, (ii) set out provisions on the principles in the operation of insurance agencies, rights and obligations of parties in the insurance agency operation which are currently provided in the decree level, and (iii) separate types of insurance agency certificates corresponding to each insurance product.
• Capital adequacy ratio will be based on the actual capital and the risk-based capital.
• Draft 2.6 contains principles on technical reserves of insurers and/or reinsurers.
• There are other proposed changes, such as the time to apply provisions on management of risk, capital and solvency, information disclosure by insurers and on a dispute resolution body.
In more detail
1. Applicable scope of the draft law
The governing scope under the current Law on Insurance Business includes provisions on insurance business activities, rights and obligations of the organizations and individuals participating in the insurance, and state management over insurance business activities.
Instead of providing a broad scope similar to the current Law on Insurance Business, Draft 2.6 specifically provides for the subjects to be governed, which include the following:
(i) any organization or individual who contributes its capital to set up an insurer, re-insurer, insurance broker or mutual micro-insurance company
(ii) insurers, re-insurers, insurance brokers, insurance agents, insurance auxiliary service providers and mutual micro-insurance companies
(iii) policyholders/insurance purchasers, insured persons and beneficiaries
(iv) the state management authorities on the operation of the insurance business sector
(v) other agencies, organizations and individuals related to the operation of insurance business
2. Compulsory insurance products
Under Draft 2.6, compulsory insurances must satisfy the following conditions:
(i) compulsory insurances must be for the protection of public interest, environment and social security
(ii) organizations and individuals subject to complulsory insurances must purchase compulsory insurances and can select the insurer licensed to provide compulsory insurance
(iii) the insurers licensed to provide compulsory insurance must not reject selling compulsory insurances to organizations and individuals eligible to purchase complulsory insurances in accordance with the laws
(iv) the minimum insurance conditions, preminum and amount will be provided by the MOF Compulsory insurances include the following:
(i) civil liability insurance for motor vehicle owners
(ii) fire and explosion insurance
(iii) compulsory insurance in construction investment
(iv) other compulsory insurance, as regulated in other laws, that satisfies the conditions referred to above
Insurance on professional liability in the legal advisory activity and of the insurance broker had been removed from Draft 2.6. Instead, Draft 2.6 proposes that other compulsory insurances may be reflected under other laws (e.g., Law on Lawyers) and satisfy certain conditions as above mentioned.
3. Contents of insurance policy
Draft 2.6 specifically recognizes agreements among parties in relation to the contents of insurance policies. It no longer sets out mandatory contents in the insurance policies. As such, insurers and policyholders have more flexibility when negotiating terms and conditions of insurance policies.
Accordingly, Draft 2.6 recommends that an insurance policy may comprise the following contents:
(i) names and addresses of the insurer, the policyholder, the insured and the beneficiary
(ii) subjects to be insured
(iii) sum insured or value of property insured
(iv) insurance coverage or benefits, insurance terms or conditions
(v) insurance term and effective date of insurance policy
(vi) insurance premium and method of payment of insurance premium
(vii) time limit for and method of payment of insurance proceeds or indemnity
(viii) insurance policy signing date.
An insurance policy must be made in writing in accordance with the civil laws (which may include the electronic form).
4. Temporary insurance
Draft 2.6 proposes a new provision on "temporary insurance" that will apply to life insurance. In particular, the insurer issues temporary insurance to the policyholder when two following conditions are met:
(i) The insurer has received the insurance application.
(ii) The estimated insurance premium has been paid by the policyholder.
The duration, sum insured and conditions of the temporary insurance may be agreed by the insurer and the policyholder. The temporary insurance will end upon the insurance's acceptance or refusal by the insurer or in other cases as agreed.
5. Operations of insurers
Draft 2.6 provides that the operation of the insurer must include the following:
(i) primary insurance business, re-insurance business
(ii) management of funds and capital investments
(iii) risk and loss prevention, limitations
(iv) provision of auxiliary services and other activities directly related to the insurance business
(v) other activities as stipulated by law
Compared to the current Law on Insurance Business, Draft 2.6 proposes to recognize insurance auxiliary services and other activities directly related to the insurance business as one of the operations of an insurer.
Draft 2.6 also provides that an insurer is not allowed to concurrently operate life insurance, non-life insurance and health insurance businesses, except under one of the following circumstances:
(i) life insurers sell/operate health insurance
(ii) non-life insurers sell/operate health insurance and/or term-life insurance of up to five years
(iii) health insurers sell/operate term-life insurance of up to five years
These proposals allow insurers to be more flexible in selling/operating their insurance products and may help insurers benefit and expand their business for more revenue.
6. Changes to be notified to the MOF
Draft 2.6 requires insurers to notify the MOF before making amendments to their charter.However, for insurance brokerage, Draft 2.6 requires insurance brokers to (i) notify the MOF before making amendments to their charters; and (ii) amend the charter after obtaining approval from the MOF. Particularly, under Draft 2.6, after obtaining approval from the MOF for the changes as prescribed in Article 124.1, in addition to amending the charter, insurers must notify the MOF of any changes to the charter with respect to the contents that have just been approved by the MOF. That means, for the same change, insurance brokers may have to undertake two procedures with the MOF. This is the difference between the regulation on this matter governing over the insurers and insurance brokers.
Draft 2.6 also introduces a new concept, that of "beneficial owner of insurers and reinsurers." Accordingly, "beneficial owner of insurers and reinsurers" refers to individuals directly or indirectly holding 25% or more of the charter capital of an insurer or reinsurer. Any change to such beneficial owner must be notified to the MOF.
7. Outsourcing activities
Draft 2.6 provides a new provision to govern specifically outsourcing activities. Accordingly, under Draft 2.6, insurers and reinsurers may negotiate and enter into contracts for third parties to perform part of their processes and operations. Draft 2.6 only provides for limited exceptions that cannot be outsourced, which are for internal control, internal audit and risk management.
Draft 2.6 provides certain requirements on the outsourcing of processes and activities directly relating to insurance activities. More specifically, insurers and reinsurers are ultimately and solely responsible to policyholder. The outsourcing policy needs to be approved by the board of directors or the members' council of the insurer and insurers. This requirement is arguably not necessary and will create an additional burden for insurers. From an insurer's perspective, insurers should be allowed to proactively carry out necessary internal approval procedures in accordance with their own charters and internal regulations in the use of outsourcing services.
Additionally, Draft 2.6 also requires that the outsourced third party must perform at least 75% of the workload of outsourced activities. This requirement may not be consistent with other provisions that require insurers and reinsurers to hold the ultimate and sole responsibility to insurance buyers when using outsourcing services. From an insurer's perspective, insurers should be flexible and proactive in deciding and controlling outsourcing service providers as long as the insurers ensure the management of their service quality.
8. Insurance sales via online channels
The government of Vietnam recognizes and encourages the application of information technology to modernize insurance business activities, corporate governance and methods to provide services and products. The application of information technology in the insurance business must comply with the regulations of the draft law, Law on E-Transactions, Law on Information Technology, Law on Cybersecurity, Law on Anti-Money Laundering and other relevant laws.
Draft 2.6 provides specifically for the provision of insurance products and services via the internet, which is defined as the insurers, insurance brokers or third parties (i.e., partners of the insurer/insurance broker such as banks and e-commerce trading platforms) conducting a part of or the whole process of providing insurance products and services via online channels to organizations and individuals.
Partial provision means when the insurer offers and introduces insurance products on its websites and will meet the customer in person to consult and execute contracts.
Full provision means when the insurer uses technology to automate the whole process of providing insurance products (including the processes such as product introduction, verification of required information, product selection, risk assessment, insurance participation confirmation, premium payment and contract issuance) via websites, applications and e-commerce trading platforms.
Based on the authorization by the insurer, a third party can only provide insurance products and services in the form of partial provision.
The conditions to provide insurance products and services via online channels will be decided by the minister of the MOF.
9. Insurance agency operations
Similar to provisions on insurance policies, Draft 2.6 no longer requires mandatory contents to be included in insurance agency contracts between the insurer and the insurance agent. Instead,Draft 2.6 only recommends that certain contents are included in the insurance agency contract, including, among others:
names and addresses of the insurer and the agent
scope of the insurance agency activities
commissions, bonuses, assistance and other benefits for the insurance agents
terms of the contract and dispute resolution bodies
Draft 2.6 proposes provisions on the principles in the operation of insurance agencies, the rights and obligations of insurers, and the rights and obligations of insurance agencies in the insurance agency's operation, rather than setting out these provisions in a decree as is being done under the current regulation. Draft 2.6 generally keeps the spirit of these provisions under the current Decree No. 73 and does not make substantial changes to these provisions.
Draft 2.6 provides some new regulations under these provisions. Particularly:
(i) Compared against the current Decree No. 73, Draft 2.6 provides four new principles in insurance agency operation, which include the following:
An individual shall only be entitled to work as insurance agent for one insurer in the same segment.
Only carry out the insurance agent activities for trained insurance products.
Comply with the code of ethics and professional conducts issued by the Insurance Association of Vietnam (IAV).
Information of individuals operating as insurance agents and employees in an insurance agency who directly perform the insurance agency activities must be registered and updated in the insurance agent management system of the IAV.
(ii) In relation to the rights of the insurer, the insurer has the right to organize the agency network in line with its business strategy. Additionally, the insurer is obligated to register and update information about individuals conducting insurance agent activities and employees of the insurance agents who directly conduct insurance agent activities with the IAV and notify the IAV of the list of insurance agents whose insurance agency contracts are terminated.
(iii) The insurance agent is obligated to keep confidential the customers' data and is not allowed to provide customers' information to any third party without consent from the customers, unless otherwise required by law.
Draft 2.6 also separates the types of insurance agency certificates corresponding to each insurance product, including: life insurance agency certificate; non-life insurance agency certificate; and health insurance agency certificate.
10. Capital adequacy ratio
Draft 2.6 requires that the insurers and/or reinsurers must constantly maintain their capital adequacy ratios to not less than the regulated capital as required in the MOF. The capital adequacy ratio is that which is between the actual capital and risk-based-capital in accordance with the regulation of the MOF.
It is a new proposed change in Draft 2.6 that the capital adequacy ratio be determined based on risk-based-capital. Under Draft 2.6, risk-based capital is determined based on the size and quantification of the impacts of various groups of risks on the business activities of the insurers and reinsurers, including the following:
(i) Insurance risks: These include risks arising from fluctuations in technical factors corresponding to types of life insurance, non-life insurance and health insurance.
(ii) Market risks: These include risks arising from the market for investment activities of insurers and reinsurers.
(iii) Operational risks: These include risks arising from operating processes, systems, and management of insurers, re-insurers.
(iv) Other risks: These include risks arising from other partners or other factors that have not been taken into account at insurance risks, market risks or operational risks.
11. Technical reserves
Draft 2.6 requires insurers to reserve an amount of money that an insurer or re-insurer must set aside for the purpose of paying its insurance liabilities that may arise from the signed insurance contracts.
Under Draft 2.6, technical reserves must be, among others, separately established for each type of insurance operation, be equal to the liabilities committed by the insurer in the insurance contracts, and be separated between the insurance contracts of the insured subjects inside territory of
Vietnam and those of the insured subjects in foreign countries, regardless of the involvement of the same insurance operation, unless otherwise stipulated by laws.
12. Other proposed changes
Draft 2.6 also proposes other important changes to the current regulation, including the following:
(i) Insurance market information and database system
Draft 2.6 proposes that there will be an insurance market information and database system that will be centrally managed and provided to insurers, reinsurers, insurance brokers and other relevant organizations and individuals for the purpose of establishing an insurance fee corresponding to insurance rights and interests, ensuring the lawful rights and interest of insurance policyholders and insurers, and preventing insurance fraud and self-interest.
Accordingly, insurers, reinsurers, insurance brokers and auxiliary insurance service providers have the obligation to provide the information of insurers, the insured subject and other relevant information for establishing the insurance market information and database system.
(ii) Application of provisions on capital determination, solvency and preventive measures
The provisions on the management of risk, capital, and solvency are proposed to fully apply to insurers and reinsurers on 1 January 2028 with a grace period of five years after the proposed new law's effective date of 1 January 2023. If insurers do not meet requirements under such provisions, the insurers will be subject to the revocation of the license for establishment and operation.
(iii) Information disclosure
Insurers are required to disclose information on a regular and irregular basis, such as information about effective judgments and rulings of the court relevant to the operations of insurers, decisions on sanctions against administrative violations in insurance business, decisions to prosecute managers of the insurers, etc. While the current Law on Insurance Business only requires insurers to disclose information about their financial statements, the proposed scope of information to be disclosed under Draft 2.6 is broader and may cause an administrative burden on insurers.
(iv) Fund for the insured's protection
Under Draft 2.6, from the effective date of the law, which is 1 January 2023, insurers will stop contributing to the fund for the insured's protection. Any outstanding amount in the current fund for the protection of the insured will be managed by the MOF to protect the rights and benefits of the insured in the case of the insurers' bankruptcy or insolvency. The MOF will issue regulations on the management and use of the outstanding amount of the fund for the insured's protection.
(v) Provision on dispute resolution
Draft 2.6 has a specific provision on dispute resolution bodies in case a dispute arises. Particularly, parties may choose one of the following methods to resolve their disputes: (i) amicable negotiation of the parties; (ii) reconciliation/mediation between the parties in accordance with the relevant laws; (iii) a settlement in arbitration; or (iv) litigation at competent court, as agreed by parties.
In addition to the above topics, Draft 2.6 provides for new regulations on the following topics:
Exclusion clauses will not apply where the policyholder has a force majeure reason for providing late notifications to the insurer of the occurrence of the insured event.
Proposal regarding specific regulations on: (i) how to determine the beneficiary in the insurance policy; (ii) the need for the determination of the beneficiary to be accepted by the insured (if the policyholder is not the insured); and (iii) the case of a replacement of beneficiary.
Proposal of specific provisions on group insurance, which are not provided in the current Law on Insurance Business.
In case of undervalued insurance policies, the insurer shall only be responsible for indemnifying in accordance with the ratio of the sum insured to (i) the market value or (ii) the value as agreed under the insurance policy of the insured property at the date of the damage (not the time of conclusion of the insurance policy as provided under the current Law on Insurance Business).
Provision of conditions applicable to investors to set up or contribute capital to insurance companies in Vietnam, and procedures for the application for the establishment of insurance companies in the draft law instead of decree level, as is currently provided under the Decree No. 73.
• A person who directly performs the brokerage services must have an insurance broker certificate issued by a licensed training center in Vietnam or foreign countries. The MOF shall stipulate training programs, the examination and issuance of the insurance brokerage certificates.