The Vietnamese government is proposing a comprehensive review and reform of the insurance legal framework covering all legal aspects, from corporate establishment and operations to financial and investment regimes, and available for insurers, insurance brokers, agents and insurance-related entities iin Vietnam.
The government recently released drafts of two new decrees to propose reforms and amendments to replace the nearly 10-year-old rules under decree No. 45, decree No. 46, as amended in 2011 by decree No. 123, and in 2014 by decree No. 68 (collectively, the current rules), implementing the Law on Insurance Business.
The draft new decrees aim to improve and streamline the legal framework and address practical issues for the development of the market. However, they also contain some stricter or new requirements on, among other things, qualifications and shareholding structure for institutional shareholders in local joint stock insurers, IT systems, additional operational reserves, and restrictions on offshore reinsurance.
Set out below are some key proposed amendments under the draft new decrees.
Under the current rules, to set up a local insurer in the form of a joint stock company (JSC) in Vietnam, there must be at least two founding institutional shareholders investing in the local insurer. The draft new decrees additionally require that those institutional shareholders must satisfy the same requirements as those that currently only apply to institutional investors in an insurance joint venture or limited liability company (LLC).
Accordingly, an offshore insurer wishing to set up or invest in a local insurer in Vietnam, whether in the form of an LLC or JSC, must have, among other things: at least 10 years of operational experience; a minimum of US$2 billion as total asset value; and a good standing in the past three years.
Institutional shareholders must also own at least 20% of the insurance JSC’s total shares. The Ministry of Finance (MOF) proposed this requirement to try to improve corporate governance and financial capacity for insurance JSCs in Vietnam.
Restrictions on reinsurance
The MOF proposed revising the provisions on reinsurance to improve the retention level of the local insurance market, reduce the reliance on offshore reinsurers, and more quickly protect the interests of the insured, especially for major projects in Vietnam. For these purposes, the proposals include the following requirements under the Draft New Decrees:
• When a local insurer cedes insurance to offshore insurers, it must collect reinsurance commissions to cover the costs and expenses of their insurance arrangements and corporate management. A minimum rate of reinsurance commission will be provided by the finance ministry;
• The maximum level of liability per single risk or loss that a local insurer may retain must not exceed 10% of its owner equity capital;
• A minimum level of liability per single risk or loss must follow specific guidance by the MOF. If a local insurer cedes insurance in accordance with a designation of the insured (fronting), the maximum rate of reinsurance to be designated must not exceed 90% of the level of insurance liability.
Registration of vehicle insurance
The MOF proposes requiring non-life insurers to register policy wording, terms and conditions, and the premium schedule of vehicle insurance products.
An approval from the MOF is required before the relevant non-life insurers can sell those insurance products to the market. This requirement does not apply to compulsory civil liability insurance for vehicle owners.
Requirements for agents
The draft new decrees add a new requirement that every insurance agent must apply for a new insurance agent certificate if he or she has not acted as an insurance agent for a period of two years, or when he or she moves to act for a new insurer.
An insurer may establish transaction offices or business locations only in the provinces or cities where the insurer has established its head office or branch offices. Insurance brokers may also collect consultancy service supply fees to be paid by customers (in addition to brokerage commissions paid by insurers).
Non-life insurers are required to make operational reserves for the risk of natural disasters. Life insurers are required to make operational reserves for payment of committed interest rates for life insurance, pension and investment-link insurance products. Operational reserves, for reinsurance, or health insurance, are also required for any insurer that provides reinsurance or health insurance, respectively.
The draft new decrees are available on the MOF website for public comment, and are subject to change.