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In 2021, Vietnam’s insurance industry recorded VND 256
trillion (US$10.9 billion) in premiums, more than triple that
recorded in 2015. Furthermore, Vietnam’s current insurance
market represented 3.96 per cent of GDP in 2021, according to the
Ministry of Finance (MoF).1 This is relatively low,
compared to the global average of 7 per cent and suggests ample
room for further growth. By comparison the UK’s insurance
market represents around 11 per cent of the UK’s economy (see
Table).
Table 1 Comparison of Vietnam and UK insurance
markets
| United Kingdom | Vietnam | |
| Population | 67 million | 98 million |
| GDP per capita (2021) | US$ 46,510 | US$ 3,756 |
| Insurance penetration (2021) | 11.1{e421c4d081ed1e1efd2d9b9e397159b409f6f1af1639f2363bfecd2822ec732a} | 3.96{e421c4d081ed1e1efd2d9b9e397159b409f6f1af1639f2363bfecd2822ec732a} |
| Total premiums | US$ 380 billion | US$ 10.9 billion |
Source: UN, World Bank, Statista, OECDStat, MoF
As foreign insurance service suppliers eye this potential
market, they should be aware of the most recent changes to the
regulatory framework. The new Insurance Business Law, Law No.
08/2022/QH15, passed on 16 June 2022 and entered into force on 01
January 2023, provides some notable changes to the former
law,2 adding clarity to the marker access and operation
conditions that are expected to contribute to further development
of Vietnam’s insurance market. This article delves into the key
conditions for foreign investors and suppliers.
Market access conditions for foreign investors
Among several changes, the new Law clarifies the licensing
requirements to attract new investors. Specifically, the new Law
affirmed that foreign investors can own shares and contribute
capital up to 100{e421c4d081ed1e1efd2d9b9e397159b409f6f1af1639f2363bfecd2822ec732a} of the charter capital of insurance and
reinsurance enterprises.3 This threshold for foreign
share in insurance sector aligned to Vietnam’s Specific
Schedule of Commitments under the General Agreement on Trade in
Services (GATS).
Under the European Union-Vietnam Free Trade Agreement (EUVFTA),
branches of foreign reinsurance enterprises shall be permitted
after three years from the date of entry into force of the
Agreement (i.e., August 2023). Accordingly, the New Law allows
reinsurers to set up reinsurance branches in Vietnam from entry
into force of the law.
Conditions for licensing and establishment
The New Law expanded the coverage of foreign investors by
allowing financial groups to join the insurance business and by
streamlining and simplifying conditions for legal entities to
establish a new insurance enterprise. The licensing conditions
include general conditions and specific conditions applicable to
the members (in case of limited liability company) or shareholders
(in case of joint stock companies).
The general licensing conditions for establishing insurance or
reinsurance companies cover the requirements concerning founding
shareholders or members, capital, and personnel, in addition to
other general establishment requirements.4 Among other
conditions, legal persons having at least 10{e421c4d081ed1e1efd2d9b9e397159b409f6f1af1639f2363bfecd2822ec732a} of capital
contribution and insurers and reinsurers who already have licensed
operations in Vietnam must ensure that they generate profits within
03 consecutive fiscal years immediately before the date of
submission of license application and must meet financial
conditions in accordance with the Government’s regulations.
The foreign investor category allowed to establish insurance and
reinsurance business in Vietnam has been expanded to include
foreign financial and insurance corporations.5 That
means the direct investors do not have to be an insurance company
so long as they satisfy the specific conditions on the sound
financial conditions, compliance, and asset specified by the New
Law. Like the Old Law, the New Law also allows subsidiaries
specialized in outbound investment of foreign finance and insurance
corporations (e.g., offshore companies) to make a capital
contribution or acquire shares of an insurance or reinsurance
company in Vietnam.
Furthermore, the New Law adds new requirements that foreign
investors must be committed to offering financial, technological,
corporate management, risk management, governance and operational
support for the insurance or reinsurance company to be incorporated
in Vietnam.
Insurance Business Activities
Under the New Law, insurance products are divided into three
distinct types: life insurance, health insurance, and non-life
insurance. The New Law no longer details the specific insurance
operations under each type, but gives the Government the
responsibility to elaborate via guiding instruments. Similar to the
Old Law, the New Law does not allow insurers to provide both life
insurance and or non-life insurance. However, the New Law does
allow flexibility for the bundling of insurance products under
specific circumstances:6
- life insurers provide health insurance products;
- non-life insurers provide health insurance products having a
term of up to one year and insurance products that only cover the
mortality risk having a term of up to one year; and - health insurers provide insurance products that only cover the
mortality risk having a term of up to one year.
Capital adequacy ratio
The New Law marks the shifting of the monitoring mechanism from
the solvency margin7 to the capital adequacy
ratio8 – a risk-based capital management model similar
to the approach used in the banking and securities sub-sectors.
Specifically, the New Law requires that the insurers and
reinsurers constantly maintain the minimum capital adequacy ratio
as prescribed by law.
The risk-weighted capital is determined based on the size and
quantitative assessment of the impacts of the four risk categories
that might affect the business activities of the insurers and
reinsurers,9 including:
- Insurance risks, including risks arising from fluctuations in
technical factors corresponding to types of insurance (i.e., life
insurance, non-life insurance and health insurance). - Market risks, including risks arising from the market for
investment activities of insurers and reinsurers. - Operational risks, including risks arising from operating
processes, system, and governance of insurers and reinsurers. - Other risks, including risks arising from other partners or
other factors that have not been taken into account under the above
three risk categories.
There is a transitional period of 5 years for applying the
capital adequacy ratio. In the meantime, the solvency margin shall
remain the applicable monitoring mechanism until 31 December 2027.
This 5-year period is considered to provide a buffer zone for the
Government to make appropriate calculations, adjustments, impact
assessments, and develop detailed implementation guidelines while
allowing businesses time to adapt, thus avoiding any potentially
abrupt changes to the industry’s short- and medium-term
outlook.
Other notable changes in the New Law
In addition to the market access and licensing conditions, the
new Insurance Business Law 2022 also introduces several changes to
the insurance operation and activities; some of the notable ones
are provided as follows:
- Removal of the requirement for compulsory insurance on
professional liabilities in the legal advisory and the insurance
brokerage professions.10 - Allowing the outsourcing of specific procedures of activities
of insurers and reinsurers, except for internal control; internal
audit; risk management; consultation, introduction, offering of
insurance products, and arranging the conclusion of an insurance
contract. The New Law requires that the outsourced third party must
perform at least 75{e421c4d081ed1e1efd2d9b9e397159b409f6f1af1639f2363bfecd2822ec732a} of the workload of outsourced activities.
Meanwhile, insurers and reinsurers remain ultimately and solely
responsible to the policyholder.11 - Insurance sales via online channels are allowed, in addition to
traditional channels of direct sale, via insurance agents or
brokers or tendering.12 The distribution of insurance
products via an online channel will be further guided by the
Minister of Finance. - Adding provisions on microinsurance products and organizations
providing microinsurance. - Supplementing provisions on the principles of entering into and
performing insurance contracts to be in line with fundamental
principles in civil law; including provisions on the choice of
forum for dispute resolution (i.e., negotiation, mediation,
arbitration, or court).
What should businesses be mindful of?
The New Law entered into force on 01 January 2023, except for
some provisions related to the capital adequacy ratio and
intervention measures, which will take effect from 1 January 2028.
This 5-year transitional period of 5 years is considered to provide
a buffer zone for the Government to make appropriate calculations,
adjustments, impact assessments, and develop detailed
implementation guidelines. This gives businesses time to adapt the
internal operational and governance processes, thus avoiding any
potentially abrupt changes to the industry’s short- and
medium-term outlook. The relaxation of some market access
conditions for foreign financial and insurance corporations and
product coverage can be expected to attract further investments to
explore the untapped potential of Vietnam’s insurance
market.
Footnotes
1. Ministry of Finance (2021). The Annual Report of the Vietnam Insurance Market
2021.
2. Law No. 24/2000/QH10 on Insurance
Business dated 9 December 2000, as amended and supplemented by (i)
Law No. 61/2010/QH12 on amendment and supplement of a number of
articles of the Law on Insurance Business and (ii) Law No.
42/2019/QH14 on amending and supplementing a number of articles of
the Law on Insurance Business and the Law on Intellectual
Property.
3. Article 68, Law No. 08/2022/QH15 on
Insurance Business.
4. Article 64, Law No. 08/2022/QH15 on
Insurance Business.
5. Article 65.1, Law No. 08/2022/QH15 on
Insurance Business.
6. Article 63.3, Law No. 08/2022/QH15 on
Insurance Business.
7. The solvency margin of an insurance
enterprise is calculated as the difference between the value of
assets and liabilities of that insurance enterprise at the time of
calculation.
8. Capital adequacy ratio is the ratio of
available capital to risk-weighted capital.
9. Article 94.5, Law No. 08/2022/QH15 on
Insurance Business.
10. Previously mandatory under Article
8.2(b) and 8.2(c) of the Law No. 24/2000/QH10 on Insurance Business
(as amended).
11. Article 90, Law No. 08/2022/QH15 on
Insurance Business.
12. Article 87.4, Law No. 08/2022/QH15 on
Insurance Business.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
