Vietnam's insurance sector expansion continues, while market becomes more competitive

Strong economic growth and demographic change are catalysing the rapid expansion of the Vietnam’s insurance sector, with premiums growing at double-digit rates and likely to do so for some years to come. Thanks to successive liberalising reforms since the 1990s, a range of foreign insurers and investors are benefitting from this growth, and competition looks set to grow as new entrants eye the opportunities available.

Regulation

The Ministry of Finance (MoF) is responsible for overseeing and regulating the insurance market through the Insurance Supervisory Authority (ISA), its subsidiary organisation. The MoF can grant and withdraw licences and has the power to issue legal documents, circulars and other decisions which set guidelines for the operation and activities of players in the sector, such as insurers, insurance agents, brokers and reinsurers.

The legal framework has been shaped by a number of laws passed over the past two and a half decades, starting with market liberalisation in the mid-1990s. Prior to 1994 state-owned insurer Bao Viet had a monopoly on the insurance industry, offering non-life products only.

Choice was very limited, as Bao Viet had only around 20 traditional non-life products. In what was then a predominantly lower-income country, penetration was low, at less than 0.4% of GDP, according to figures from the OECD.

A series of reforms in the 1990s created the basis for the fast-growing industry that exists today. In 1994 Bao Minh Insurance Corporation was incorporated as a 100% state-owned insurer under the MoF. The following year the government permitted the sale of life insurance products and the formation of joint stock insurance companies. In 1996 joint ventures (JVs) with foreign insurers, and then in 1999, 100% foreign-owned insurers, were given permission to operate on the market.

Strengthening The Framework

The 2000 Law on Insurance Business (LIB) forms the basis of regulation, and takes a holistic view of the sector. The LIB was amended in 2010 to take into account the industry’s development and a range of new insurance products, as well as the country’s obligations as a member of the World Trade Organisation, as well as more generally bring the industry in line with international practices.

A number of decrees and circulars issued by the authorities have also enhanced the regulatory infrastructure. In effect since July 1, 2016, Decree 73 clarified regulations on foreign and domestic organisations establishing insurance businesses, including setting a minimum asset base of $2bn for the former and VND2trn ($89.5m) for the latter. In addition, the decree introduced new rules on reinsurance, limiting the amount of premium that can be transferred to associated or parent companies abroad through reinsurance placements, with a view to developing the local reinsurance market and retaining more capital in-country.

The regulator is generally well-regarded by the industry, and consistently solicits views from insurers on the sector’s evolution. The government has also welcomed foreign investors’ presence in the sector and the competition and technical development that they have stimulated.

“The MoF is very active, and holds regular meetings with CEOs for feedback,” Paul Nguyen, CEO of Manulife Vietnam, told OBG. “It’s an open market with open opportunities for investors. The approval process for new products has also improved considerably,” he continued.

Criticisms of the regulatory environment include a lack of data and insufficient regulatory clarity. Better data transparency would help inform companies as they develop strategy, as well as building awareness among analysts and the media, feeding through to investors and the general public. However, the evolving regulatory framework continues to improve, and the industry is maturing.

Performance

The sector grew strongly in 2016, with overall revenue reaching VND102trn ($4.6bn), according to Pham Thu Phuong, deputy head of the ISA, which operates under the umbrella of the MoF. Premium income rose 22.74% to VND86.05trn ($3.8bn) and was supplemented by VND15.7trn ($702.3m) from investment activities. Life insurance in particular recorded strong expansion, with premium revenue rising by 31%, the fastest rate in 10 years, while non-life premium revenue was up 13%. Insurance payouts totalled VND25.67trn ($1.2bn), down around 1% on 2015, potentially boosting margins for insurers, given high premium growth. Insurers’ total assets rose 18% to VND240trn ($10.7bn), while equity increased by 15% to VND53trn ($2.4bn). Insurers set aside VND145trn ($6.5bn) in total for risk provisioning, up 24% on 2015.

Strong growth recorded in 2016 came on the back of an excellent year in 2015, when life insurance premium revenue rose by 30% – the highest rate in a decade – and non-life premiums grew 14%, according figures from the Insurance Association of Vietnam (IAV). Total assets recorded an increase of 21.7% to VND201trn ($9bn), with the life segment accounting for 65% of the total. Indemnity and benefit payments were up by 2% to VND21trn ($939.4m), with 62% of outlay coming from the non-life segment.

The MoF estimates that insurers invested VND186.57trn ($8.3bn) in 2016, a 16% increase on 2015, with 75% invested on a long-term basis.

Market players are upbeat about the outlook, and most expect double-digit growth in 2017 and probably beyond. In 2016 gross written premiums reached the equivalent of 2% of GDP – still relatively low by most standards – indicating substantial room for growth, particularly given Vietnam’s rapid economic development and trends such as urbanisation and rising internet penetration. Some in the industry estimate penetration to be somewhat higher, but still below regional norms.

For purposes of comparison, the ASEAN average is 3.55% of GDP, Phan Quoc Dung, general director of Bao Long Insurance Corporation, told local media in early 2017. Across Asia, insurance penetration – usually the proportion of gross written premiums to GDP – is equivalent to 5.37% of GDP, while the global average is around 6.3%. Estimates vary on the proportion of the population with insurance of any kind, but it is estimated to be less than 10%. Wilf Blackburn, former CEO of Prudential Vietnam, told OBG that it is around 7%.

The growth potential and Vietnam’s relative openness to foreign players in the sector are likely to encourage new entrants, adding to competition. From 2018, with the implementation of the ASEAN Economic Community (AEC) rules, Vietnam will be obliged to further to open its market to players from the other nine ASEAN member states, including Malaysia and Singapore, which have particularly strong financial services sectors.

“Vietnam is reaching an inflection point for the sector in terms of wage growth and demographics, with an average age in the late 20s, combined with economic stability,” Gaurav Sharma, CEO of BIDV MetLife, told OBG. “These factors mean that interest in the sector is high compared to the rest of ASEAN, and even Asia. Insurance is well-positioned to grow at 23-25% a year. There’s interest from players from all over the world – the US, Japan, Korea, Hong Kong, with some looking to better returns than on their home markets.”

Changing Market

Insurance has been seen as a savings product rather than a means of protection – one reason that the life segment is considerably bigger than non-life. Vietnamese choose insurance to generate returns from their savings in preference to time deposits, the interest rates of which fluctuate and which are more vulnerable to inflation, and equity investment, which has yet to gain widespread appeal and is hampered by Vietnam’s relatively illiquid and undiversified stock markets (see Capital Markets chapter). The 2012 banking crunch and associated difficulties in the property market heightened awareness of insurance products as an alternative investment.

However, the insurance customer profile is changing. Awareness of the importance of protecting assets is increasing, as is the disposable income to do so. Rising car ownership and property ownership outside of traditional family homes is broadening household asset bases, and therefore driving demand for protection.

“Insurance companies competed with banks at first, but now need to promote insurance as a protection product,” Nguyen told OBG. “But we need to bear in mind that people want to see a return on investment, not just pure protection.”

Market Breakdown

As of the end of 2015, the last full year for which figures were available, there were a total of 61 insurance companies operating in Vietnam, according to legal information service Practical Law. This included 29 non-life insurers, 17 life insurers, 12 insurance brokers and two reinsurance companies.

The non-life market leader in terms of premium income was PetroVietnam Insurance Joint Stock Corporation (PVI), with a 21% market share in 2015, according to the ISA’s report on the insurance market in Vietnam for that year. The second was Bao Viet Holdings (Bao Viet), the former monopoly holder which remains majority state-owned, with 18.52%. Some way behind Bao Viet was Bao Minh Corporation (Bao Minh), in which the state also owns a majority stake, with 9%. In fourth place was Post and Telecommunication Insurance (PTI), the largest shareholder of which is Korean insurer Dongbu, holding a market share of 8%. PTI was followed by Petrolimex Joint Stock Insurance Company (PJICO), which is majority owned by state energy company Petrolimex, with a share of 7%.

The life sector, meanwhile, is dominated by the “big five” insurers, with another five or six companies also competing for market share. Other smaller players have a fairly limited presence. The leader in the life insurance market was Prudential Vietnam Assurance Private, a member of US-based Prudential Group, with 21%. The second was Bao Viet Life with 20%, followed by Canadian-owned Manulife Vietnam – the first 100% foreign-owned insurance company in Vietnam – with 13%. Vietnamese subsidiary of Hong Kong-based AIA Group came fourth with a 12% share. The fifth-largest life insurance company was Dai-ichi Life Vietnam, a Japanese insurer, which has 10% of the market.

Licensing Requirements

A range of requirements are in place for insurers to operate in Vietnam, mostly in line with international norms. They are largely intended to ensure that only robust insurers operate on the market, and have not established insurmountable barriers to entry for the several foreign players present.

Insurance products are divided into three categories: life, non-life and health insurance. The MoF must approve all rules, terms and premium scales of life and health insurance products before they are offered to consumers. The requirement does not apply to non-life products.

Insurers and reinsurers are obliged to deposit a share of their charter capital equal to 2% of their legal capital in an escrow account at a Vietnamese bank. To operate as an insurer, companies must also comply with a range of other requirements. Paid-up charter capital should be no less than VND300bn ($13.4m) for non-life insurers and VND600bn ($26.8m) for the life segment, VND400bn ($17.9m) for non-life or health reinsurance, VND700bn ($31.3m) for life reinsurance – including those operating in both life and health reinsurance – and VND1.1trn ($49.2m) for reinsurance in the life, non-life and health segments.

There are additional requirements in some cases. For example, those companies operating in aviation insurance must have an additional VND50bn ($2.2m) in paid-up capital, as must those insuring satellites. Insurers with more than 20 branches and representative offices are required to have an extra VND10bn ($447,000) for each branch or representative office.

To establish an insurance company in Vietnam, an investor must have a minimum of VND2trn ($89.5m) in total assets. If entering into a JV, an investor must have VND1.5trn ($67.1m) in total assets. In addition, once operational, insurance and reinsurance providers are also required to meet minimum requirements with regard to charter capital, which must remain at least at the level of legal capital, risk provisioning and solvency, with solvency margins varying depending on length of contract and type of insurance.

Foreign Sector Players

Foreign insurers can currently participate in the Vietnamese market in one of five main ways. Firstly, they can establish a wholly-owned subsidiary in Vietnam. Secondly, foreign insurance companies can form a JV with a Vietnamese insurer. Thirdly, it is possible for foreign insurers to acquire a stake in a joint stock insurance company or a capital contribution portion in a limited liability company. Fourthly, they can set up a branch in Vietnam, and lastly, a company may provide cross-border services from another country into Vietnam.

Examples of JVs in the sector include one between Bao Viet and Japan’s Tokio Marine and Fire Insurance Company and United Insurance Company, and a JV between Bao Minh and Japanese players Mitsui Insurance Company, Sompo Japan Insurance and LIG, a subsidiary of Korea’s KB Insurance. Vietcombank Cardiff Life Insurance is a JV between Vietcombank, France’s BNP Paribas Assurance, and SeABank, another domestic bank.

Foreign players taking stakes in existing insurers is another common means of entry, including for financial investors from outside the insurance sector, and has been a driver of merger and acquisition activity over the past decade. In 2007 HSBC Insurance (Asia Pacific) won a public tender to acquire 10% of the issued charter of Bao Viet Holdings, and acquired a further 8% in 2009 before selling its entire stake to Japan’s Sumitomo Life for VND7.1trn ($317.6m) in 2012. France’s AXA Group took a 18% stake in Bao Minh in 2007, while Swiss Re obtained 25% of Vietnam Insurance Corporation’s issued charter capital in 2008.

In 2010 PVI issued shares equal to a 12.6% stake to sovereign wealth fund Oman Investment Fund, and the following year German insurance company Talanx Group took a 25% share in the Vietnamese insurer. In January 2016 Fairfax Asia, a subsidiary of Canada’s Fairfax Financial Holdings, completed the acquisition of a 35% stake in BIDV Insurance Corporation for an undisclosed amount.

Conditions For Entry

To establish a wholly owned subsidiary, branch office or joint venture in Vietnam, insurers must fulfil a range of other requirements. They must have a head office in a country which is a member of a treaty on cross-border insurance with Vietnam, a minimum 10 years’ experience providing non-life insurance in that country, total asset value of at least $2bn, except in the case of insurance brokers, and to have been profitable for three consecutive years prior to applying for a licence. In addition, the insurer must also have been free of violations of insurance regulations for at least three years prior to application, and have approval to operate in Vietnam from authorities in the home country.

Insurers based offshore – or those located outside Vietnam – are permitted to offer non-life products to foreign individuals in Vietnam and Vietnamese companies in which foreign shareholders have a stake of more than 49%. They are barred from the life insurance sector.

Cross-border operators must have a minimum rating from at least one of the following ratings agencies: Standard and Poor’s, Fitch (both “BBB+”), Moody’s (“Baa”) or A.M. Best (“B++”). They must also deposit at least VND100bn ($4.5m) in a Vietnamese bank. Branch offices, meanwhile, are required to maintain capital contributed by the parent entity at no less than VND200bn ($8.9m), the required legal capital.

Investments

Insurers are permitted to make investments from equity, “idle capital” – premium reserves less funds required for regular payouts – and any other lawful source of funds. Each source must be accounted for equally. Insurance companies are prohibited from borrowing for direct or entrusted investments in securities and real estate, and reinvesting in any form in shareholder companies and affiliated persons and entities, with the exception of deposits with shareholders that are credit institutions.

Insurance companies are increasingly significant players in the Vietnamese financial sector. In 2015 the insurance industry invested VND6trn ($268.4m) in 20-year government bonds (g-bonds) alone, according to the IAV. Life and non-life insurers alike are permitted unlimited investments in g-bonds or government-guaranteed bonds of enterprises, for example, many state-owned enterprises, as well as unlimited deposits with credit institutions. Purchase of shares, unsecured bonds and capital contribution in other enterprises cannot exceed 35% of idle capital of non-life and health insurers and 50% of life insurers. Investment in and lending to real estate ventures is capped at 20% of idle capital for non-life and health operators, and 40% for life insurers.

Channels

The Vietnamese insurance sector is still strongly agency led, with agency sales accounting for approximately 93% of premiums, while the growing bancassurance segment still only makes up 6-7%. Direct and digital marketing comprise a tiny fraction, but has considerable potential. Vietnam’s internet penetration stands at approximately 44%, and is growing rapidly. An increasing number of Vietnamese now own smart-phones, with penetration nearing 40%, and mobile data is the primary means of accessing the internet. “There is potential for an explosion in digital marketing and sales, particularly to young people, from 25-35,” Hang Luu, branding and marketing, senior director of Dai-ichi Life Vietnam, told OBG.

Using agents has suited insurers in Vietnam, given the local preference for dealing with financial service providers directly. But the agency model is labour-intensive, as it relies on a large network of agents. This puts pressure on margins, as well as creating challenges for insurers in recruitment in an increasingly crowded market.

Bancassurance

Bancassurance took some time to take off in Vietnam partly because banks have yet to develop as one-stop-shops for financial services, unlike some emerging markets such as India where customers can invest in unit trusts and make foreign exchange transactions through their local branches. The dominance of the sector by state-owned banks, some of which are slow in adopting innovations, may be one reason.

Yet the range of JVs that have been formed between banks and international insurance companies has energised the bancassurance sector, which has seen its market share grow rapidly in recent years. Banks’ established networks of branches, large customer bases and widespread brand awareness make them ideal conduits for insurance distribution. Customers’ relationship with their banks also makes the distribution network “stickier”, whereas the high rate of attrition of agents either to other companies or to other industries leaves tens of thousands of their customers “orphaned” every year, Sharma told OBG.

“Bank branches have been there for years, and will remain there,” he said. “BIDV has 1000 points of presence and 8.5m customers, and we can leverage these networks. A large part is about awareness – we need to work on how to incentivise bank employees and shareholders to expand and create value for the banks themselves.”

JVs with banks are particularly useful for new entrants to the market seeking ready-made networks and recognisable brands for quick expansion, while establishing an entirely new entity involves more investment. “Bancassurance will be a growing trend over the next five years,” Hang told OBG. “It’s common sense – there’s an emerging middle class doing a lot of banking transactions, and they prefer one-stop financial services.”

Outlook

The growth of the insurance sector in Vietnam has been driven by the country’s buoyant economy and changing demographic profile, developments that look set to continue in the coming years. Awareness of the benefits of insurance is growing, particularly for middle-class families acquiring assets and planning for the future.

Growing trends in the sector include the expansion of bancassurance, a model that benefits banks and insurers alike, while the use of digital channels is just starting to emerge. Competitive as the sector is, its open nature – and the changes likely to be brought in by the AEC in particular – are likely to see foreign entrants continue to seek opportunities and partnerships in Vietnam.

 

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The Report: Vietnam 2017

Insurance chapter from The Report: Vietnam 2017

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