The Ministry of Finance of Vietnam (the MOF) is finalizing a draft of a new circular (the Draft Circular) designed to implement last year's Decree No. 731 on insurance business.
The Draft Circular aims to contribute to the reform of the insurance legal framework and covers a comprehensive scope of legal aspects for local insurers, insurance brokers, agents and insurance-related entities in Vietnam. The Draft Circular mainly consolidates the provisions under the three previous implementing circulars, namely: Circular No. 124/2012/TT-BTC, Circular No. 125/2012/TT-BTC and Circular No. 194/2014/TT-BTC (the Existing Circulars). However, it also introduces a number of new and stricter requirements and guidelines compared to the Existing Circulars. This may potentially result in increased costs for insurers.
We have highlighted below some requirements proposed by the MOF under the Draft Circular.
Insurance agents' commissions and the reduction of insurance premiums
The Draft Circular provides for a new guideline in cases where an insurer sells its life or health insurance products directly to customers and does not have to pay any commission to its agents or brokers. In such cases, the insurer can reduce premiums for its customers. However, under the Draft Circular, the insurer must:
- ensure that the amount of reduction does not exceed the amount equivalent to the maximum insurance commissions rates as regulated by the MOF; and
- formulate and approve an internal regulation on the reduction of premiums and the level of reduction, ensuring equality between different customers; they must also notify the MOF of such internal regulations before applying them.
In addition, an insurer can reduce premiums for its customers if it collects premiums automatically via banks or other methods that reduce the cost of collecting premiums. In these cases, the Draft Circular requires that the level of reduction of the premiums correspond with the ratio of commissions which would have been payable to their premium-collecting agents. Also, the insurer must send a written notice of this reduction mechanism to the MOF before its application.
Periodical reporting requirements related to insurance products
The Draft Circular proposes to increase the reporting frequency for life insurers from quarterly to monthly on their reports on the list of new insurance products. Under the Existing Circulars, while non-life insurers are required to submit reports on the list of new insurance products on a monthly basis, life insurers are only required to report on a quarterly basis.
Specifically, under the Draft Circular, within the first 15 days of each month, insurers must submit a monthly report to the MOF on the list, terms and conditions, and premiums of new products from the previous month. The MOF mentioned that they would use details of such reports to post information on their website.
In addition, the life insurers must, on an annual basis, notify their clients of, among other things, the status of their life insurance policies.
The Draft Circular requires insurance brokers to confirm in writing with their customers regarding work items completed at the end of their insurance brokerage service provided to their customers.
In terms of the maximum rate of brokerage commission of each insurance operation/class under each insurance policy contract, the Draft Circular leaves it unchanged at 15%. However, under the Draft Circular, this rate is calculated based on the amount of premiums as specified in the insurance policy (rather than on the amount of premiums as actually collected by insurers, which is the case under the Existing Circulars).
Under Decree No. 73, if a local insurer "cedes insurance in accordance with a designation of the insured", the maximum rate of such reinsurance to be designated must not exceed 90% of the level of insurance liability.
Given the uncertainty of the term "cedes insurance in accordance with a designation of the insured", the Draft Circular adds an explanation that it means either of the cases where:
- an insured person requests that a local insurer cede insurance to one or more particular reinsurers; or
- an insured person requests that a local insurer arrange to cede the insurance via one or more particular reinsurance brokers.
The request of the insured person can be in the form of a designation/authorization letter or a written agreement between the insurer and the insured person (or another entity having the rights and benefits related to the insured object).
In addition, in relation to offshore reinsurers, the Draft Circular clarifies that regardless of whether they accept reinsurance under a fronting arrangement (as set out above) or any other traditional reinsurance arrangement, the strict legal and financial conditions for offshore reinsurers still apply.
Higher duties for appointed actuaries
In relation to life and health insurers, the Draft Circular adds a new duty for their appointed actuaries. Among other things as provided under the Existing Circulars, they must assess investment activities on a quarterly and annual basis, specifying the risks arising and providing their suggestions for assets to be invested and the term of investment for each type of asset, ensuring a correlation between the invested assets and the liabilities the insurer is committed to pay under the insurance policies.
For non-life insurers and reinsurers' appointed actuaries, the Draft Circular proposes to increase the reporting frequency from quarterly to monthly for their appointed actuaries to assess the solvency of their non-life insurers or reinsurers and certify their solvency reports for submission to the MOF.
In addition, the Draft Circular requires non-life insurers and reinsurers' appointed actuaries to prepare and submit annual reports on matters related to their duties for assessment of insurance reserves and solvency of their non-life insurers or reinsurers to the MOF within 90 days of the end of each fiscal year. Under the Existing Circulars, only life and health insurers' appointed actuaries are subject to this annual reporting requirement.
Other than the above, the Draft Circular provides for new guidelines on other legal and financial requirements for insurers, reinsurers and brokers. These include guidelines addressing issues relating to financial governance, insurance operation reserves, solvency margins, principles for determination of revenues and expenses, separation between owners' funds and policyholders' funds, financial and statistical reporting regimes, and the establishment of the solvency supervision board.
1 Decree No. 73/2016/ND-CP of the Government dated 1 July 2016 guiding the implementation of the Law on Insurance Business.