Vietnamese Insurance Sector Update

15 years - A long leap
The Vietnamese insurance sector has made major progress since opening its insurance market in 1993.

 

As of late 2006, Vietnam had more than 30 insurers, operating in all fields like non-life insurance, life insurance, reinsurance and brokerage, compared with only Bao Viet before opening the market. This is great progress.

 

However, Vietnam has different market opening policies for different segments of insurance market. For example, in the non-life insurance field, Vietnamese companies make up for 95 per cent of market share because Vietnam has not opened this field. In the life insurance field, foreign insurers keep up to 62.5 per cent of the market share.

 

With more than 800 products of all types, the main income is from premiums. Premium revenues increased 30 per cent a year on average during the period from 1993 to 2004. The premium revenue has made significant contributions to GDP. It increased from 0.37 per cent in 1993 to 2.13 per cent in late 2006. Total indemnity for economic organisations and people was VND12,300 billion (US$768.75 million) from 2000 to 2005.

 

In spite of its quick rise, the contribution of premiums to Vietnamese GDP remained rather small in comparison with regional countries.

 

Another concern is disparity among insurers. The biggest market segment is life insurance and there is a certain monopoly in specialised industries like oil, gas, petroleum, post and telecom. The business size of Vietnamese insurers is still small. Competition methods are premium reduction and are based on good relationships.

 

As of late 2006, insurers invested VND34,400 billion (US$2.15 billion) back into the economy, accounting for 4.07 per cent of GDP, higher than 1.06 per cent of GDP in 2001.

 

The main investment channels of insurers are government bonds and bank deposits. The remaining capital is used for setting up securities joint ventures, investing in infrastructure, and developing production and business.

 

The organisation of investment activities by insurers is unprofessional. At present, only three insurance firms set up fund management companies and two insurance companies are listed on the stock market. This undeveloped aspect blunts the capital mobilisation capacity of insurance firms.

 

Insurers are disallowed to provide direct loans or strongly invest in real estate and securities markets because of the absence of legal instructions. Hence, the investment efficiency of insurance companies remains low.

 

The insurance market may be in its golden age, with an average annual growth rate of nearly 50 per cent. Many insurers optimistically put forward targets of “increasing premium revenues by some 24 per cent and keeping the growth rates of non-life insurance sector by 16.5 per cent annually and life insurance by 28 per cent. The premiums will be equal to 4.2 per cent of GDP by 2010 from the 2.5 per cent rate in 2005. Provisions for their operations will increased by 12 times, and total reinvested capital will be 14 times higher than that in 2002.”

 

However, immediately after that, the insurance sector, especially life insurance, reached a saturation point. In the last three years, the slowing premium turnover was only up 16 per cent a year on average. The premium revenues were equal to 2.13 per cent of GDP in late 2006, and total capital reinvested in the economy was VND34,400 billion (US$2.15 billion), equalling 4.07 per cent of GDP.

 

Consequently, the plan for the period until 2005 failed to reach the target. Therefore, to realise the target set for 2010, the premium revenue must grow 41 per cent annually on average and capital reinvested in the economy must go up 42 per cent annually. If the growth rate is kept at 24 per cent, premiums will equal 3.3 per cent of GDP.

 

Which solutions?
The near future objectives of the Vietnamese insurance are difficult to reach. Retaining an annual growth rate of up to 40 per cent is a hard nut to crack, although it was possibly within reach in the past three years.

 

To realise the ambitious goals, Vietnamese insurers should focus on suitable solutions to increasing revenues and improving investment efficiency as follows:

 

- Continue to diversify the products, improving service quality, developing professional insurance agents and expanding insurance networks. At present, domestic non-life insurance companies, under the umbrella of the government and with their long-developed networks, are operating better than foreign rivals. Vietnamese insurers need to improve competitiveness, and exploit markets and good relations to maintain and enlarge regular client networks. This is an important factor for long-term business plans and strategies of Vietnamese insurers, before the entrance of severe competition from potential foreign rivals.

 

- Set up independent investment organisations to make full and efficient use of premiums.

 

- Cooperate with stronger financial organisations to sharpen the competitive edge before the arrival of foreign insurers, as stipulated in Vietnam’s WTO entry commitments.

 

- Reduce state protection for insurers by listing on stock markets, enabling insurers to increase their added values, expand capital approaches and strengthen financial capacities.

 

In the past 10 years, the insurance sector has made certain contributions to the development of the Vietnamese financial sector and the Vietnamese economy in general. The Vietnamese insurance market is an important capital channel with a full role on the financial market. It ensures stability in dispersing risks, strengthens financial stability in households and enterprises, mobilises long-term capital and investment, and reduces pressure on the State Budget via the social insurance channel.

 

Existing shortcomings of the insurance market will be soon eradicated by suitable development strategy and favourable socio-economic situation.

 

(VietNamNet)