Discussing investment activities in life insurance companies

3.1.Charter capital

Insurance companies usually have to sign a part of their charter capital according to the law. In Vietnam, the current regulation is 5% of the legal capital, the remaining part can be invested by the insurance company to generate profit.

In life insurance companies, this source of capital does not account for a large proportion but plays a quite important role. It is the company's own capital so it is not subject to strict control and regulation by law, therefore, insurance companies can invest in items with high profit margins to serve their strategies and goals.

3.2.Required reserve fund

In the process of risk business, the insurance company itself may also encounter risks that affect the company's ability to pay, which may affect customers. Therefore, the State must require insurance companies to set aside mandatory reserve funds to not only ensure the company's ability to pay but also protect the rights of insurance participants. The Law on Insurance Business of Vietnam stipulates that insurance companies must set aside 5% of their annual after-tax profits to set up mandatory reserve funds, the maximum level of this fund is 10% of the charter capital of the insurance company.

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3.3.Voluntary reserve fund

During business operations, insurance companies must always maintain their solvency. In addition to the mandatory reserve fund, insurance companies can establish a voluntary reserve fund. This fund is taken from the company's undistributed after-tax profits. Insurance companies establish this additional fund to increase their solvency and fulfill their commitments to customers.

The compulsory and voluntary reserve funds of insurance companies often account for a small proportion of the investment capital of the enterprise, but also play an important role, contributing to increasing revenue and ensuring the solvency of the insurance company.

3.4.Unused profits from previous years and retained earnings of the enterprise.

At the end of each fiscal year, the after-tax profit of the insurance company is used to pay dividends to shareholders of joint stock companies, set up funds such as development investment fund, welfare reward fund, etc. The remainder will be added to the investment capital of the enterprise.

In life insurance business, insurance companies also have investment funds formed from retained earnings, ensuring profit sharing commitments.

3.5. Idle capital from insurance reserves

a, Business reserve fund in insurance companies

According to current regulations, the operational reserve is a fund that insurance companies must establish to fulfill their commitments to customers under insurance contracts in all situations. In addition, operational reserve funds also act as a "regulating valve" for the company's revenue, expenditure and profits, ensuring that the company is always in a state of development and stability.

If the operational reserve fund is not strictly controlled and operated arbitrarily, it will be counterproductive and harmful to the business.

The operating reserve is derived from the fees owned by the enterprise, and tends to increase in size due to the growth of the business and the retention level. The growth of the operating reserve fund and its relative stability become a financial potential of the enterprise, which is used by the enterprise for investment in its overall business strategy.

The insurance company's operational reserve fund includes:

 Mathematical reserve;

 Payment reserve (compensation);

 Balanced reserve;

 Profit sharing reserve;

b, Idle capital from insurance reserves

Idle capital from insurance reserves of life insurance companies is the total insurance reserves minus regular insurance compensation amounts during the period.

The Law on Insurance Business stipulates that the regular compensation amount for a life insurance company is greater than or equal to 5% of the total business reserves.

At the end of each fiscal year, the insurance company sets aside professional reserve funds from the insurance financial fund for each insurance business and for the remaining liability of the insurance contract. In the following fiscal year, the professional reserve funds usually do not have to be used to pay or compensate immediately. The insurance company can take from the premiums collected during the year to pay compensation for the liability arising from contracts signed from

last year. Therefore, DNBH will have a part of the "idle" operational reserve fund that can be invested to make a profit.

Among the above investment sources, idle capital from insurance companies' operational reserves always accounts for a large proportion of the total investment capital. For life insurance companies, this capital source accounts for over 90%. The investment of this capital source is strictly controlled by law. In Vietnam, the law stipulates as follows:

Buy government bonds, guaranteed corporate bonds, deposit money at credit institutions without restrictions.

Purchase of stocks, unsecured corporate bonds, and capital contribution to other enterprises with a maximum of 50% of idle capital from insurance reserves.

For real estate business, lending, and investment trust through credit financial institutions, the maximum is 40% of idle capital from insurance reserves.

4. Factors affecting investment activities of life insurance companies

There are many factors affecting the investment activities of life insurance companies, including both internal and external factors.

4.1 . Internal factors:

4.1.1. Financial obligations of life insurance companies.

It can be said that the financial obligations of the insurer are the key factor in determining the choice of investment forms of the insurance company, especially the obligations towards the customer (the insured). This obligation is stipulated in the terms of the insurance contract. The investment form of the insurer will depend on the nature of the insurer's obligations towards the customer.

The capital for investment of insurance companies is mostly taken from the reserve funds; therefore, to ensure the interests of customers as well as the company's solvency, insurance companies when investing must not only consider profits but also ensure the ability to meet high responsibilities to the insured. If there is no strict management of investment activities, insurance companies will tend to seek investment forms that can gain the highest profits based on existing financial assets.

Like non-life insurance companies, life insurance companies have two main financial obligations:

 Responsibility to the insured

 Responsibility to shareholders.

The nature of financial obligations to insured persons in life insurance companies has a great influence on the investment policy of the company, especially on the choice of assets considered as security for that obligation. In general, financial obligations to insured persons of life insurance companies have a longer term than those of non-life insurance companies, especially in life insurance activities related to the provision of long-term savings and retirement products.

This means that the time horizon for investing life insurance participants’ funds is much longer than in non-life insurance. In addition, the inflows from life insurance premiums are relatively stable because the premiums are pre-calculated and collected periodically or in a lump sum. Therefore, life insurers do not have to worry too much about the liquidity of the assets in their investment portfolio.

4.1.2. Size of insurance company

The size of the insurance company also affects the choice of investment forms.

Insurance companies with large investment capital will have a wider range of investment options, with the ability to invest in many different portfolios, especially when there are regulations on minimum investment ratios for some areas such as real estate, government bonds... In contrast to insurance companies with smaller investment capital.

The liquidity of financial assets will depend on the scale of investment in that asset of the insurance company compared to the scale of the entire market. For example, a small insurance company, because the investment asset has a small value, when needed, they can sell it immediately to the market without worrying about disrupting the market, ensuring liquidity to have cash to spend. Meanwhile, with a large insurance company, holding a large value of the same type of investment asset, when needed, if sold to the market, it can be significantly affected because when selling in large quantities, the price is often reduced. In this case, the investment asset can be considered not having the necessary liquidity.

4.1.3. Profit distribution policy

This factor affects the investment activities of life insurance companies, when the company signs insurance contracts with profit sharing commitments such as whole life insurance products, mixed life insurance products and annuities.

-If the local insurance market has a practice of distributing profits to policyholders in the form of annual cash dividends, insurers will focus more on short-term income from investments.

-On the contrary, if the distribution of profits to life insurance participants is mainly done in the form of adding to the insurance amount or paying bonuses at the end of the insurance contract, the insurance company is less interested in short-term investment profits and focuses on long-term investments.

4.1.4. Investment views of managers.

Investment activities are affected by many factors, but the final investment decision: where to invest, in what form and how much... is decided by the person responsible for investment management within the legal framework.

If the investment manager is conservative, he or she will tend to choose portfolios with low risk. On the other hand, if he or she is risk-averse, he or she will tend to choose portfolios with higher risk but with a much higher expected return.

The reality is that investment management approaches vary across insurance markets. This has implications for the boards of directors of insurance companies, who set the overall limits on the company's investment policy. Under similar pressures, investment policies tend to be broadly similar across insurers operating in the same market.

However, it is also true that investment philosophies or views are not separate from the context of the size and development speed of the capital market. Large capital markets often have the active participation of insurance companies. Freer and more dynamic financial sectors often create less prudent investment management practices.

4.2. External factors:

Like any other economic activity, the investment activities of insurance companies are always affected by external environmental factors such as the legal environment and the economic environment.

-social-political...

4.2.1. State rental regime.

Tax is an important external factor that significantly affects the investment activities of DNBH, specifically as follows:

If the tax rate applicable to investment income is different from the tax rate applicable to capital gains income, this will affect the choice of investment form.

If capital gains income were not taxed, this could change the attractiveness of different financial assets.

DNBH will increase investment value in areas encouraged by the State through tax reduction.

The State encourages investment in the economy by preferential policies of not imposing taxes on enterprises' after-tax profits if those profits are reinvested. Then, insurance companies will tend to keep more after-tax profits to add to their charter capital, increasing investment capital for enterprises.

4.2.2.Capital market conditions.

The size of domestic capital and financial markets has an important impact on the choice of investment forms. Well-organized capital markets can provide a wide range of available financial assets and this is reflected in the investment portfolios of insurance companies. If the capital market is not fully developed, the choice of investment forms will be limited. (This is clearly shown in the Vietnamese market in recent years: Since 2000, we have had a stock market but the scale is still small and the operation is not effective.

4.2.3. Some other State management tools.

Insurance companies cannot freely invest their idle capital but are always subject to State management. The State must have legal restrictions on insurance companies' investment activities, investment orientation, provide certain investment portfolios, and even limit the maximum and minimum investment levels.

In fact, the capital of insurance companies is very large and plays an important role in the economy, so the State needs to manage the investment activities of insurance companies for the purpose of:

+ Protect insurance participants;

+ Orientation of investment funds;

+Reduce the risk of concentration of power in the financial sector;

5. Forms and organization of investment activities in life insurance enterprises:

5.1 . Investment forms in life insurance companies:

5.1.1. Secured loans

For life insurance companies, investment activities through lending play a very important role, reflected in the following characteristics:

 Compliance with financial standards

 Create stable income for insurance companies

 Provide society with a channel for capital mobilization

 Contribute to encouraging the consumption of insurance products

As an investment tool, when lending, insurance companies are also subject to certain restrictions such as restrictions on the maximum amount allowed to be lent or restrictions on the currency of the loan.

Currently, the mortgage loans of insurance companies are mainly secured by real estate. For example, in the late 1990s in the US, more than 17% of the total value of investments of life insurance companies were loans secured by real estate, while the real estate directly owned by these insurance companies accounted for only 3%.

In addition, loans based on life insurance policies are increasingly increasing. This is also a form of attracting more customers for insurance companies. In Vietnam today, lending based on insurance policies is very popular and is used by insurance companies as a form of competition.

5.1.2.Stock investment

This is the most widely used investment tool by insurance companies. In the US in the 1990s, the value of investment in securities accounted for about 60% of the total investment value of life insurance companies. In France, up to 63.9% of the investment value of insurance companies in 1994 was spent on buying bonds. In addition, 17% of the investment value of US life insurance companies were securities issued by the US Treasury and federal government agencies. This means that the income from investment activities in securities brings to insurance companies is very large.

In addition, investing in securities is highly liquid because insurers can quickly sell securities to the market if cash is needed. The securities that insurers invest in are usually stocks and bonds.

Share:

A stock is a certificate or book entry that confirms ownership of one or more shares of a company. There are two types of stocks: common stock and preferred stock. Common stock is an investment in the form of equity and is distinct from bonds, while preferred stock has characteristics of both stocks and bonds.

When insurers invest in stocks, they enjoy rights to the company as shareholders, ownership and dividends at a level equivalent to the proportion of shares they hold. The benefits that insurers enjoy at this time depend on whether they hold common or preferred stocks. In addition to the interest earned from dividends, they can also earn capital gains. This is the income that insurers get from the difference between the current market price and the purchase price of the stock.

Bonds :

This is a type of security issued in the form of a certificate or book entry, confirming the debt repayment obligation of the bond issuer to the bondholder. This debt instrument can be issued by the Government or businesses. Corporate bonds have a higher risk than government bonds but have a higher rate of return. Investing in bonds is mainly affected by interest rate risk. Because bonds have certain advantages such as long maturity, it creates conditions for life insurance companies to eliminate interest rate risk, especially when competition in the insurance market has caused interest rate guarantees for conventional life insurance contracts and annuities to increase.

In short, investing in securities has a higher rate of return than other forms of investment. Insurance companies tend to invest large amounts in this category. Along with the development of the stock market in recent years, investment in the stock market by insurance companies has increased, especially non-life insurance companies. Currently, life insurance companies mainly switch to investing in securities and loans with lower levels of security but with higher expected rates of return.

5.1.3. Real estate investment

Discussing investment activities in life insurance companies - 2

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