Law on life insurance business in Vietnam - Theoretical and practical issues

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The author believes that the provision is reasonable in the context of Vietnam's economy in the past, present and in the next few years: that is, allowing the Government to prescribe additional types of life insurance if they arise in reality. Due to the rapid development of the life insurance market in the world and in Vietnam, the law often tends to lag behind practice, and then practice must be recorded in the law. This situation has happened in reality: Decree 45/2007/ND-CP prescribes a type of investment-linked insurance that was not previously prescribed in the Law on Insurance Business 2000. However, the Government is allowed to do so according to the provisions of Point e, Clause 1, Article 7 of the Law on Insurance Business 2000. Allowing the Government to prescribe new types of life insurance products will limit the need to amend the Law when it is not really necessary.

Second , current regulations on approval procedures for life insurance products are not clear and transparent enough to ensure the rights and responsibilities of the parties.

As analyzed above, approving life insurance products is a necessary legal procedure to protect insurance participants as well as ensure fair competition among insurance companies in the life insurance market in Vietnam. Immediately after the Law on Insurance Business 2000 took effect, there were regulations on this content in Decree 42/2001/ND-CP of the Government and Circular 98/2004/TT-BTC of the Ministry of Finance. However, Decree 42/2001/ND-CP has quite sketchy regulations on this issue. Until the document replacing Decree 42/2001/ND-CP, Decree 45/2007/ND-CP, this content has not changed. Specifically, it only stipulates that the competent authority to approve life insurance rules and terms is the Ministry of Finance; insurance companies must submit a request for approval with full documents as prescribed; The Ministry of Finance must approve or reject within 30 days. In the circular guiding the above documents, Circular 155/2007/TT-BTC, the Ministry of Finance also only specifically explains some of the contents of the above regulations. Although later, Circular 124/2012/TT-BTC replaced Circular 155/2007/TT-BTC with important additions compared to previous documents, which are regulations on the content of approval, it can still be seen that the issues of the order and procedures for approving life insurance products do not have specific regulations. For example: Although the Ministry of Finance is the competent authority, currently, the specialized management agency for the insurance business sector is the Department of Insurance Management and Supervision , so which entity has actually assessed the content of insurance rules and terms? What are the steps to carry out the approval to ensure correct assessment? During the approval process, does the competent state agency have to work and discuss with the insurance company whose product is proposed for approval, etc.? These are necessary issues to ensure the quality of the approval process, and at the same time, it is necessary to specifically determine the responsibilities of individuals and organizations involved in the approval of life insurance products for the following reasons:

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- Firstly , in theory, the approval of life insurance products is an administrative procedure, therefore, with the current administrative reform policy, the approval procedure of life insurance products needs to be clarified in terms of process, in order to create conditions for insurance companies to properly perform their responsibilities, as well as accurately determine the authority of the competent state management agency in this activity.

- Second , the introduction of a new life insurance product to the market belongs to the business freedom of the insurance company, on the basis of meeting legal requirements. Although the level of management of life insurance products since the Law on Insurance Business in 2000 has been reduced compared to before (through the transition from licensing procedures to approval procedures), in essence, without the approval of the Ministry of Finance, the insurance company cannot introduce life insurance products to the market. Therefore, specifying the requirements that must be met for life insurance products as well as approval procedures is extremely important for insurance companies in the current increasingly fierce competition conditions.

- Third , clearly defining the procedures and responsibilities of organizations and individuals in the process of approving life insurance products is important for the quality of approval activities, thereby protecting the rights of insurance participants. If a life insurance product does not meet legal requirements but is approved, it will certainly have a significant impact on the insurance participants. In particular, the drafting of the insurance clause has a great impact on the implementation of the rights and obligations of the parties in the implementation of the life insurance contract. In fact, many life insurance contracts have provisions that do not protect insurance participants, which are contrary to the principles of the Law on Insurance Business, but are still approved and implemented. This issue will be analyzed in detail in section 3.3. Obviously, once a life insurance product has been sold, the measures to deal with the consequences will not be simple in terms of procedures and will of course be costly for all participants.

Third, the law still has many inappropriate regulations on distribution channels of life insurance products.

As analyzed above, current Vietnamese law has stipulated many distribution channels for life insurance products. Diversifying distribution channels will help create conditions for both insurance companies and insurance buyers to easily contact and sign contracts. However, the current regulations on distribution of life insurance products still have some main shortcomings as follows:

- First , the regulations on insurance agents are not yet complete.

The Law on Insurance Business devotes 5 articles to regulating insurance agents from article 84 to article 88. Practice shows that in the field of life insurance business, insurance agents are the most important distribution channel. According to the approach of current law, agents

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Insurance agents transact with customers under the authorization of insurance companies and receive insurance commissions paid by insurance companies. Although Decree 45/2007/ND-CP has gone further than Decree 42/2001/ND-CP in detailing regulations on agents, and many contents have been supplemented in Circular 124/2012/TT-BTC, however, according to the author, these contents need to be regulated in the Law on Insurance Business to ensure high legal validity and stability.

In addition, the Law on Insurance Business lacks specific provisions on the responsibility of insurance agents to customers as a professional principle, because this responsibility is not limited to the obligations of insurance agents under the agency contract. Article 88 of the Law on Insurance Business only assigns responsibility to insurance companies when agents violate the agency contract, but if the agent does not violate the agency contract, but uses other tricks to get customers to enter into contracts, violating the principle of voluntariness, what is the responsibility of the insurance company, because in principle, for insurance participants, the insurance agent is representing the insurance company and the insurance participant cannot know and does not need to know about the agency contract. On the other hand, also according to the provisions of Article 88, the subject of damage is only clearly defined as the insured person, which is not enough because for life insurance contracts, the insurance buyer can still suffer damage due to the actions of the insurance agent.

In practice, in recent times, many disputes over life insurance contracts have arisen from the actions of insurance agents such as declaring on behalf of customers, forcing customers to buy insurance, fraudulently collecting fees, falsifying contracts, etc. In addition, according to the assessment of state management agencies, the actual quality of agents of many insurance companies is not high due to non-compliance with legal regulations on the process of recruiting, training and using agents, and even attracting and using agents of other insurance companies to sell their life insurance products [20, p.7].

The above facts have revealed the unreasonable approach of the current insurance business law in regulating that insurance agents are simply authorized representatives of insurance companies without independent practice status. This approach leads to the entire responsibility of insurance agents in concluding and implementing contracts being the responsibility of the insurance companies themselves, therefore, the insurance companies must be responsible for training and supervising their insurance agents. At the same time, the current law will of course have to link insurance agents with a certain insurance company by stipulating that organizations and individuals cannot simultaneously act as agents for other insurance companies without the written approval of the insurance company for which they are acting as agents [13]. Meanwhile, in essence, insurance agency is a commercial profession or, in other words, it is a commercial service, similar to agency services under the provisions of the Commercial Law. Because, if we look at the provisions of the Commercial Law regulating agency activities,

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In addition to commercial agents, insurance agents are fully qualified to be regulated similarly. In many countries, the independent agent model as a business entity has been recognized by law, through which agents must comply with legal regulations and agency agreements and take full responsibility for their actions. In the United States, independent agents are the main distribution channel, accounting for 54% of life insurance product distribution [103, p.45]. Corresponding to that responsibility, insurance agents have the right to sell insurance products to many insurance companies, increasing customers' choice and ensuring the effectiveness of agency operations.

- Second , the law does not have specific regulations on the distribution channel of life insurance products through banks.

Although within the scope of the law, credit institutions in general and banks in particular have the right to cooperate with insurance companies to deploy the distribution of life insurance products on the basis of sharing customer data. In fact, bancassurance activities have been taking place for a long time and have developed very rapidly in Vietnam in recent times. However, there is almost no legal regulation regulating this association model up to now, although in reality there are many contents that need to be clarified in terms of law. Because in the association of banks - insurance to do insurance business, in fact, banks can have many different legal positions in this activity. First , the bank is the entity that buys insurance for customers who borrow money from the bank, in which case the bank is both the insurance buyer and the beneficiary. Second , the bank represents the insurance company to sell insurance products to its customers, in which case the bank has the status of an insurance agent. Third , banks cooperate with insurance companies to offer combined products, then to a certain extent, banks are the insurance business entities. And finally, the form of bancassurance is even understood as mutual ownership between banks and insurance companies or simply banks giving insurance companies a location to offer insurance products [21, pp.17-20].

Due to the lack of legal basis for bancassurance activities , in practice, this activity is taking place without proper supervision. In addition to the benefits of bancassurance activities , it is possible to see potential risks that require legal regulations to prevent or limit. The ownership of a bank by an insurance company or the establishment of an insurance company by a bank can lead to risks in both banking and insurance business activities, so a method of close coordination and management between the State Bank and the Ministry of Finance is needed for this linkage model.

3.1.4. Regulations on investment activities of insurance enterprises

Similar to the laws of many countries, the current Law on Insurance Business in Vietnam stipulates that capital investment activities of insurance companies must ensure the principles of safety,

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effective and meet the requirements for regular payments for commitments under the insurance contract. To ensure this principle, insurance enterprises are only allowed to carry out investment activities in the following areas: purchasing government bonds; purchasing stocks and corporate bonds; trading in real estate; contributing capital to other enterprises; lending according to the provisions of the Law on Credit Institutions; and depositing money at credit institutions.

Guiding the investment contents of insurance companies, Decree 46/2007/ND-CP and Circular 125/2012/TT-BTC have specified quite specifically the limits that insurance companies need to implement, divided into the following major issues:

Firstly , the law stipulates that investment capital includes two main types: idle capital from operational reserves and equity capital.

Idle capital from the insurance company's operational reserves is the total operational reserves minus the amounts that the insurance company uses to pay regular insurance premiums during the period. This capital source, in essence, is the responsibility of the insurance company to customers but is temporarily unused, so it is allowed to be invested for two purposes: one is to increase the insurance company's profits; and two is to increase the ability to pay and increase benefits for insurance participants. Also according to the provisions of Decree 46/2007/ND-CP, to ensure normal payment capacity, the amount used to pay regular insurance premiums during the period for insurance companies doing life insurance business must not be lower than 5% of the total insurance operational reserves and must be deposited at credit institutions operating in Vietnam.

Regarding equity capital, Circular 155/2012/TT-BTC divides investment contents into two groups: one is , for investment activities to establish facilities and cover business expenses, it is implemented according to general regulations; and two is , for the remaining equity capital, it must be used for investment similar to idle capital from insurance reserves. At the same time, to ensure transparency, the law also stipulates that insurance enterprises must separate the accounting of investment sources, as well as ensure consistent recording of investment assets.

Second , the law stipulates investment limits for each type of investment. For life insurance companies, Decree 46/2007/ND-CP allows

DNBH can buy unlimited government bonds and corporate bonds.

guarantees as well as deposits at credit institutions. For investment in stocks, corporate bonds without guarantees or capital contributions to other enterprises, it is only allowed to be implemented with a maximum of 50% of idle capital from operational reserves. For real estate business or lending activities, it is only allowed to invest a maximum of 40% of idle capital from operational reserves. This regulation also applies to equity capital for investment. These limits for life insurance enterprises are higher when compared to non-life insurance enterprises.

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This is due to the nature of life insurance business activities, which often have large and stable operational reserves due to long-term life insurance contracts. Circular 155/2012/TT-BTC also provides additional guidance, accordingly, to ensure financial safety, insurance companies are not allowed to reinvest in any form for shareholders/capital contributors and related parties (except for deposits in credit institutions), at the same time, credit institutions receiving deposits must have high credit ratings (belonging to groups 1 and 2) according to the assessment of the State Bank.

Third , the law regulates foreign investment activities of insurance companies.

Current law stipulates that insurance companies have the right to use their equity capital to invest abroad and insurance companies are allowed to carry out many forms of investment such as investment in establishing insurance companies, insurance company branches abroad and other forms of investment. However, insurance companies are only allowed to invest abroad in the capital portion corresponding to the difference between the equity capital exceeding the legal capital. In case the minimum solvency margin is greater than the legal capital, the limit for overseas investment will be the difference between the equity capital exceeding the minimum solvency margin. Another important content also stipulated in the implementation of overseas investment by insurance companies is that they must obtain the approval of the Ministry of Finance when making investments, adjusting and terminating investments according to the procedures prescribed in Circular 125/2012/TT-BTC.

It can be generally assessed that the provisions of Vietnamese law on investment by insurance companies are quite similar to those of many countries in the world. Some countries also have regulations on restricting overseas investment by insurance companies to ensure that investment capital meets domestic needs, especially in developing countries. For example, recently, Chinese law has many new regulations to restrict overseas investment by Chinese insurance companies. According to the new regulations in 2012 of the China Insurance Regulatory Commission (CIRC), overseas investment is limited to indirect investment in bonds, stocks, investment funds and real estate, and insurance companies must ensure outstanding solvency and can only invest no more than 15% of their total assets. Overseas investment organizations receiving investment trusts from Chinese insurance companies must also ensure financial capacity and experience [97].

Besides the advantages achieved, the legal regulations regulating the investment activities of life insurance enterprises still have some shortcomings, reflected in the following main aspects:

Firstly , the regulations on investment limits are still quite sketchy, not ensuring the balance between safety principles and profitability of investment activities.

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With the above regulations, in general, DNBH is quite favorable in investment activities to ensure diversification of investment portfolio. However, there should be more specific limits to ensure safety as well as a basis for monitoring activities in some investment activities, such as investing in stocks, contributing capital to enterprises, etc. Decree 46/2007/ND-CP only stipulates restrictions on the maximum investment capital ratio for each type of investment but does not have regulations controlling specific investment ratios for each type of investment asset such as the ratio or level of investment in unsecured stocks at an enterprise, or the maximum ratio or level of lending to a customer, etc. In addition, Decree 46/2007/ND-CP also does not distinguish between securities listed or registered for trading on the official stock market and securities not listed or registered for trading, while securities on the official market are often safer. The laws of many countries often specify these limits. For example, the NAIC Model Law on Investment Activities of Insurance Enterprises stipulates many investment limits for the life insurance sector such as: Insurance enterprises may not hold more than 5% of the voting shares of a depository institution, may not hold more than 20% of the assets of the insurance enterprise for investments rated as medium or low, etc. [128, pp. 23-24]

Unlike the laws in many countries with developed insurance markets such as the European Union or the United States, the investment limits prescribed by current Vietnamese law only have maximum limits, not minimum limits [49, p.5]. Meanwhile, the regulations on minimum investment limits are important in ensuring that the investment capital of insurance companies is diversified and consistent with the State's orientation for developing the capital market.

In fact, the investment activities of life insurance companies in Vietnam in recent times have been assessed as quite simple, focusing mainly on two areas: investing in government bonds and depositing at credit institutions, while the majority of the remaining investment capital is for investment trust. Statistics in 2012 of the Ministry of Finance have proven the above statement, accordingly, the investment rate in government bonds of life insurance companies is 48.33%, depositing at credit institutions is 15.25%, investment trust is 23.83%, lending is 7.05%, other investment areas are insignificant and especially there is no real estate investment activity. There are even many foreign-invested insurance companies newly established in recent years that only invest in the form of depositing money at credit institutions [4, p.15]. Meanwhile, in many countries in the European Union, except Germany, the investment structure is inclined towards bonds and stocks, in which stock investment accounts for a significant proportion of 20% to 30% [49, p.5].

Second , the regulations on investment trusts are unclear, which may distort actual investment limits.

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According to current regulations, insurance companies can invest directly or invest through entrustment to another entity, such as an investment management company. There is a current trend in the world that insurance companies invest through investment entrustment. In Vietnam, this trend is also gradually becoming clear through the establishment of affiliated investment companies by many insurance companies. Therefore, the issue of investment entrustment is in great need of legal regulation, but there are currently no specific regulations. Current regulations do not clearly state whether the investment capital through entrustment must meet the prescribed investment limits or not. In essence, investment entrustment is an investment method, not an investment field because it does not show what type of investment assets the insurance company is investing in or which entity is receiving the investment. Statistics from the Ministry of Finance on the investment activities of insurance companies in recent years show that state management agencies also consider investment through trust as an investment field. This confusion will make it more difficult to consider investment limits, and will even create conditions for insurance companies to "evade" regulations on investment limits by entrusting investments. Meanwhile, countries with developed insurance markets such as the European Union or the United States all believe that when determining investment limits, it does not depend on whether the insurance company directly invests or invests through trust. This is clearly shown in the NAIC Model Law on Investment Activities of Insurance Companies and the IAIS guidelines. With the absence of regulations as analyzed above, the entrusted investment activities of insurance companies in recent times have been assessed by experts as not meeting the necessary standards according to international practices [42, p.47].

Third, there is a conflict between the Law on Insurance Business and the Law on Credit Institutions regarding investment activities through lending.

According to the provisions of the Law on Insurance Business, lending is one of the investment fields implemented according to the provisions of the Law on Credit Institutions, including both independent lending and lending under life insurance contracts. According to the practice of most countries for life insurance products, the insurance buyer has the right to borrow from the insurance company on the basis of the life insurance contract having a surrender value, or in other words, the insurance buyer has "pledged" the surrender value of the contract to borrow a certain amount of money. This is very meaningful for the insurance buyer because the life insurance contract has a long term, the insurance buyer wants to maintain the contract and have money to use for a certain period of time. The insurance company's lending, on the one hand, meets the legitimate needs of customers, on the other hand, it is an investment channel. Although the Law on Insurance Business stipulates that lending must be carried out in accordance with the provisions of the Law on Credit Institutions, the Law on Credit Institutions itself prohibits organizations that are not credit institutions from carrying out lending activities as a business activity. Article 8 of the Law on Credit Institutions stipulates: “ Individuals and organizations that are not credit institutions are strictly prohibited from

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