Law on life insurance business in Vietnam - Theoretical and practical issues - 22

In recent years, group insurance products have tended to develop rapidly with the main buyers being businesses. This shows that awareness of the benefits of life insurance in Vietnam has changed significantly, especially for businesses. Group insurance products focus on term insurance to increase benefits for employees and key managers in businesses. For example, Prudential's " Phu - Bao Nghiep " product is term insurance for groups of customers with 5 or more members; meanwhile, Bao Viet Life has a similar product called " An Nghiep Thanh Cong ".

One of the most popular life insurance products in the world life insurance market today is investment-linked insurance. Appearing in the world more than 30 years ago, by the 1990s this product was very popular in Asia. In Vietnam, investment-linked insurance products began to be officially regulated legally since 2007 and were immediately deployed by many insurance companies, bringing new appeal to the life insurance market.

Maybe you are interested!

• Law on life insurance business in Vietnam - Theoretical and practical issues - 2
• Law on life insurance business in Vietnam - Theoretical and practical issues - 5
• Law on life insurance business in Vietnam - Theoretical and practical issues - 12
• Viewpoints on Perfecting State Management of Business Activities of Non-Life Insurance Enterprises in Vietnam
• State management of business activities of non-life insurance enterprises in Vietnam - 25

A new trend that has recently emerged is the growth of term insurance in the proportion of life insurance products provided to the market. With the recent fluctuations in the world and Vietnam's socio-economic situation, it has greatly affected people's ability to accumulate as well as increased the desire to be protected purely through insurance products. In addition, the promotion of insurance product sales channels through banks by insurance companies has also contributed to the growth of term insurance products in Vietnam [70, p.2].

Third, life insurance distribution channels are increasingly diversified to better serve customers.

Distribution activities are one of the factors that determine the success of life insurance business. Traditional distribution channels including direct sales and sales through agents have determined the success of insurance companies in recent years.

vii

In the first years of development of the Vietnamese life insurance market, the brokerage channel usually does not account for a high proportion in the life insurance sector but mainly focuses on the non-life insurance market. The growth rate of the number of life insurance agents is quite fast, from about more than 6,000 agents in 1998 to more than 100,000 agents in 2004 and reaching 225,963 agents by the end of 2012 [45] [83, p.58]. Up to now, the distribution channel through agents is still considered the main distribution channel for life insurance products. In addition, the direct sales channel of life insurance products has also been enhanced thanks to technological support such as the internet, credit card services, etc. In addition to the above distribution channels, the distribution of life insurance products is currently also implemented through a number of other channels, the most prominent of which is the channel of selling life insurance products through banks with product lines for individual borrowers [69, p.2].

viii

APPENDIX B

DEVELOPMENT PROCESS OF

INSURANCE BUSINESS LAW IN VIETNAM

1. Period from January 1, 1994 to April 1, 2001

The development of the law on insurance business in general and life insurance business in particular was marked by the birth of Decree 100-CP dated December 18, 1993, effective from January 1, 1994. In the light of the innovative thinking clearly expressed in the 1992 Constitution, although quite simple, Decree 100-CP has relatively fully recorded the viewpoints of the Party and State in building the insurance market in Vietnam. A bright spot of Decree 100-CP is Article 4 with the provision that the State protects the legitimate rights and interests of the insured. According to Decree 100-CP, insurance enterprises are established from many economic sectors, including state-owned enterprises, joint-stock insurance companies, mutual insurance companies, joint-venture insurance companies, 100% foreign-owned insurance companies and branches of foreign insurance organizations in Vietnam. Insurance companies, when established and operating in Vietnam, must be granted a certificate of eligibility to conduct insurance business by the Ministry of Finance. To be granted a certificate, insurance companies must meet the conditions in Articles 17 and 22 of this Decree. Overall, these conditions are quite similar to later regulations of Vietnamese law, showing the Vietnamese Government's clear awareness of the insurance business sector right from the early years of reform. Decree 100-CP also regulates insurance intermediaries including insurance brokers and insurance agents. Unlike later regulations, at this time, only individuals are allowed to act as insurance agents.

Decree 100-CP also clearly stipulates in Article 7 about life insurance as an insurance business permitted to do business in Vietnam. Unlike later, Decree 100-CP does not prohibit insurance companies from simultaneously doing business in life insurance and non-life insurance, but requires separate accounting for these two business lines. Decree 100-CP also devotes a chapter with 8 articles to regulating the supervision of insurance business activities. Although the content is still sketchy, the phrase "supervision" alone shows the quite accurate approach of this document compared to international practice.

To guide the implementation of Decree 100-CP, on May 30, 1994, the Ministry of Finance issued two documents: Circular 46-TC/CĐTC guiding Decree 100-CP and Circular 45-TC/CĐKT regulating the financial management regime for insurance enterprises. Notably,

ix

especially Circular 45-TC/CDKT with regulations requiring insurance companies to ensure capital, deposits and payment capacity. For life insurance, the payment capacity margin is stipulated as 0.1% of the total insurance amount according to insurance contracts in effect in the previous fiscal year. Technical reserves for life insurance are not specifically regulated but only state the principles applied according to international practices. Also according to Circular 45-TC/CDKT, investment activities are carried out from idle capital in the form of purchasing government bonds, treasury bills, capital contributions, etc. In particular, this document allows insurance companies to make loans according to the provisions of the Ordinance on Banks, Credit Cooperatives and Finance Companies dated May 23, 1990, that is, lending activities of insurance companies are considered as credit granting activities.

During this period, the 1995 Civil Code was also promulgated, which included provisions on insurance contracts as a common type of civil contract. According to the provisions of the 1995 Civil Code, insurance contracts have insurance objects including people, property, civil liability and other objects. Insurance contracts must be made in writing with the principle that the insurance buyer must provide complete and honest information. Until the Law on Insurance Business was promulgated, only the 1995 Civil Code had provisions on insurance contracts.

After a period of implementation, Decree 100-CP was amended and supplemented by Decree 74/CP dated June 14, 1997. Regarding the life insurance sector, there are two important contents amended according to Decree 74/CP including: first , insurance operations related to people, including life insurance, must be approved by the Ministry of Finance in terms of insurance rules and terms, and must register the insurance premium schedule with the Ministry of Finance before implementation; second , bringing the provisions already in Circular 45-TC/CDKT to the level of a decree, according to which insurance enterprises are allowed to invest according to the principle of ensuring safety and efficiency, always meeting the requirements for regular payments arising during the process of paying insurance money.

During the period from 1997 to 2000, many documents issued by the Ministry of Finance specified many contents related to insurance business, including life insurance business. Circular 26/1998/TT-BTC dated March 4, 1998 replaced Circular 46-TC/CĐTC with more specific regulations on licensing for insurance companies. Most notably in this document is the regulation that, in addition to meeting the conditions of the guiding decrees, licensing for insurance companies must also be consistent with the orientation and strategy for developing the insurance market, the needs of the economy and ensuring market stability. Regarding insurance exploitation and premium management activities, the Ministry of Finance issued Circular 27/1998/TT-BTC dated March 4, 1998, according to which propaganda and advertising activities must be carried out honestly,

x

exactly, strictly prohibiting the exploitation of customers' trust. This document also stipulates that there are 3 insurance distribution channels: direct sales, sales through intermediaries and sales through bidding. For the first time, in Circular 144/1999/TT-BTC dated December 13, 1999 regulating the life insurance commission regime, the Ministry of Finance classified life insurance products similar to later legal documents such as term insurance, pure life insurance, mixed insurance, whole life insurance and life annuities, and also distinguished between individual life insurance and group life insurance. This document also stipulates the commission rate and the principles for determining the commission rate applicable to agents and collaborators selling life insurance products.

Thus, in the period from 1993 to 2000, with the first legal documents at the level of decrees and circulars, it can be seen that the legal basis for life insurance business activities has been formed, although still simple but gradually improved, from allowing the implementation of life insurance business, insurance enterprise models, regulations on capital, payment capacity and investment activities... However, in the life insurance field, the content of Decree 100-CP, Decree 74/CP and guiding documents still have the following basic limitations:

- Firstly , the regulations on insurance business in general and life insurance business in particular are still at a simple level, with regulations of a "framework" nature, lacking specificity for implementation. For example, during the period from 1993 to 1999, legal regulations did not classify life insurance products, thus affecting the legal adjustment of life insurance products in practice. Part of the reason for this situation is that the life insurance market in this period developed very slowly and did not have a significant impact on the economy and society, so the need for legal adjustment was not high.

- Second , the legal regulations on insurance business during this period did not specifically require separation between life insurance business and non-life insurance business. This affected the management and supervision of the life insurance business. For some foreign-invested life insurance companies licensed in Vietnam during this period such as Chinfon - Manulife and Bao Minh - CMG, they only did life insurance business, while Bao Viet still did both life and non-life insurance business at the same time.

- Third , the regulations on insurance business in general and life insurance in particular are still scattered in many different legal documents, and at the same time, these documents are all sub-law documents, so they have greatly affected the effectiveness of the actual adjustment. Many regulations are gradually supplemented through guiding circulars, although they are considered suitable for the practical situation, these contents were not mentioned in Decree 100-CP and Decree 74/CP afterwards.

xi

2. Period from April 1, 2001 to June 30, 2011

For the above reasons, along with the rapid development of the insurance market in general and the life insurance market in particular, the increasingly urgent need is to have a document with higher legal effect, capable of codifying reasonable regulations at this stage, at the same time amending inadequate regulations and adding new contents to regulate the insurance market. Therefore, the National Assembly passed the Law on Insurance Business on December 9, 2000, effective from April 1, 2001. For the first time, insurance business activities are comprehensively regulated by a law. To implement the Law on Insurance Business, the Government issued Decree No. 42/2001/ND-CP detailing the implementation of the Law on Insurance Business and Decree No. 43/2001/ND-CP regulating the financial regime for insurance enterprises and insurance brokerage enterprises. At the same time, the Ministry of Finance issued Circular 71/2001/TT-BTC and Circular 72/2001/TT-BTC on the same day of August 28, 2001 to guide the above documents. Compared with previous regulations, the law on life insurance business in this period has developed as follows:

- Firstly , the legal regulations have been relatively consistent and consistent with each other from legal documents to decrees and circulars. There are almost no overlapping or conflicting regulations between the Law on Insurance Business and sub-law documents. The regulations of the decrees and circulars are basically consistent with the spirit of the Law on Insurance Business.

- Second , the Law on Insurance Business and its implementing documents have specific regulations on types of life insurance products, general regulations on insurance contracts, regulations on human insurance, including some specific regulations for life insurance such as regulations on age notification and regulations on premium payment. In guiding documents such as Circular 71/2001/TT-BTC (later replaced by Circular 98/2004/TT-BTC dated October 19, 2004), there are also regulations on life insurance exploitation, principles of life insurance product approval, etc. These regulations, although not yet complete, are an important legal basis for regulating life insurance business activities in practice.

- Third , the regulations on the legal status of insurance companies in general, including life insurance companies, have made significant progress. First, the Law on Insurance Business requires the separation of life insurance and non-life insurance. This regulation is similar to the regulations of many countries in the world, especially developing countries, helping to ensure the health of the young insurance market. In addition, the regulations in Decree 43/2001/ND-CP, Circular 72/2001/TT-BTC (later replaced by Circular 99/2004/TT-BTC dated October 19, 2004) on investment activities and payment capacity are relatively clear and specific, helping insurance companies more easily meet the supervision requirements of state management agencies.

xii

With a relatively complete legal system, along with investment incentive policies, the life insurance market in the period of 2001 - 2004 had a very rapid growth rate. However, after a period of implementation, the above legal documents began to reveal some shortcomings that needed to be amended and supplemented. Therefore, a system of replacement documents was issued including Decree 45/2007/ND-CP (replacing Decree 42/2001/ND-CP), Decree 46/2007/ND-CP (replacing Decree 43/2001/ND-CP) issued on the same day of March 27, 2007, Circulars 155/2007/TT-BTC and 156/2007/TT-BTC issued on the same day of December 20, 2007, replacing Circular 98/2004/TT-BTC and Circular 99/2004/TT-BTC respectively. Compared to the previous documents, the replacement documents have the following new points:

- Firstly , the new regulations have increased the financial capacity requirements for insurance companies in general, including life insurance companies. The legal capital for life insurance business activities is regulated to increase from 140 billion VND to 600 billion VND. For assets calculating the solvency margin, instead of accepting 100% of the accounting value as before, the accounting value must now be reduced corresponding to the risk level. The Ministry of Finance also provides specific guidance on the provision of mathematical reserves in the direction of only accepting the method of provisioning net premiums with Zillmer adjustment of 3% of the insurance amount.

- Second , the new regulations require more responsibility from insurance companies for corporate governance activities such as the development of control regulations, internal audit, requirements for information transparency through reporting and disclosure regimes, etc.

- Third , the Government allows life insurance companies to conduct investment-linked life insurance business with two types: universal life insurance and unit-linked life insurance. After that, the Ministry of Finance issued specific regulations on these products by Decision 96/2007/QD-BTC dated November 23, 2007 on promulgating the Regulation on implementing universal life insurance products and Decision 102/2007/QD-BTC dated December 14, 2007 on promulgating the Regulation on implementing unit-linked insurance products. Since then, investment-linked insurance products have appeared in the Vietnamese insurance market, meeting the needs of customers and being an effective capital mobilization channel for the economy.

3. Period from July 1, 2011 to present

This period is marked from the effective date of the Law amending and supplementing a number of articles of the Law on Insurance Business (hereinafter referred to as the Law amending and supplementing), passed by the National Assembly on November 24, 2010. To detail some new contents, the Government issued Decree 123/2011/ND-CP on December 28, 2011. This Decree does not replace Decree 45/2007/ND-CP but only supplements and amends a number of provisions.

xiii

to comply with the amended and supplemented Law, while still maintaining Decree 46/2007/ND-CP on financial activities of insurance companies. Then, on July 30, 2012, the Ministry of Finance issued two documents, Circular 124/2012/TT-BTC replacing Circular 155/2007/TT-BTC and Circular 125/2012/TT-BTC replacing Circular 156/2007/TT-BTC. And most recently, the Ministry of Finance issued Circular 101/2013/TT-BTC dated July 30, 2013 guiding the management and use of the Insured Person Protection Fund and Circular 115/2013/TT-BTC dated August 20, 2013 guiding pension insurance and voluntary pension funds.

The system of regulations on insurance business in general and life insurance business in particular has many changes explained by the following reasons:

- Firstly , Vietnam needs to meet the requirements of international commitments on trade liberalization.

During the period from 2000 to 2010, Vietnam has made many advances in bilateral and multilateral trade relations. Vietnam has signed a trade agreement with the United States, joined the World Trade Organization (WTO), expanded cooperation within ASEAN, with Japan, Singapore, etc. Therefore, the law on insurance business in general and life insurance business in particular needs to demonstrate Vietnam's commitments to opening the insurance market, thus changing the regulations restricting foreign investment and providing cross-border insurance services as before.

- Second , insurance laws have revealed many limitations and need to be revised and supplemented.

During the implementation of the Law on Insurance Business 2000, many regulations proved to be inadequate. For example, the regulations on the time of arising of insurance liability were unclear (Article 15), or the regulations on insurance agents were sketchy, etc. In addition, many relevant legal documents had important changes, leading to conflicts between the Law on Insurance Business 2000 and these documents. For example, the unification of domestic investment and foreign investment led to the abolition of the Law on Foreign Investment, affecting the regulations on foreign investment in the insurance sector; the unification of the Law on Enterprises led to the elimination of the model of state-owned enterprises, etc.

- Third , Vietnam gradually integrates internationally in insurance management and supervision.

After Vietnam's insurance regulatory agency joined IAIS, international principles of insurance management and supervision have been increasingly respected and gradually reflected in Vietnamese law. The principle of protecting insurance participants has received more attention along with the transparency of information on insurance business activities.