Orientation of Supervision of Vietnam Non-Life Insurance Market

in stabilizing the organization to improve the effectiveness of market supervision and management. The number of staff is still lacking, so the frequency of supervision is still low.

+ Technical facilities (information technology systems) serving management and supervision are still rudimentary and outdated: The Department of Insurance Management has not been equipped with technical facilities serving management and supervision, especially the software system for management and supervision, the early warning system for risks of insurance companies and the information technology system connecting data with insurance companies, there is no database to determine net fees, as a basis for competition monitoring and issuing model rules and regulations. The Department of Insurance Management has only started to have a separate website to update management and market information since September 2013.

+ The financial mechanism still has many shortcomings: The Insurance Management Department has its own account and seal, and is financially autonomous, but the expenditure level is completely implemented according to the regime of the administrative unit, so the Insurance Management Department cannot be proactive in operating in the face of market fluctuations due to limited funding. The Insurance Management Department does not have a mechanism and does not have funding to hire outside calculation experts to serve the fee calculation work because the salary of calculation experts in the market is very high (about 100-200 million VND/month).

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- Limitations in applying the system of indicators and methods of implementing monitoring

+ One of the remote monitoring tools is the system of indicators that are not very effective because they do not provide early warning. According to Decision 153/2003/QD-BTC dated September 22, 2003 of the Minister of Finance, there are 12 indicators for monitoring non-life insurance enterprises. These indicators focus on assessing changes in capital, business scale, financial capacity, payment capacity, provisioning for technical services and liquidity in the business activities of enterprises, assessing risks and the ability to handle risks of enterprises. However, these indicators were studied and learned from the US IRIS monitoring indicators, so there are some shortcomings such as:

 IRIS is just one of the financial analysis tools used in the US. In addition to IRIS, risk-based capital ratios, CAMEL ratios, and criteria indicating the risk of a problem enterprise are also used. Along with the use of ratios, information technology systems, reports, and business analysis and monitoring manuals also greatly support analysts.

 The data source used to calculate IRIS is extracted from the standard reporting form of the National Association of Insurance Regulators (NAIC) according to the accounting regime for insurance enterprises issued by the insurance regulatory agency (not the general accounting system), so it is different from the data source that Vietnam uses to guide the calculation of indicators according to Decision 153/2003/QD-BTC. Furthermore, the indicators are based on the data of the Financial Report, which has now changed according to Circular No. 232/2012/TT-BTC of the Ministry of Finance, the indicators on the reporting system have also changed, so the data collection will not be accurate and consistent.

 Every year, NAIC Committees discuss the indicators to give opinions on each indicator and industry standard comparison parameters. Meanwhile, Vietnam's indicators do not have standard comparison parameters, are using reference parameters from the US, which are not suitable for Vietnam, and some of the indicators themselves are no longer used in the US and their standard comparison has also changed.

 The instructions for calculating the indicators for monitoring the DNBH issued together with Decision No. 153/2003/QD-BTC do not state the meaning of each indicator, leading to incorrect or incomplete understanding by the analysts, thus the ability to apply it in practice is not high. At the same time, each officer and department does not know how to combine the indicators to have a comprehensive assessment, as well as what indicators need to be considered and supplemented in addition to the current indicators.

 The indicators are based on US statistics but have not yet provided the appropriate limits for each indicator for Vietnam. Within each threshold, what actions are needed from the supervisory agency has not been specifically indicated. For example: the indicator for changing fund capital sources (-15% to +50%). In practice, Vietnamese SMEs in recent years have had indicators that exceed this common limit, mainly due to increased charter capital. Therefore, the limits of the indicators have no practical significance in making supervisory decisions.

CONCLUSION OF CHAPTER 2

In addition to the successes achieved in the supervision of the non-life insurance market, with the requirements and development level of the current insurance market as well as the development trend in the world, the supervision of the non-life insurance market in Vietnam also has weaknesses and shortcomings that need to be overcome to meet the requirements of building a stable and sustainable insurance market.

In chapter 2 “The current situation of supervision of the non-life insurance market in Vietnam” presented an overview of all the achievements of the non-life insurance market in Vietnam during the period of 2008-2013, with an average growth rate of 2 digits, expanding market size, the number of products on the market is increasingly diverse, and the quality of products is also getting better. These results are partly due to the impact of market supervision activities of the supervision agency on professional and financial aspects. Besides, the supervision activities also have certain limitations in terms of institutions, methods, supervision processes, etc., which limit the impact of supervision activities on the achievements of the market. The limitations analyzed in chapter 2 serve as a basis for proposing solutions to improve supervision work, ensuring the goal of developing the non-life insurance market is safe and sustainable.

Chapter 3

SOLUTIONS TO IMPROVE THE SUPERVISION ACTIVITIES OF VIETNAM'S NON-LIFE INSURANCE MARKET

3.1. ORIENTATION FOR SUPERVISION OF VIETNAM'S NON-LIFE INSURANCE MARKET

3.1.1. Trends in monitoring the non-life insurance market in the world

3.1.1.1. Global economic context and its impact on the non-life insurance market

In recent years, the world economy has undergone many changes. Countries have faced many difficulties and challenges due to economic and political instability. The public debt crisis in the Eurozone has been tense, the US has difficulty in escaping the public debt ceiling, the political situation in the Middle East and North Africa, etc. The global economy is still fragile and the risk of recession still exists. New risks are piling up on old risks, including the possibility of an increasing economic recession in emerging economies. Along with that, the slow economic recovery in advanced countries has led to continued lackluster global economic growth. Meanwhile, the instability of US fiscal and monetary policies has brought more risks to the world economy. According to the International Monetary Fund's October 2013 World Economic Outlook Report, global economic growth will slow slightly to 2.9% in 2013 (3.2% in 2012) and increase slightly in 2014, reaching 3.6%.

The economic downturn in the Eurozone is expected to continue, driven by weak demand, low confidence, and weak financial conditions. The region’s economic recovery will be slow due to delays in policy implementation in key areas. Moreover, growth in the US economy is likely to slow further due to tightening fiscal policy and monetary policy disincentives. The combination of increased fiscal policy and tighter monetary policy in the US could cause market and financial sector adjustments and systemic damage.

Against the backdrop of the global economy, Southeast Asia’s GDP growth reached 5.7% in 2012. However, ASEAN economies were not completely immune to the global economic downturn. The three largest economies were affected, mainly due to weak external demand and capital flight. Export markets

and lackluster investment have reduced growth in Indonesia, Thailand, Malaysia and the region's GDP is forecast to grow by only 4.9% in 2013 (ADB, October 2013).

Economic growth in the ASEAN region remains driven by domestic consumption and investment. Since late 2011, private consumption has played an important role in economic growth. The contribution of investment to economic growth has declined slightly in 2013. Economic resilience is also evident in smaller economies such as Cambodia, Laos, Myanmar and Vietnam. ADB forecasts that these economies will continue to grow over the next two years.

The economic downturn in developed economies has affected the development of the insurance market and posed a number of challenges for global insurers. The low interest rate environment since 2011 continues to pose a risk to insurers’ profitability, but it has also boosted equity prices. Weak global growth has weakened demand for insurance and reduced investment returns due to low interest rates.

Despite the global economic uncertainty, global gross written premiums (both life and non-life) grew by 2.4% to US$4,612.5 billion in 2012, compared to a 1.1% increase in 2011. Global non-life premiums continued to grow modestly by 2.6% in 2012 to US$1,992 billion. Non-life premiums in advanced economies edged up slightly, increasing by 1.5% in 2012 from 0.9% in 2011, likely due to growth in some advanced Asian markets such as South Korea (14%), Hong Kong (8.2%) and Japan (which continued to grow at 3%). Non-life insurance premiums in emerging economies continued to grow strongly, increasing from 8.1% in 2011 to 8.6% in 2012. Growth improved in both advanced markets (1.8%) and emerging markets (4.9%) in 2012.

Latin America was the second fastest growing region in the world with a growth rate of 7.8% in 2012 and the Middle East recorded a 7% growth in non-life insurance premiums in 2012. Emerging economies are expected to grow strongly in 2013 and 2014, supported by greater stability and economic recovery in advanced markets.

Growth rates in emerging economies in Asia continue to rise

at 13% in 2012 compared to 10% in 2011, mainly due to growth in

Some key markets in the region include China (13.6%), Thailand (21.2%), and Indonesia (10.3%).

With improvements in China and strong economic growth in ASEAN, Asian insurance markets have performed well in both the life and non-life sectors. In terms of profitability, non-life, although losses in 2012 were the third largest insured catastrophe losses since 2005, performed better due to lower claims. Growth and reserves still outpaced gains in non-life profits. However, low interest rates continue to weigh on investment returns globally, leading to a decline in average investment income. Global insurance premiums per capita declined slightly from US$661 in 2011 to US$655.7 in 2012. Emerging economies saw positive growth (2%), with the ASEAN-6 (Indonesia, Malaysia, the Philippines, Thailand and Vietnam) growing by 10.2% to US$134.4 per capita. The ASEAN-6 non-life premium per capita of US$46 was slightly lower than that of emerging markets, but still higher than that of an Asian emerging market. The global insurance industry’s share of GDP in 2012 declined to 6.5%, with a slight decline in emerging markets from 2.73% of GDP in 2011 to 2.65% of GDP in 2012 and the advanced economies’ share remaining at 8.6%. This index in 6 ASEAN countries also increased from 3% of GDP in 2011 to 3.2% in 2012. In general, the global economic environment and financial markets are still challenging and have a significant impact on the insurance industry worldwide, especially on the demand for insurance and the profits of insurance companies.

Due to the weak economic environment of the global economy, the profitability of insurance companies remained low in 2013. The impact of low interest rates and changes in regulations led to high capital requirements. However, the insurance outlook in 2014 is more optimistic with the gradual recovery of the economy, increased investment returns, and better profitability. However, the regional market still has many challenges. The issue of insurance penetration in ASEAN remains a major concern. Although the rate increased in 2012, it is still small in many markets. In addition, 2012 and 2013 became challenging years for insurance companies due to the poor economic environment, continued low interest rates, increased losses due to natural disasters, and tightening payment margins.

Tight fiscal policies continue to be implemented in many economies, leading to the need for economic stimulus packages to maintain growth in the economies, but low interest rates will put pressure on the investment returns of insurance companies. With low interest rates in the long term, investment returns will decrease. Overall, with the instability of the economy, it is important that insurance companies adapt to market changes, have new strategies and alternatives and seek opportunities to ensure profits, while being able to withstand the global economic crisis.

In the current global economic climate, it is important for insurers to seek new strategies and ways to ensure profitability. Mergers and acquisitions (M&A) have increasingly become one of the ways to manage costs while maintaining operational efficiency for local and regional insurers in Asia. Recently, there have been growth opportunities in the health insurance and pensions sectors. Regarding the health insurance opportunity, in 2012, ASEAN committed to build a unified health insurance network in ASEAN + 3 (including Japan, China and Korea) in the process of building national and regional capacity for an effective system to support regional health insurance. As a result, with the health insurance reform, opportunities have been opened for insurers to provide the Government with expertise, systems and products to support the development of effective health care regimes in the region.

Despite the improvement in business performance, the losses from disasters remain high. In 2012, 318 disasters occurred, causing a total loss of US$186 billion to the economy. These natural disasters caused US$71 billion in losses to insurers, while the compensation from man-made risks was US$6 billion. Floods in Indonesia, Myanmar, Thailand and Vietnam, typhoons in the Philippines were mainly affected by natural disasters. The losses from super typhoon Haiyan, super typhoon Bopha, which hit the eastern seaboard of the Philippine island of Minadanao, were estimated at US$0.9 billion. These losses are challenging non-life insurers to maintain profitability. Considering these challenges, the insurance industry is inclined to cooperate with the private sector in developing a mechanism for insurance risk management and disaster management. At the regional level, ASEAN has recognized the increasingly severe impacts of natural disasters due to climate change on the economic, physical, social and environmental aspects of ASEAN member countries. For example, since

2009 The ASEAN Agreement on Disaster Management and Emergency Response (AADMER) entered into force and actions have been taken to ensure that AADMER serves as an important disaster management mechanism in the region.

3.1.1.2. Trends in monitoring the non-life insurance market in the world

According to IMF forecasts, global economic growth in the coming years will still grow slowly. In addition to the level of economic growth that has a certain impact on the growth rate of insurance activities, the impacts of climate change and natural disasters, the sophistication of insurance fraud, etc. also affect insurance activities. Aiming for a sustainable insurance market in a changing world is the theme of the IAIS 20 Conference (taking place from October 16-19, 2013 in Taiwan) and is also what insurance agencies of countries are interested in. To do that, the supervision of non-life insurance markets of countries in the coming time requires appropriate changes. Supervisory agencies in emerging markets will continue to improve supervision regimes and policies, focusing on supervision standards and adopting risk-based supervision methods. Emerging markets in Latin America and Asia have begun to adopt risk-based capital (RBC) methods. EU member states in Central and Eastern Europe will postpone the use of Solvency II until 2015 or 2016. IAIS recommends that countries, especially those in emerging markets, switch to risk-based supervision to increase the level of prediction and prevention of possible risks for insurance companies, helping the market develop sustainably. At the IAIS 20 conference, there was a lot of discussion about the role of insurance supervision as well as policy measures for global risk issues.

For ASEAN countries, insurance regulators in ASEAN countries will need to review their regulations in line with international practices. Under current financial pressures, regulators in many countries have begun to reform, develop and implement new financial regulations to ensure financial stability. With these changes in the financial sector towards tightening solvency regulations, enhancing insurance liability and capital calculations. ASEAN markets also need to pay more attention to professional and rigorous underwriting to benefit from the sustainable economic outlook (Swiss Re report 2013).

As the ASEAN Economic Community (AEC) 2015 target approaches, liberalization of the insurance sector will be further supported. Under the free flow of services,

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