TPP CHALLENGES AND OPPORTUNITIES FOR VIETNAM’S INSURANCE INDUSTRY

While examining those TPP’s articles, this thesis will also study Vietnam’s current legal documents regulated insurance activities e.g.: Law on Insurance Business 2000, WTO agreement in

MINISTRY OF EDUCATION AND TRAINING

FOREIGN TRADE UNIVERSITY

DISSERTATION

TPP: CHALLENGES AND OPPORTUNITIES FOR VIETNAM’S

INSURANCE INDUSTRY

Major: International Trade Policy and Law

Full name: Nguyen Thuy Binh

MINISTRY OF EDUCATION AND TRAINING

FOREIGN TRADE UNIVERSITY

DISSERTATION

TPP: challenges and opportunities for Vietnam’s insurance industry

Major: International Trade Policy and Law

Full Name: Nguyen Thuy Binh SUPERVISOR: Dr Nguyen Binh Minh

Hanoi - 2017

DECLARATION

I declare that this dissertation is my own work Where material is obtained from other works, it has been fully acknowledged by citation in the main text and included in the references

TABLE OF CONTENTS

INTRODUCTION 1

CHAPTER 1 OVERVIEW OF VIETNAM INSURANCE INDUSTRY 5

1.1 History of Vietnam’s insurance industry 5

1.2 Overview of life insurance industry 7

1.3 Overview of non-life insurance industry 14

CHAPTER 2 TPP’S OVERVIEW AND VIETNAM’S INSURANCE COMMITMENTS IN TPP 21

2.1 TPP’s overview and commitments in insurance industry 21

2.2 Current regulations and legislation of Vietnam relating to insurance 25

2.3 Vietnam’s insurance commitments in TPP 30

CHAPTER 3 CHALLENGES AND OPPORTUNITIES FOR VIETNAM’S INSURANCE INDUSTRY AFTER EFFECTIVENESS OF TPP 40

3.1 Challenges for Vietnam’s insurance industry 40

a Challenges for life insurance industry 40

b Challenges for non-life insurance industry 44

3.2 Opportunities for Vietnam’s insurance industry 52

a Opportunities for life insurance industry 52

b Opportunities for non-life insurance industry 54

CHAPTER 4 VIETNAM’S PREPARATION FOR TPP & RECOMMENDATIONS FOR VIETNAM 65

4.1 Preparation of Vietnam 65

a Preparation of Vietnam’s authority 65

b Preparation of Vietnam’s local insurers 68

4.2 Recommendations for Vietnam 72

a Recommendations for Vietnam authority 72

b Recommendations for local insurers 74

CONCLUSION 77

REFERENCE 81

LIST OF ABBREVIATION

TPP: The Transpacific Partnership Agreement

MOF: The Vietnam Ministry of Finance

LIST OF FIGURES

Figure 1.1 Vietnam Life Insurance indicators 9

Figure 1.2 Vietnam Life Insurance Market share in first quarter of 2016 10

Figure 1.3 Year of establishment of Life Insurers and charter capital (billion dong) in 2013 11

Figure 1.4 Policy numbers by products in 2015 13

Figure 1.5 Types of life products by insurer in 2015 14

Figure 1.6 Vietnam Non-Life Insurance indicators 14

Figure 1.7 Vietnam Non-Life Insurance Market share in first quarter of 2016 15

Figure 1.8 Year of establishment of Non-Life Insurer and charter capital (billion dong) in 2013 16

Figure 1.9 Types of non-life products by insurer in 2015 18

Figure 1.10 Non-life loss ratio in 2014 19

Figure 3.1 Insurance Premium Growth Rate (2013) 46

Figure 3.2 Insurance penetration rate for TPP countries 47

Figure 3.3 ACE gross premium for developing TPP countries 47

Figure 3.4 Impact of TPP on sectoral output by 2030 49

LIST OF TABLES Table 1.1 Vietnam indicators in comparison with ASEAN countries and world in 2015 8

Table 1.2 Numbers of life insurers 9

Table 1.3 Numbers of non-life insurers 15

Table 1.4 Vietnam’s non-life agents 17

Table 2.1 Comparison of insurance cross-border trade in WTO and Vietnam’s domestic law 28

Table 3.1 Trade and investment effects of TPP (Unit: billions of 2015 dollars) 57

Table 3.2 Importing cars of Vietnam in October 2016 61

INTRODUCTION

1 Research background

Regional integration has become a new trend in the Asia- Pacific region, which represents in the form of treaties The Trans-Pacific Partnership Agreement (TPP) was one among of those treaties TPP is a multilateral free trade agreement, which aims to create a free trade zone among Asian – Pacific countries Singapore, Chile, New Zealand, Brunei was the founders of this Agreement They had signed the TPP since 3 June 2005 However, until present the member number of TPP has expanded up to 12 countries, including: Singapore, Chile, New Zealand, Brunei, United States, Australia, Canada, Japan, Malaysia, Mexico, Peru, and Vietnam

In TPP, member countries commit to open their market by tariff reduction, non-tariff measure transparency, market access barrier elimination for foreign companies from other member countries etc For example, USA will remove tariff for 74 percent of Vietnam exporting agriculture goods upon TPP’s effective date and for 100 percent of goods after 10 years of TPP implementation 38.4 percent of Vietnam agriculture goods exporting to Japan will be eliminated upon TPP’s implementation and 100 percent of goods exporting to Japan will be exempted from

tax after 15 years (Duy Anh, 2015) Given those tariff reduction, Vietnam will be

benefited by increase in exports to those major markets In addition, foreign investment into Vietnam will surge thanks to TPP

Besides the above benefits, Vietnam also have market opening commitments, bringing big challenges to domestic companies, whose competitiveness is still quite low One of those commitments refers to insurance market Since Vietnam’s insurance industry is among the youngest insurance markets in the world The first non-life insurance company of Vietnam was established just 51 years ago and of life insurance company was 20 years ago, compared to hundreds-year companies in other developed countries, such as: USA, Canada, Japan etc Therefore, it is predicted that Vietnam’s insurance industry will face tough challenges from

competition of foreign insurers Of course, there will be opportunities for Vietnam’s insurance industry from TPP However, those challenges and opportunities is still a controversial topic

At the inception date of this research, TPP is highly likely to be implemented

by 12 member countries Until now, the United States had changed its president (i.e.: Donal Trump), who strongly opposes TPP Therefore, this agreement is predicted to be canceled Despite of this fact, the value of this thesis is not reduced The reason is that international integration is an undeniable trend of the world Besides TPP, Vietnam is on the way to participate in similar multilateral free trade agreements Therefore, sooner or later Vietnam’s insurance industry shall face similar challenges and opportunities brought by TPP This research will give readers an understanding of impacts that TPP and future multilateral treaties may bring to Vietnam’s insurance industry

2 Literature review

From the very beginning of first discussion round, Vietnam’s insurance commitment in TPP had attracted attention from local and foreign media, researchers

From foreign writers, TPP’s impact to Vietnam was a hot topic for foreign

newspaper and researchers However, those articles and studies examined the impacts of TPP in general The impact of insurance to Vietnam received smaller attention from foreigners This topic had been analyzed on some foreign newspapers, e.g.: the Insurance Journal of Canada, which discussed about the potential of Vietnam insurance market thanks to TPP It was also assessed by foreign insurers, e.g.: ACE Group had published a small analysis named “Trans-Pacific Partnership: Unlocking new opportunities” However, it was very hard to find an academic research of this topic Some of them is working paper titled “The Economic Effects of the Trans-Pacific Partnership: New Estimates” e.g.: by Peter

A Petri and Michael G Plummer in January 2016 But TPP’s impacts to Vietnam insurance market was a very small part of the working paper

From domestic writers, there were more articles discussing the impacts of TPP to

Vietnam’s insurance market, including: newspapers, conference, discussion papers Some local newspaper e.g.: Vietnamnet, Financial News of Vietnam, had quite valuable analysis of this topic Besides those newspaper, some conferences were held by competent authorities for the discussion of this topic Take example of the Conference named “Opportunities, Challenges of TPP and new generation FTAs to Vietnam’s insurance industry” held by the Vietnam Insurance Association and Vietnam International Arbitration Center on 16 May 2015 This conference had participation of some insurance specialists, which contributed their discussion papers to the conference, i.e.: “TPP and challenges to Vietnam’s insurance industry” of Master Ton Thi Thanh Huyen from National Economics University and

“Impact of TPP to Vietnam’s insurance industry” of Doctor Nguyen Binh Minh from Foreign Trade University Those two university are among top colleges in Vietnam in terms of finance Therefore, their discussion papers are more argumentative academic than newspaper articles However, until now there has not been a comprehensive, large-scale research of this topic of the local Some research had analyzed the impacts of TPP to Vietnam in general, e.g.: dissertations However, there is absence of study focusing only on impacts of TPP to Vietnam’s insurance industry This thesis will concentrate on the analysis of TPP’s effects on insurance industry only

3 Subject of the research

This thesis aims at the impacts of TPP on Vietnam’s insurance industry,

including the impacts on life and non-life insurance

4 Scope of the research

This thesis will not study all articles of TPP Instead of that, it will only analyze articles related to Vietnam’s insurance industry, which are included in

Chapter 11 and Annex III of the TPP While examining those TPP’s articles, this thesis will also study Vietnam’s current legal documents regulated insurance activities (e.g.: Law on Insurance Business 2000, WTO agreement) in order to make comparison between those documents and TPP as well as take research of Vietnam’s insurance industry situation including life and non-life insurance market

5 Research question

This thesis will answer a question: “What opportunities and challenges will TPP bring to Vietnam’s insurance industry?” In order to find the answer, this study will Firstly, analyze insurance commitments that Vietnam made in TPP in

comparison with current legal framework in order to highlight the new regulations

in TPP Secondly, examine the impacts of those new regulations to Vietnam’s

insurance industry, including opportunities and challenges Some recommendations for local insurers and authority will be given at the end of the thesis to help the local utilizing those opportunities and overcome challenges

6 Methodology

In order to achieve the above purpose, this thesis will employ qualitative research methodology Particularly, this research will examine legal documents, make comparison between different legal documents, gather insurance data, and make analysis from those data

7 Research structure

This thesis comprises of 4 chapters, which are:

Chapter 1: Overview of Vietnam’s insurance industry

Chapter 2: TPP’s overview and Vietnam’s insurance commitments in TPP

Chapter 3: Challenges and Opportunities for Vietnam’s insurance industry after effectiveness of TPP

Chapter 4: Vietnam’s preparation for TPP and Recommendations for Vietnam

CHAPTER 1 OVERVIEW OF VIETNAM INSURANCE INDUSTRY

1.1 History of Vietnam’s insurance industry

In 1964 Vietnam Insurance Company was established, which is the first insurance company in the North of Vietnam, providing transported goods insurance, hull insurance and accident insurance for passengers travelling in Vietnam The establishment of Vietnam Insurance Company had opened an era of insurance monopoly in Vietnam

Until 1979 – 1980, accident insurance for passengers was actually brought to the market The main target of this company was to support the foreign trade, therefore, it had remained a very low insurance rate, making the company suffering from loss at some times Besides the insurance providing, this company was in charge of cooperating with state trade agencies, transporting agencies to prevent and minimize the loss to transported goods and hulls From 1966, the company started

to reinsure to foreign insurance companies based outsides of Vietnam By contrast,

in the South, there was 41 domestic insurance companies and 10 foreign companies Among them, Vietnam Assurance and Reinsurance company (VAR) was the

biggest company, accounting for 51% insurance contracts in the South (Baoviet,

2015, p.65) This company was a joint venture among Vietnam, French and Swiss

In 1975, Spring Offensive was successful The North and the South were unified and both were under control of Vietnam Vietnam authority requested all insurance companies in South to end their business All assets of those companies

were given to Vietnam Insurance and Reinsurance company – BAVINA (Baoviet,

2015, p.66) – a state company established in 1976 After that, in 1977, BAVINA became a branch of Vietnam Insurance Company according to Decision No 61 of Government Therefore, Vietnam insurance market was still state monopoly

On 18 December 1993, Decree No 100/CP was enacted, allowing the establishment of joint venture companies, joint stock companies and 100% foreign

companies providing insurance in Vietnam This Decree was the end of state monopoly lasting for decades As request of MOF, the Vietnam Insurance Company was acted as a market founder In particular, the Vietnam Insurance Company had

to contribute human resources, finance to create new insurance companies, which were VINARE (1994), Bao Minh (1994), Bao Long (1995), etc They were all non-life insurers

Until 1995, there was no life insurance operating in Vietnam market In the situation that the law had enabled foreigners to participate in insurance market, Vietnam was on the edge of losing life market into foreigner’s hand if the authority did not started to establish a local life insurers Therefore, in middle of 1995, the Vietnam Insurance Company acting as the market leader had started to carry out research of life insurance and in June 1996, it established Life Insurance Company, which is Baoviet Life nowadays At that time, Baoviet Life only provided 2 products, which were: child education insurance (“An sinh giao duc’) and 5-year or 10-year-term life Those types were considered to be the best suitable to Vietnam market Indeed, those 2 products are still core products bringing most revenue to Baoviet Life at the present time In addition, the legal framework was also completed by the promulgation of Law on Insurance Business in 2000 to protect legitimate rights of insurance purchasers As the results, till 2001, there were 18 insurers and insurance brokers in Vietnam, but after just 3 years, the numbers were increased up to 25 insurers, showing a very competitive and attractive insurance market

In terms of product lines, after 1975, Vietnam had chance to develop existing insurance products as well as introduce new non-life and life insurance types into the market, for example: physical and liability insurance of ship owners (1986), farm animal insurance (1987), physical damage of vehicles (1991), liability insurance of vehicle owner (1988), oil and gas insurance (1978), automated vehicle insurance (1978), aviation insurance (1981), fire insurance (1989), pupils insurance (1991), etc

In 2003, Vietnam authority passed through Strategy for Development of Vietnam’s Insurance Market during 2003 and 2010, in which equitization of local insurers was one of the main target to attract foreign investment in terms of finance, knowledge and technologies, which would finally enhance the competitiveness of local insurers The Vietnam Insurance Company was one of the first insurer to carry out equitization process in 2007, before that it had restructured into an Insurance - Finance Group in 2004

Vietnam had taken some huge steps in international integration in terms of insurance In particular, in late of 2001, Vietnam and United States had signed the Vietnam Bilateral Trade Agreement (referred as “BTA”) which opened the cooperation of insurance In 2007, Vietnam had officially joined WTO with commitments to open the insurance market for all WTO members

1.2 Overview of life insurance industry

Vietnam population has high growth rate and had reached over 92 million in the end of 2015, helping it ranked third among ASEAN countries It shares the same demographic patterns with ASEAN countries, of which the largest proportion of population is between 15-64 years old, followed by the 0-14 year old segment and last but not least the people at the age of over 64 Those young people and especially the elderly with idle in come are potential customers for life insurance products Though Vietnam’s GNI was quite low, only 1,980 USD in 2015, but the average growth rate of Vietnam during 10 years was three times of such of the world It is forecasted that the income of Vietnam people will increase fast, and the middle and upper class will be enlarged, who may afford for luxury goods as life insurance In addition, due to extraordinary characteristic of ASEAN people, who save a major amount of their income in preparation for far future, Vietnam has a high saving rates, of 30% in 2015 They may use those money to buy life insurance

as an investment-insurance method Combining of all above mentioned indicators, Vietnam shows to be a promising insurance market

Table 1.1 Vietnam indicators in comparison with ASEAN countries and world

in 2015

Country Vietnam

Cambo-dia

sia

Malay- pines

Philip- land

Thai- sia

Indone- pore World

Singa-Population 92 mil 15.6 mil 30.3 mil 100.7

mil 70 mil

257.6 mil 5.5 mil 7.3 bill

Total gross premium of Life insurance in Vietnam had an upward trend with an average of growth rate at 19% since 2007 (after Vietnam officially joined WTO) In

2015, such growth rate climbed up to 30% (The Insurance Supervisory Agency of Vietnam, 2016), while the average growth rate of the world was only 4.0% (Swiss

Re, Sigma no.3 2016) Vietnam life insurance growth rate was eight times higher

than such of the world Life insurance market in Vietnam showed to be a fruitful market However, in term of penetration rate, Vietnam’s indicator was quite small, i.e.: from 0.65% in 2012 (The Insurance Supervisory Agency of Vietnam, 2014) to 0.86% in 2015, compared to some ASEAN countries such as: Malaysia (3.2%), Indonesia (1.1%) etc

Source: Author’s illustration based on Vietnam Insurance Association reports

2007- 2015

Figure 1.1 Vietnam Life Insurance indicators

The number of life insurers joined into the market has increased continuously Till the end of 2015, Vietnam had 17 life insurance companies

Table 1.2 Numbers of life insurers

Source: Data consolidated from Vietnam Insurance Association reports 2007- 2015

Among them only 1 state-own company , 2 joint stock companies, 3 joint venture companies and 11 companies with 100% foreign investment capital This number is still on the way of increase since Vietnam life insurance is considered an attractive market in the eye of foreign enterprises, according to Integrated Report 2015 of Baoviet Group In 2015, 7 companies had increased investment capital in Vietnam, i.e.: Sun Life Financial, Manulife, Chubb, Fubon, Generali etc New foreign enterprises is seeking the way to join into Vietnam market, for example: MB Ageas Life (Thailand), Samsung Life (Korea), Taiwan Life (Taiwan) (Baoviet Group, 2016)

In general, Vietnam’s life insurance market is dominated by foreign companies in terms of numbers However, the market has been led by 2 giant companies, which are Prudential (an English company) and Baoviet Life Insurance (a state-own company) Those 2 companies accounts for over 50% of total gross premiums For a long time, Prudential had taken the leading position, followed closely by Baoviet Life Insurance However, till the end of March 2016, Baoviet Life Insurance had hold the first position in terms of gross premium, accounting for 28.5% market shares, compared to 26.1% of Prudential

Source: Vietnam Insurance Association report Q1, 2016

Figure 1.2 Vietnam Life Insurance Market share in first quarter of 2016

Foreigner companies still dominate Vietnam’s life insurance market both in terms of numbers and market shares They make up for over 60% of gross premium Vietnam’s neighbors have the same circumstance, for example: Indonesia, Malaysia, Philippines etc., in which local life insurance market is dominated by foreigners (Ngo Trung Dung, 2015)

Among 6 local insurers, there are 5 insurers under control of state-owned corporations, for example: the largest shareholder of Baoviet Life is MOF with 80%

of shares, of PVI SunLife is Vietnam Oil and Gas Group with 51% in 2014, of VietinAviva is Vietnam Commercial Bank for Industry and Trade with 50% of shares, etc The participation of local private companies is still absent In terms of lifetime of local segment, Baoviet Life insurance was found earliest in 2004, other local companies have been established recently in 2008 and mostly during 2011-

2014 period This means that local companies may lack of knowledge and experience in insurance to compete with foreign companies, who already have a long history of providing insurance in international market

Note: Insurers with 100% foreign capital

Insurers with majority local capital

Source: Author’s illustration based on Vietnam Insurance Association’s article

“Danh muc cac doanh nghiep bao hiem, tai bao hiem, moi gioi bao hiem”

Figure 1.3 Year of establishment of Life Insurers and charter capital (billion

dong) in 2013

Among 5 companies with local investment capital, Baoviet Life Insurance belonging to Baoviet Group is originally established to provide insurance products Other 4 Insurers are opened as another investment channel of giant companies, for example: Vietnam oil and gas exploitation (PVI Sunlife), state-owned commercial banks (VietinAviva, Vietcombank-Cardrif, BIDV Metlife) or real estate group (Phu Hung Life Insurance)

Regarding distribution channel, main distribution channel of life insurers are agents In fact, in 2015, the number of newly recruited agents was 245,451 person, increasing 40.4% compared to such number in 2014 Agent number in total was 404,607 persons in 2015 Therefore, agents are predicted to remain as the main channel in the near future The leader insurers come out to be the owner of biggest agent forces In particular, Prudential had 181,638 agents in total in 2015, ranked 1st

in terms of agent numbers, followed by Baoviet Life Insurance with 76,074 agents and Dai-ichi Life Insurance with 49,778 agents (Association of Vietnamese Insurers, 2016, p.12)

Insurance brokers play very small role in life insurance’s distribution channel One of the reason may be vague awareness and even prejudice of Vietnamese

towards life insurance that the brokers ( Dang Dinh Chinh, 2012), who do not have

face-to-face interaction, find hard to get through in order to sell such comprehensive invisible products like life insurance In this case, the agents, who come to customers and utilize direct contact, have higher chance to successfully persuade them

Besides agents, bancassurance and telesales are becoming new trend in insurance market

Furthermore, new model is also developed, including nest by AIA, AIA exchange, which provide a unique friendly zone for agents and customers to meet each other

In terms of products, endowment insurance accounts for major part, which is

61.5% of policy number in 2015 (Association of Vietnamese Insurers, 2016, p.9),

followed by investment insurance with 29.3%, term insurance with 7.6% Endowment insurance, which give higher security to customer’s finance, seems best fit Vietnamese taste

61.50%

29.30%

Endowment insuranceInvestment insuranceTerm insuranceWhole life insuranceOthers

Source: Association of Vietnamese Insurer’s Report 2015

Figure 1.4 Policy numbers by products in 2015

However, traditional products including endowment, pure endowment, whole life, term life, start to show downward trend In the end of 2015, the total number of

in force policy dropped, compared to that in 2014

In contrary, investment insurance and pension insurance have impressive increase, i.e.: 128% and 172% respectively

Each company finds their own strength in specific products, for example: Prudential, Manulife, Generali, VietinAviva have strength in endownment insurance, Baoviet Life Insurance, Dai-ichi have almost equal proportion of endowment and investment insurance, while Prevoir and Vietcombank-Cardrif find their advantages in term life insurance

Source: Author’s illustration based on Association of Vietnamese Insurer’s Report

In 2015, Vietnam saw a very high growth rate, which is 19%, compared to just

3.6% of the world (Swiss Re, 2016, p.1) Similar to its life market, Vietnam non-life

insurance has low penetration rate, at an average of 7.7% during 2007-2015 period

Source: Author’s illustration based on Vietnam Insurance Association reports 2007- 2015

However, unlike the life insurance market with few players, non-life segment

is more active market with many insures The reason may be that: firstly, the life market has been established much longer than life market, secondly, the charter capital minimum level is lower, at 300 billion dong, compared to 600 billion dong

Source: Vietnam Insurance Association report Q1, 2016

Figure 1.7 Vietnam Non-Life Insurance Market share in first quarter of 2016

Those top companies have strong financial support from the government In particular, Vietnam oil and gas Group holds 35%of PVI, becoming the largest shareholder, MOF holds 80% of shares in Baoviet, State Capital Investment Corporation hold the largest shares of Bao Minh at 34%, Vietnam National Petroleum Group holds 51% of PJICO Since the monopoly market was only ceased

in 1993, Baoviet Insurance Corporation was the first insurer for nearly 30 years From 1994, other insurers started to be established according to government’s decision, including Bao Minh, PJICO, Bao Long etc In terms of charter capital, Baoviet Insurance Corporation and PVI left other insurers far behind with 1,800 billion dong and 1,700 billion dong respectively Other local and foreign companies (except for Liberty) have charter capital of below 1,000 billion dong This is different from the life market, on which insurers do not have much difference relating to charter capital Among the below 1,000 billion dong-charter capital non-life companies, 80% of them have even below 500 billion dong However, company size seems not to decide the winners In fact, 3 of the top 5 leaders are small size companies, i.e: Bao Minh with 755 billion dong of charter capital, PJICO with 709 billion dong and PTI with only 504 billion dong

Source: Author’s illustration based on MOF’s article “Danh muc cac doanh nghiep bao hiem, tai bao hiem, moi gioi bao hiem”

Figure 1.8 Year of establishment of Non-Life Insurer and charter capital

(billion dong) in 2013

In terms of distribution channel, besides agents channel, brokers, bancassurance, online sales, telesales also alternative channel of non-life insurers to provide products to customers

However, agents are still the main source to bring premium to insurers, followed by brokers and bancassurance

Online sales and telesales have been introduced into Vietnam market recently and still on first stage of development

Table 1.4 Vietnam’s non-life agents

Number of agents 36,866 35,155 37,561 60,071 65,676 66,084 69,037 69,617

Source: Data consolidated from Association of Vietnam Insurers reports 2007-2015

In terms of product basket, non-life market have many more products than life market Insurers are continuing to develop new products

Motor vehicle insurance accounts for the biggest shares in terms of total gross premium, at 30% in 2015 The second position is health insurance with 24% of total non-life gross premium The third position is property and casualty insurance accounting for 19% (Association of Vietnamese Insurers, 2016, p.7) As we can see from the figure below, health insurance and motor vehicle insurance contributes majority of premium to almost all insurers, except for PVI with largest premium proportion derived from property and casualty insurance, in particular construction, installation and operation of industrial projects

Source: Author’s illustration based on Association of Vietnamese insurer’s report

2015

Figure 1.9 Types of non-life products by insurer in 2015

However, health insurance is facing alarming high loss ratio due to two reasons, including: inflation of medical costs, insurance frauds This situation urges insurers to change or die In fact, in 2015 – 2016, non-life market had saw some players withdraw totally or partly from this line of insurance, for example: Prevoir stopped health insurance since November 2015, Baoviet and PVI tightened the terms & conditions and increased premium to limit the participation of children under 9 years old However, there is still much of work that insurers need to do to mitigate insurance fraud, for example: applying control mechanism at hospital to prevent collusion between customers and hospitals, improving the health risk assessment quality to detect fraud Regarding motor vehicle insurance, there is unfair competition among local insurers Insurers compete by decreasing premium, which is against the law, instead of competition by service and product improvement This is a sign of unsustainable growth strategy that local non-life insurers are trapped in

However, in terms of average loss ratio combining all lines of insurance, Vietnam’s non-life loss ratio is quite good

Note: Loss ratio of Vietnam as of 2015

Source: Author’s illustration based on data from Association of Vietnamese

Insurers report 2014 and Swiss Re 2014

Figure 1.10 Non-life loss ratio in 2014

In terms of expertise knowledge, local insurers are still weak in actuary calculation In fact, very few local insurers have a real actuary Baoviet seems to play the role of leader in premium calculation, terms & conditions designing for the other local insurers to follow In fact, it is not difficult to find striking resemblance between product wording, for example: health insurance, motor vehicle insurance, private home insurance among local insurers The difference is very small and mostly in terms of premium However, the foreign products are quite differently designed, compared to local products

Unlike local insurers, foreign companies do not have advantage of wide national network in comparison with local companies, which is very crucial to introduce non-life products to individual customers Foreign companies only have some branches based in major cities/ provinces, while local insurers usually have nation-wide networks Unlike life insurance industry, networks play very more

important role in non-life market The reason is that non-life insurance products with small premium target lots of customers, from middle customers to high income customers, who lives in all cities, provinces However, life insurance with high premium mostly target to high income customers, who lives in big cities, provinces Wider network will increase the chance for non-life insurers to contact with potential customers As the results, the local insurers dominated non-life market

In general, due to the limitation of charter capital requirement, the number of

local life insurers is less than that of foreign insurers Except for Baoviet Insurance Company, other local insurers were established within 8 years This leads to less competitiveness of the local, compared to the foreigner However, in the case of Baoviet Insurance Company, local insurers seem to make determined efforts to move forward and take the number one position in first quarter 2016 through dynamic comprehensive pack of changes including products diversify, customer services quality improvement, technology investments etc The main life products are endowment insurance and investment insurance

By contrast, the non-life insurance market is dominated by local insurers thanks to nation-wide networks Vehicle insurance takes the first position in terms

of premium, followed by health insurance However, due to lack of insurance fraud controls and data-based premium calculation, non-life insurers are facing high loss ratio of those two products

CHAPTER 2 TPP’S OVERVIEW AND VIETNAM’S INSURANCE COMMITMENTS IN TPP

2.1 TPP’s overview and commitments in insurance industry

The Transpacific Pacific Partnership Agreement (TPP) was originated from the Trans-Pacific Strategic Economic Partnership Agreement This was a free trade agreement signing on 3 June 2005 among four countries i.e.: Singapore, Chile, New Zealand, Brunei (P4).The Agreement among P4 has wide scope, covering trade in goods, services (excluding financial services), Sanitary and phytosanitary (SPS) measures, Technical Barriers to Trade (TBT), competition policy, intelligence property, government procurement, transparency, cooperation in environment and labor A standing character of this Agreement was the high level of liberalization of trade in goods Import tax shall be removed completely from the effective date of the Agreement In terms of services, the Agreement applied “choose-exclude” rule, which is contrary to the “choose-give” rule in WTO agreement For more clarity, in this Agreement, each member country has to fully liberalize domestic market for other member countries, except if it had reserved it in exclusion list

Until September 2008, the United States announced to join the Agreement In November 2008, following the United States, other countries also informed to participate in the Agreement i.e.: Australia, Peru and Vietnam From then, the P4 agreement has been named the Trans-Pacific Agreement (TPP) Starting with P4, until now TPP has totally 12 member countries, which are Singapore, Chile, New Zealand, Brunei, United States, Australia, Canada, Japan, Malaysia, Mexico, Peru, and Vietnam

However, the first discussion round of TPP had not launched until December

2009, when the United States finished it presidential election with new president

Mr Obama Obama had showed great support to the progress of TPP from the beginning

After five years of discussion with over 30 discussion round, TPP’s member countries had ended those discussion on 5 October 2015 at Atlanta, United States

On 4 February 2016, the Ministry of Commerce of TPP’s member countries had officially passed the content of TPP At the presence, TPP’s member countries are

in progress to ratify it domestically according to its own law Until November 2016, among twelve countries only Japan had passed TPP Regarding Vietnam’s participation in TPP, since 2006, Singapore had actively invited Vietnam to join TPP However, Vietnam still hesitated to become full member of TPP Only until

2008 when United States joined the agreement and encouraged Vietnam to participate, Vietnam had decided to become an associate member and later a full member of TPP

According to Vietnam Chamber of Commerce and Industry, TPP is considered

as “FTA of 21st century” The reason is that of its extraordinarily broad scope and high level of liberalization In particular, TPP includes thirty chapters, covering not only traditional subjects, i.e.: goods, services, investments but also covering new issues, for example: commercial trade, State-owned Enterprises, Supply Chain Facilitation High liberalization level of TPP for example: tax will be cut down to 90% at least with prompt effectiveness or very short implementation schedule; services liberalization will be significantly increased; protection level to intellectual property is much higher than that in WTO etc

Regarding to trade in services, there are three chapters covering this issues i.e.: Chapter 9-Investment, Chapter 10-Cross border trade in services, Chapter 11-Financial services and three annexes of TPP including exceptions of each countries

In particular, Chapter 9 applies to measures of a TPP’s member country, which affect investors of another member countries, investments of those investors from

the entry into force of TPP (TPP, Chapter 9, Article 9.2, Point 1) Some article of

Chapter 9 also applies to all investments within a country’s territory However,

Chapter 9 does not apply to measures which are covered by Chapter 11 (TPP,

Chapter 9, Article 9.3, Point 3) Chapter 10 regulates measures of a member

country, which affect cross-border services of another members, including production, distribution, marketing, sale or delivery of a service; purchase or use of,

or payment for, a service; the access to and use of distribution, transport or telecommunications networks and services in connection with the supply of a service; the presence of a service supplier of another member; the provision of a bond or other form of financial security as a condition for the supply of a service

(TPP, Chapter 10, Article 10.2, Point 1) However, as Chapter 9, scope of Chapter

10 excludes all financial services defined and stipulated in Chapter 11 but with

some exceptions (TPP, Chapter 10, Article 10.2, Point 3) Financial services

defined in Chapter 11 includes all insurance and banking services as well as other

services incidental or auxiliary to a service of a financial nature (TPP, Chapter 11,

Article 11.1) In conclusion, only Chapter 11 shall be applied to regulate insurance services This chapter includes commitments of TPP’s member countries to open insurance market In contrary to Chapter 11, Annex III of the TPP stipulates exceptions of each member countries to those commitments

Besides Vietnam, other TPP members also make commitments related to insurance In particular, they are also regulated by Chapter 11 and have their own Annexes of non-conforming measures

Firstly, all articles in chapter 11 are obligations of other TPP members They are

National Treatment, Most Favor Nation, New Financial Services, Board of Directors, etc However, each TPP members commit differently in terms of Cross Border Trade Those commitments can be grouped into 3 level

- The first level include Australia and USA, whose Cross Border Trade commitments are widest For more details, those two countries allow cross border trade of maritime and aviation insurance; space launching and freight insurance; insurance for goods in international transit; reinsurance and retrocession; brokerage; agency; services auxiliary

- The second level include countries, whose Cross Border Trade commitments are stricter than first group Those countries are Japan, Canada, New Zealand and Peru Their cross border trade commitments are similar to such of first group, except that brokerage and agency are only allowed for maritime, aviation, space launching, freight and goods in international transit insurance

- The last level include remaining members, which also include Vietnam, whose cross border trade commitments are very limited For example: Vietnam, Singapore, Malaysia and Mexico do not permit cross border trade of agency; Brunei prohibits cross border trade of both agency and brokerage; while Chile bans cross border trade of agency and services auxiliary

Secondly, each TPP members has its own annex of non-conforming measure

In general, contents of those annexes are different But we can still point out some similar non-conforming measure among those annexes First of all, they reserve the right to remain additional requirements for establishment of foreign insurance company within their territories Secondly, they remain right to adopt measures, which may violate Most Favor Nation article, for public purposes Thirdly, most of TPP members reserve right to adopt measure or remain restrictions with respect to the supply of compulsory insurance in favor of local insurers, for example: Singapore and Brunei only permit insurers registered/licensed in Singapore/Brunei

to provide compulsory insurance for motor third party liability, and workmen’s compensation insurance; New Zealand reserves right to adopt measure with respect

to the supply of compulsory social insurance for personal injury and disaster insurance for residential property, etc Forthly, most of TPP countries reserve right

to grant subsidies for state-owned enterprises Fifthly, most of them require some specific percentage of local people in Board of Directors of insurance companies, for example: Singapore requires at least one director of companies to be resident in Singapore, while Malaysia requires at least two directors to be resident in Malaysia, etc

2.2 Current regulations and legislation of Vietnam relating to insurance

Law on Insurance Business in 2000 and its amendment in 2010 are the core

legal document to regulate insurance market It contains basic regulations related to insurance, which are: principles in insurance activities, type of insurance operation, insurance contracts of each insurance lines, insurance enterprises activities e.g.: establishment and operation, restoration of solvency, dissolution, etc Besides Law

on Insurance Business, there are some laws regulating a particular type of insurance, e.g.: Vietnam Maritime Code in 2015 regulates marine insurance activities, Vietnam’s Health Insurance Law in 2008 regulates public health insurance, and Law on Construction in 2014 regulates property insurance

Decrees issued by the Government give more detail instructions for insurers to

apply the Law (e.g.: Decree No 73/2016/ND-CP on the details of the implementation of the Law on Insurance Business and amendments to certain articles of the Law on Insurance Business) Sometimes they also regulate issues not mentioned in Law (e.g.: the compulsory fire and explosion insurance regime)

Decisions issued by Vietnam’s Prime Ministers often stipulate strategy for

insurance market in a particular period (e.g.: Decision No 175/2003/QD-TTg of the Prime Minister of the Government dated 29 August 2003 approving the strategy for development of the Vietnamese insurance market from year 2003 to year 2010)

Circulars issued by the Minister of Finance account for the highest number of

legal documents They provide guidance for insurers in various fields, e.g.: financial regime, benefit and premium table of compulsory insurance such as: third party liability insurance of vehicle owner, fire and explosion insurance In another word, they help insurance companies to understand and apply the laws and decrees correctly

Bilateral and multilateral agreements signed between Vietnam and other

countries also regulate Vietnam’s insurance activities As per Law on the Conclusion, Accession to and Implementation of Treaties, in cases where a legal

document and a treaty to which the Socialist Republic of Vietnam is a party, contains different provisions on the same matter, the provisions of the treaty shall prevail Therefore, in case of lack of domestic legislation, treaties still have effects

on insurance activities (Dang Trung Ha, Vi tri cu dieu uoc quoc te trong he thong phap luat Viet Nam, 2015). According to Insurance Management and Supervision Department of Vietnam, there are 2 effective treaties of Vietnam related to insurance, which are: two bilateral free trade agreement i.e.: Agreement between the U.S and Vietnam on Trade Relations in 2001, Free Trade Agreement between the Government of the Socialist Republic of Vietnam and the Government of the Republic of Korea in 2015, and a multilateral agreement i.e.: Vietnam’s WTO commitments in 2006

Although Vietnam’s insurance market has been officially established in 1993, when Vietnam enacted Decree No 100/CP to end the monopoly stage, only until

2000, Vietnam has made a milestones by passing its first Law on Insurance Business The Law has created a legal framework for insurance activities, a more transparent business environment for insurance companies, especially foreign companies During first 7-year period from 1993 to 2000, there were 13 insurers, reinsurers, insurance brokers established During the next 7-year period from 2001

to 2007, such number had doubled with 27 companies opened Among them, there were many foreign companies, including: Gras Savoye Willies – a French insurance broker, Liberty Mutual Insurance – an American life insurer, QBE – an Australian non-life insurer etc Those legal documents stipulate activities of insurers (e.g.: organizational structures, financial scheme of insurers, agent usages), and also regulates insurance product contents

In terms of non-life insurance products, Vietnam’s government mostly

releases legislation related to compulsory insurance, e.g.: Compulsory Third Party Liability Insurance, Compulsory Fire and Explosion Insurance For other types of non-life insurance except for motor vehicle insurance, insurers have freedom to design and offer it to the market There is no detail legislation of products

In term of life insurance products, there are concrete legislation of product

benefits, premium calculation, e.g.: Decree no 115/2013/TT-BTC issued on 20/08/2013 guiding pension insurance and pension insurance fund; Decree no 52/2016/TT-BTC issued on 21/03/2016 guiding the implementation of universal life insurance products

Regarding insurance activities of foreigners, Vietnam’s law stipulates and

allows distribution through presence of representative and cross-border supply In particular, presence of representative includes four types, which are: companies associating with local investors, 100% foreign-invested insurance enterprises, branches of foreign insurance enterprises (only in non-life segment), representative offices of foreign enterprises Among them, the first and the second types are not limited in terms of insurance products selling in Vietnam market There is no difference between foreign and local companies But regarding the third type i.e: branches of foreign enterprises, their business is restricted in non-life insurance only (including health insurance) They are prohibited to offer life insurance in Vietnam market The last type is representative offices, which are not allowed to sell any insurance products in Vietnam

In terms of cross-border supply, Decree no.73/2016/ND-CP of the

Government allows foreigner of countries, which have signed treaties with Vietnam including agreement related to cross-border supply of insurance Those insurance companies can provide insurance products to Vietnam’s enterprises having more than 49% of foreign-invested capital; or to foreigners working in Vietnam only Therefore, enterprises with under 49% of foreign-invested capital and the Vietnamese still have to buy insurance from local insurance enterprises Insurance products distributed by cross-border supply are non-life insurance products, except for health insurance In addition, foreign insurance companies must distribute through a local insurance brokers

There are some differences of cross-border supply regulation between Vietnam’ law and WTO commitments In particular, WTO commitments allow

cross-border supply of all insurance types to foreign-invested enterprises, foreigners working in Vietnam There is neither restriction of the proportion of foreign-invested capital, nor insurance product selling to those insurance buyers And moreover, WTO commitments also allows cross-border supply of insurance services in international transportation and some insurance-related services, i.e.: reinsurance services, insurance broking and reinsurance broking services, consultancy, actuarial, risk assessment and claim settlement services for local companies and the Vietnamese

Table 2.1 Comparison of insurance cross-border trade in WTO and Vietnam’s

- Vietnam’s enterprises having more than 49% of foreign-invested capital; or

- foreigners working in Vietnam

- Insurance broking and reinsurance broking services;

- Consultancy, actuarial,

All products, except for life insurance and health insurance services

risk assessment and claim settlement services

Above insurance and insurance related-services are permitted to provide to any insurance purchaser in Vietnam

- Other insurance services (including: life and non-life insurance services, but excluding health insurance services, etc.)

Those insurance services can only be provided to one of two subjects, which are: enterprises with foreign-invested capital in Vietnam or foreigners working

provide insurance services via a broker operating in Vietnam

- Foreign brokers shall sell insurance services for Vietnam’s insurance companies

or foreign insurance braches operating in Vietnam

Source: Author’s comparision

Besides presence of representative and cross-border supply, there are also two modes for insurance distributions, which are: consumption abroad and presence of natural person However, there is lack of regulations related to those two mode in Vietnam’s law They only can find in Vietnam’s WTO commitments In particular,

for consumption abroad, there is neither limitation of market access nor national treatment In contrary to consumption abroad, the presence of natural person mode

is restricted to some entry and temporary stay of some specific people, i.e: corporate transferees; service sales person; managers, executives and specialists employed by foreign enterprises in Vietnam; persons responsible for setting up a commercial presence; contractual service suppliers

intra-In short, since the WTO accession, Vietnam had completed its insurance legal

framework in order to meet its commitment in WTO In generally, local and foreign insurers are treated quite equally Foreign insurers are allowed to provide insurance

in Vietnam under different legal entities, i.e.: 100% foreign-invested capital companies, company with local partners, branches (except for life insurance branches) However, there are still some additional requirements for foreign insurance companies to open business in Vietnam The cross-border trade in insurance is also limited to several products, which requires expertized knowledge and big capital support, e.g.: marine and aviation insurance

2.3 Vietnam’s insurance commitments in TPP

- Vietnam’s commitments in Chapter 11

Like other members, Vietnam follows insurance-related obligations stipulated

in twenty two articles of Chapter 11.As stipulated in Point 1, Article 11.2, Chapter

11 shall apply to measures adopted or maintained by a TPP’s member relating to:

(a) financial institutions of another Member;

(b) investors of another Member, and investments of those investors, in financial institutions in a Member’s territory; and

(c) cross-border trade in financial services, i.e: Insurance and insurance-related services and Banking and other financial services (excluding insurance) In particular, Insurance and insurance-related service includes:

- direct insurance (including co-insurance) of life and non-life;

- reinsurance and retrocession;

- insurance intermediation, such as brokerage and agency; and

- services auxiliary to insurance, such as consultancy, actuarial, risk assessment and claim settlement services;

Therefore, Chapter 11 contains provisions on the treatment affecting insurance companies operating within territory of a TPP’s member and the cross-border trade

of insurance between TPP’s members Those treatments of all TPP’s member including Vietnam shall follow some obligations in order to promote an equal business environment for local and foreign companies

National Treatment and Most-Favored Nation articles are the first two obligations They are basic obligations, which are established in almost every

Chapter of TPP The National Treatment obligation requires Vietnam not to treat foreign companies less favorably than like domestic companies While the Most-Favored Nation Treatment obligation requires Vietnam not to treat foreign companies from another TPP’ member less favorably than like companies from any other country

In the pursuit of creating a fair business environment for local and foreign companies, TPP’s members as well as Vietnam also follows other three obligations, which are: market access, new financial services and Senior Management and Boards of Directors

According to market access article, Vietnam must not apply limitations to

foreign insurers in the form of:

- number of insurers, including: numerical quotas, monopolies, exclusive service suppliers or the requirement of an economic needs test;

- total value of insurance’s transactions in the form of numerical quotas or the requirement of an economic needs test;

- total number of insurance operations or the total quantity of insurance output expressed in terms of designated numerical units in the form of quotas or the requirement of an economic needs test;

- total number of employees that may be employed in insurance service sector or the number of employees that an insurer may employ in the form of numerical quotas or the requirement of an economic needs test;

- restrictions or requirements of specific types of legal entity or joint venture through which an insurer may supply insurance services However, Vietnam has

reserved this obligation and treated it as a “non-conforming measure” (TPP,

Chapter 11, Article 11.10) in Annex III In particular, foreign non-life insurers can provide insurance within Vietnam’s territory under types of a 100% foreign capital or a joint venture with local insurance company or a branch; but, in terms of life insurance, foreign insurers cannot establish a branch in Vietnam to sell life insurance products

Relating to new financial services article, Vietnam shall permit a financial

institution of another Member to supply a new financial service that it would permit its own financial institutions, in like circumstances, to supply without adopting a

law or modifying an existing law (TPP, Chapter 11, Article 11.7) It means that in

case of new insurance products being developed in the future, both local and foreign insurance companies are allowed to sell them in Vietnam’s territory

In terms of board of director article, Vietnam cannot require an insurance

company of another TPP’s member to appoint individuals of any particular nationality to be senior managers or essential personnel of such company Moreover, Vietnam cannot require a proportion between local and foreign citizens

within the board of directors of a foreign insurance company (TPP, Chapter 11,

Article 11.9)

The transparency of legal framework article is also a great concern of foreign

investors Therefore, chapter 11 also requires Vietnam as well as all members to promote a transparent regulation and policy system In particular, Vietnam shall:

- ensure that general application are administered in a reasonable, objective and impartial manner;

- publish in advance any regulation that Vietnam proposes to adopt and the purpose of the regulation; and provide interested persons and other Members with a reasonable opportunity to comment on that proposed regulation

- adopt a transparent, prompt procedure of receiving and processing applicant form investors or insurers, i.e.: on request of an applicant, Vietnam’s regulatory authority shall inform the applicant of the status of its application; and make an administrative decision within 120 days and shall promptly

notify the applicant of the decision (TPP, Chapter 11, Article 11.3)

Related to cross-border trade, each country has its own commitments in

Annex 11-A Regarding Vietnam’s cross-border trade commitments, Vietnam only commits to apply cross-border trade in some specific insurance services, i.e: maritime and aviation insurance (including goods, vehicle, and liability insurance); insurance for goods in international transit; reinsurance and retrocession; brokerage services, and other services auxiliary to insurance (such as: consultancy, actuarial,

risk assessment and claim settlement services) (TPP, Chapter 11, Annex A, p.39)

For other types of insurance, foreign insurance company shall only conduct business via an insurance broker which has the license to establish and operate in

Viet Nam (TPP, Annex III, p.10)

Postal entities article is a new point of insurance-related commitments in TPP,

by which, Vietnam and other TPP’s members commit not to create conditions of competition that are more favorable to those postal insurance entities, including:

(a) imposing more onerous conditions on a private supplier’s license to supply insurance services than the conditions the Party imposes on a postal insurance entity to supply like services; or

(b) making a distribution channel for the sale of insurance services available to a postal insurance entity under terms and conditions more favorable than those it

applies to private suppliers of like services (TPP, Chapter 11, Annex B,

Section C, Point 2) Such postal insurance entities must also publish an annual financial statement with respect to the supply of insurance services

However, those above regulations shall not apply to either insurance services for collection, transport and delivery of letters or packages; or postal insurance entities:

(a) that Vietnam neither owns nor controls, directly or indirectly, as long as Vietnam does not maintain any advantages that modify the conditions of competition in favor of the postal insurance entity in the supply of insurance services as compared to a private supplier of like insurance services in Vietnam’s market; or

(b) if sales of direct life and non-life insurance underwritten by the postal insurance entity each account for no more than 10 per cent, respectively, of total annual premium income from direct life and non-life insurance in

Vietnam’s market as of January 1, 2013 (TPP, Chapter 11, Annex B, Section

C, Point 6) However, Vietnam will not be bounded by this obligations since Vietnam’s postal insurance companies has less than 10 per cent of total annual premium income as of January 1,2013 (Tran Huu Huynh, 2016)

Financial Services Committee article under Chapter 11 also apply to Vietnam

and other Members According to this article, all members agree to establish a committee for the supervision of the implementation of this Chapter The Committee consists of representatives of all TPP’s members, which are officials of

authority responsible for financial services in each country Representative of Vietnam are State Bank of Viet Nam and the Ministry of Finance

A safeguards article is also stipulated in Chapter 11 According to it, any

dispute relating to a prudential measure in an investor-State arbitration can be placed under review of financial regulatory authorities of TPP’s member countries The dispute will then be resolved through a State-to-State arbitration between TPP governments, rather than in an investor-State proceeding Those are general obligations and rules relating to financial services imposing to all TPP’s members including Vietnam

- Vietnam’s non-commitments in Annex III

While Chapter 11 includes obligations of Vietnam and other Members in order

to liberalize insurance market, Annex III of the TPP includes exceptions of those

obligations of each country There are two sections in Annex III

Section A sets out TPP’s existing measures that are not subject to obligation in

Chapter 11 i.e.: National Treatment, Most-Favored-Nation Treatment, Market Access for Financial Institutions, Cross-Border Trade, Senior Management and Boards of Directors Section B sets out measures for which a TPP’s member country may maintain existing, or adopt new or more restrictive, measures that

do not conform with above obligations In Section A, there are two existing

measures of Vietnam relating to insurance that against to general obligations in Chapter 11 Those two measure will be remained by Vietnam even after the entry into force of Chapter 11 The first measure is that “Foreign natural persons are not

allowed to supply insurance agency services in Viet Nam” (TPP, Annex III, p.9)

This measure is currently established in Law No.24/2000/QH10 on Insurance Business The second measure is that foreign insurance company supplying cross border insurance services not committed by Vietnam shall only conduct business via an insurance broker which has the license to establish and operate in Viet Nam; and foreign insurance broker when supplying cross-border those non-committed