Investment business of insurance enterprises are managed more strictly

Law on Insurance Business (revised) stipulates more strictly the right of business and investment of insurance enterprises

Strict regulation on capital

The Law on Insurance Business (revised) is promulgated following the spirit of more autonomy for insurance enterprises in their business operations, in which the regulatory authorities will not interfere too deeply in terms of techniques into the operation of insurance enterprises as before.

Instead, the management authority will play a supervisory role, promoting transparency and healthy development of the insurance market. At the same time, giving greater autonomy to insurance enterprises will also help them be proactive and ensure better efficiency in business operations.

The Law on Insurance Business (revised) also added a number of new provisions to guide insurance companies and revised some previous regulations to avoid confusion when applied in practice.

One of the important changes affecting the business activities of insurance companies is the capital. Instead of a flat scale as before, the Law on Insurance Business (amended) has clearly classified each type of capital of insurance enterprises and reinsurance enterprises in the course of business operations; supplementing the requirements that insurance and reinsurance enterprises must always maintain a capital adequacy ratio in order to ensure capital commensurate with the size and risk level of the basic risk groups. The new regulation is expected to create conditions for businesses that have good financial status and sound governance to develop and promptly correct poor performance businesses in financial and risk management.

According to Ms. Nguyen Thu Ha, Head of Analysis Department, SSI Research, the changes in the capital management model may put pressure on increasing capital at certain insurance companies. However, these regulations have a transition period of 5 years, providing a buffer period between the legal framework and actual implementation (2023 – 2027).

In addition, the Law on Insurance Business (revised) has also supplemented regulations requiring an annual independent audit of financial statements, reports on the separation of equity sources, and premium sources, and reports assessing solvency and risk. The Law also supplements regulations on responsibilities of independent auditing organizations such as explaining, providing information and data related to auditing activities of insurance enterprises and reinsurance enterprises in case of request of the Ministry of Finance; notifying in a document to the Ministry of Finance in case of detecting material violations due to non-compliance with the law or insurance fraud.

Experts believed that this would help the insurance market to be transparent and workable in competition and people have the most objective views when choosing insurance companies to provide services.

Besides that, the Law also encourages the application of information technology in the insurance business, contributing to promoting enterprises and the market to develop in line with the trend of the fourth industrial revolution, while improving and reducing administrative procedures as well as creating an initiative for businesses in developing insurance products. Enterprises do not have to approve insurance products like before, but only register the method and basis of premium calculation. This will be more convenient in the purchase and sale agreements of businesses as well as customers.

Prohibiting insurance companies from direct investment in real estate

An important point related to the operation of insurance enterprises is that if previously, insurance companies were allowed to invest in real estate with a maximum of 10-20% of idle capital from the provision of non-life insurance and life insurance companies, now, in the Law on Insurance Business (revised) clearly stipulates that insurance companies are not allowed to invest in real estate except the case of buying shares of real estate enterprises listed on the stock market, fund certificates of public funds.

Furthermore, insurance enterprises are not allowed to operate real estate businesses directly, but will be allowed to buy, invest, and own real estate to use as a business headquarters, working location, or warehouse facility directly serving professional activities.

Besides, the Law on Insurance Business (revised) also stipulates that insurance enterprises are not allowed to borrow to invest in securities; do not invest in precious metals and gems; do not invest in derivative securities or derivative contracts, except for derivative securities listed for the purpose of hedging risks arising from insurance contracts.

Analyzing this regulation more closely, Mrs. Nguyen Thu Ha said that it is necessary to clarify that the new Law prohibits insurance enterprises from directly investing in real estate business, not from investing in real estate stock or in a business office/lease a part of the business office that is not yet fully operational.

Currently, insurance companies, especially non-life sectors, have a nationwide network of branches/business points. The properties which they own are usually used for business headquarters. They can also lease out part of the business premises that are not yet fully operational. Therefore, this new regulation does not have a great impact on the business results of insurance enterprises.

Mrs. Nguyen Thu Ha also emphasized that not being allowed to invest in real estate business is to comply with Clause 1, Article 10 of the Law on Real Estate Business.

Accordingly, organizations and individuals who want to invest in real estate businesses must establish a real estate investment enterprise. Therefore, insurance enterprises are not allowed to directly invest in real estate. For the parent company and its member companies under the parent company, whether they can directly conduct real estate investment and business or not will depend on whether they are a legal entity with business registration including the field of real estate business or not; rather than depending on whether their ecosystem has an insurance business.