Subject:
"Proposals of the Suitable Solvency Regulation for the Vietnamese Life Insurance Industry based on the Experience from the US and Japan"
by Mr. Nguyen Van Thanh and Prof. Takao Atsushi (Kobe University)

Summary

In this workshop, VDF-Tokyo welcomed Mr. Nguyen Van Thanh, a Ph.D Candidate from Kobe University, to present his co-authored study with Prof. Takao Atsushi on solvency regulation for Vietnam’s life insurance industry. 

Solvency of an insurer is known as the capacity of the insurer to meet its commitments with customers. Solvency regulation in insurance industry is used as a tool of policy makers and insurers to supervise insurers’ solvency in order to protect consumers. Recently, there are two methods determining solvency of insurers. The first is “fixed-ratio” model, which has been used by the European Union (EU) since 1979. The other is “risk-based” capital model (RBC), which has been used by the U.S. since 1992, and Japan since 1996. Vietnam has issued new standards of solvency margin and threshold value based on “fixed-ratio” model since 2000. Therefore, the purpose of this research was to compare the effectiveness of the two models, and to propose an effective model for Vietnam by using data and experiences from the Vietnam’s insurance industry in the period 2001-2003. 

The author started by introducing two RBC models applied in the U.S. and Japan, and the capability to apply these models in the context of the life insurance industry in Vietnam. As shown in the presentation, in the both RBC models, Solvency Margin Ratio (M) was depended on Solvency Margin (S) and Total Risk Amount (R). However, the difference in counting R and S in the two methods led to the difference in Solvency Margin Ratio. (Please see presentation slides for more details about these models). 

There were two noticeable factors influencing to the efficiency of applying both American and Japanese RBC methods in the Vietnam’s life insurance industry. First, since life insurers in Vietnam were setting high Assumed Interest Rate, which was one of five elements to determine Total Risk, the application of the Japanese RBC model would increase Total Risk amount of the insurers and reduce Solvency Margin Ratio. Secondly, in the U.S., for the purpose of security, strict requirements on risky investments, such as shares, joint venture, and real estate, were applied. In Vietnam, however, stock market was in its infancy, so that life insurers could not invest in such risky investment. These two main factors led to the necessary to develop a more appropriate model for the Vietnam’s life insurance industry. 

For a better solvency regulation for the Vietnam’s life insurance, a new model was proposed by selecting and mixing different elements of the American and Japanese models. The model applied (1) Interest Rate Risk factor, (2) Reinsurance Risk factor, (3) Insurance Risk factor, and (4) Catastrophic Risk factors of the Japanese RBC model. It also used (4) Asset Management Risk factors for shares, deposits, and real estate, (5) Receivable Risk factor, (6) Business Administration Risk factors as in the American RBC model. Applying the new model, the paper measured Solvency Margin Ratio of life insurance companies in the Vietnam, particularly those of AIA, Prudential, and Manulife. The results showed that the proposed model was stronger (or more conservative) than that of the fixed-ratio model. The paper also illustrated an example of AIA, who suffered losses and had owner’s equity which was much lower than legal capital, but who was still recognized by the Ministry of Finance of Vietnam (MoF) as being solvent due to the application of the old solvency regulation. The paper, therefore, suggested applying RBC model for the Vietnam’s life insurance and the regulation of quarterly solvency report, instead of recent annual report.

In Q&A section, several questions and comments were given to the presenter. Related to data and cases of insurers in Vietnam, Mr. Mac Quang Huy (Lehman Brothers Japan Inc.) wondered about short term analysis of the study, i.e. during 2001-2003. He also asked about the appropriateness of the proposed model when Vietnam would enter WTO in the coming year. Ms. Tran Thu Hanh (Ernst & Young Financial Services Co., Ltd.) had a question about the solvency of the other three Vietnamese life insurers. In his answer, Mr. Thanh said that the new solvency regulation based on fixed-ratio model has just applied in Vietnam since 2000, and thus it obstructed his possible long-term analysis. He agreed that new business environment under WTO could change the industry’s situation and the solvency model. He also added some information related to the Vietnamese life insurers to show that these firms could have even less risk rate. 

Prof. Kenichi Ohno (GRIPS/VDF) suggested the author present the background of the Vietnam’s insurance industry, including insurers, market share, consumers, its specific features compared to insurance industries in advanced countries, as well as the developing trend of the industry. Besides, according to him, solvency rate reflected the negotiation between business sector and government. While insurers wanted to have low solvency ratio, governments wanted it to be higher to protect consumers. As in the experience of Japan, it was because that the government had strengthened solvency ratio that insurance firms were difficult to develop. Thus, how determine the effective solvency ratio to satisfy willingness of both sides? Sharing this concern, Mr. Vu Tuan Khai (Yokohama National University & VDF-Tokyo) asked about the method to determine the Assumed Interest Rate, which was an element to determine solvency ratio. In his response, Mr. Thanh said that the MoF talked with insurance firms annually to decide the solvency ratio, and to solve the benefit conflicts. Prof. Ohno and Mr. Huy added the necessity to have a fairer method of determining solvency ratio for all firms, and of enabling that firms were less dependent on the government in their business. 

Regarding to the application of two methods of solvency ratio, Mr. Huy had a question that why fixed-amount model was still applied in different countries, especially in the EU where there were two major insurance countries, i.e. England and Germany. He, then, extended that whether Vietnam could apply experiences of the EU. Mr. Thanh replied that in addition to the fixed-ratio model, the EU was applying other additional regulations. He emphasized that, although EU’s experience might be applied in Vietnam, the risk could be high. 

Some other comments focused on specific features of Vietnam-as a developing country-that could constrain the effectiveness of applying the American and Japanese models. Prof. Ohno raised a question on the differences of factors that determined the solvency ratio between Vietnam-as a developing and highly-growing economy- and developed economies. Ms. Hanh mentioned on the relationship between foreign insurance subsidiaries in Vietnam and their headquarters in enabling solvency. Mr. Pham Truong Hoang (Yokohama National University & VDF-Tokyo) asked about the models which could be applied to other developing countries, especially those who had similar development level as Vietnam’s. In his turn, Mr. Thanh said that it was necessary to have additional regulation for foreign insurance firms in Vietnam as in the experiences from the Philippines or Singapore. He also noted that, since the RBC models had just developed since 1992 in the U.S. and since 1996 in Japan, so that many countries still applied the fixed-ratio method. Though, some studies on this topic pointed out many advantages of the RBC models and suggested that it was better to move from fixed-ratio model to RBC model. The author thanked the participants for their comments, which would be useful for his further studies.  

In the last one hour, we have an exchange information section. Various information and research topics were discussed, and VDF-Tokyo also announced some forthcoming activities.

 (By Pham Truong Hoang)