In the chase to attract policyholders and earn greater returns, insurance funds have their eyes firmly fixed on establishing fund management companies.
Vietnam’s insurance sector saw a strong rebound in the wake of the global financial crisis, in both the life and non-life segments. In sharp contrast to the gloomy forecasts, total revenue topped US$625 million in 2009, the highest since 2005. This can be partly attributed to the commitment of insurance companies to pay a bonus of 5-8 percent, equivalent to the interest rate being offered by commercial banks. Another crucial factor was higher premiums. According to a survey conducted by the Ministry of Labor, Invalids and Social Affairs (MoLISA), average salaries rose 20.08 percent last year against 2008. The life insurance segment remains dominated by BaoViet, Prudential and Manulife, with the three having market share of more than 80 percent.
Hard for late arrivals
The global pattern every life insurance company wants to follow is to have its own fund management company. In the middle of 2005, Prudential and Manulife both obtained licenses to set up their own fund management arm. Both can be quite satisfied being early birds, because other companies couldn’t arrive at a decision on whether to seek permission to form fund managers. According to the WTO roadmap, after 2011, fund management firms with 100 percent foreign-owned capital will be allowed to operate in Vietnam. If insurance companies establish joint ventures for the time being, they will have to face their eventual dissolution someday to make room for funds with 100 percent foreign-owned capital. Deficiencies in the legal framework are another concern. There is still no regulation on open-ended funds. More importantly, insurance companies haven’t been sufficiently attracted by Vietnam’s stock market. In the opinion of one CEO in the insurance sector, the country’s stock market is still not fully developed and individual investors still follow the “herd mentality”. “Having a fund management company will help insurance companies to separate investment income from operating income,” he said. “However, now is not the right time to break into Vietnam’s market. Even though we have good products, great skills and top-notch facilities, we can still lose the game if we choose the wrong time.”
Early days
Insurance companies now lean towards developing in- vestment-linked products, which are considered a prerequi- site for the establishment of fund management companies. Remarkably, the total number of investment-linked policies in 2009 reached approximately 135,223, for massive growth of 116 percent year-on-year. The rate of policy cancellations was also lower.
With greater transparency compared with traditional methods, it is true to say that investment-linked insurance has proved to be particularly attractive for both policyhold- ers and agents. A large number of people in Vietnam are still unfamiliar with the stock market, especially people in rural areas. Many have idle funds but can’t directly participate in the stock market due to lack of know-how or because of geographi- cal obstacles. Buying investment-linked products allows them to hedge against risk, on the one hand, and make a long-term investment on the other. Part of the premium goes towards the sum assured and the balance is put in a mutual fund. The return can therefore be significantly higher than from depositing the money in a bank account. High returns, however, always come with high risks, depending on the market and the fund managers’ performance. Policyholders must also pay all the fees associated with traditional insurance policies, plus fund management fees.
In Vietnam there are now several insurance companies licensed to provide two types of investment-linked products (universal life and unit-linked): ACE Life, BaoViet, Dai-ichi Life, Korea Life, Prevoir, and Prudential. The major difference between universal life and unit-linked products is that, with unit-linked policies, policyholders can use their initiative in asset allocation or dividing their investment portfolio among different asset categories, including stocks, fixed income, private equity, venture capital, hedge funds, closely held companies, distressed securities, commodities and cash.
Of equal note, every single customer only needs to save VND5 million (US$260) per year at the very least to buy unit-linked products and become an investor in the mutual funds of insurance companies. “There’s a vast number of people able to dedicate more than VND5 million per year to participate in unit-linked contracts, such as public servants, employees in foreign-owned enterprises, owners of small- and medium- sized enterprises and even farm owners in remote areas,” said Mr. Phung Dac Loc, General Secretary of the Association of Vietnamese Insurers. “Investment-linked insurance is very closely related to the development of the stock market. And Vietnam’s stock market is also in the process of stabilizing after many adjustments, promising enormous growth in the future. Therefore, the potential of investment-linked products is great. They could account for 70 to 80 percent of the industry’s revenue in the future and become a considerable capital supply to the economy.”
Prudence, though, is still required, because potential risks are unavoidable. It took insurers six years to restore revenue to previous levels after the collapse of the London stock market in 1987.