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Supervising financial investment activities of Vietnamese life insurance companies (LIBs)
Posted date 26/06/2017
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Posted date 26/06/2017
3.013 view
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Life insurance activities have been officially implemented in Vietnam since 1996, which has been 20 years. In addition to the main business of insurance business, life insurance companies also carry out investment activities from idle capital when they have not yet had to fulfill their payment obligations to customers according to the contract. However, because the investment capital is mainly formed from the insurance premiums contributed by participants, the inspection and supervision of financial investment activities of life insurance companies is of great significance in preserving the fund. In the scope of this article, the author will mention the issue of inspection and supervision by the State Management Agency on financial investment activities of life insurance companies.
MSc. Nguyen Thi Thu Trang
Lecturer of Faculty of Finance and Banking
Life insurance activities have been officially implemented in Vietnam since 1996, which has been 20 years. In addition to the main business of insurance business, life insurance companies also carry out investment activities from idle capital when they have not yet had to fulfill their payment obligations to customers according to the contract. However, because the investment capital is mainly formed from the insurance premiums contributed by participants, the inspection and supervision of financial investment activities of life insurance companies is of great significance in preserving the fund. In the scope of this article, the author will mention the issue of inspection and supervision by the State Management Agency on financial investment activities of life insurance companies.
1. Overview of Financial Investment Monitoring of Life Insurance Companies
Life insurance and financial investment of life insurance companies
Life insurance is a type of insurance that includes commitments whose implementation depends on the life expectancy of a person . The characteristic of insurance business is that insurance premiums are collected first and insurance payment commitments are made later. In addition, the insurance term of life insurance contracts is long-term, so the revenue collected from insurance premiums will not have to be spent immediately (compensation, insurance payments) but will be idle for a relatively long period of time, so life insurance companies can use this idle money for investment. Life insurance companies use idle money from equity and collected insurance premiums and some other sources of capital to provide capital to the economy as a financial intermediary through the financial market in the form of bank deposits, securities purchases or equity contributions.
Thus, Financial investment of DNBHNT is the use of idle capital by enterprises to invest in investment fields according to the law .
Supervise financial investment activities of DNBHNT
From a macro perspective, the investment activities of insurance companies in general and life insurance companies in particular are subject to inspection and supervision by supervisory agencies (Insurance Supervision and Management Department, Insurance Supervision and Management Department, Insurance Supervision and Management Department or Financial Services Supervision Commission under the Ministry of Finance or the State Bank or the Government). These supervisory agencies will be under different levels of authority depending on the supervisory model chosen by the countries such as: Institutional supervisory model; Functional supervisory model; Twin peak supervisory model; Integrated supervisory model: Including full integration and partial integration.
* Monitoring method : Currently, there are two methods of monitoring investment activities in the world: Compliance monitoring method is a monitoring method based on the Law (analyzing indicators from business and investment activities from financial reports) and comparing with monitoring indicators according to the provisions of law. Risk-based monitoring method is a method of quantifying the scale of risks arising from the business situation and management capacity of the insurance company based on a synchronous assessment to detect weaknesses of the enterprise in the past and future (using quantitative analysis models, early warning, risk assessment).
Risk-based supervision focuses on the quality of investment management ( the investment process from policy setting, implementation and monitoring of investments) rather than the investment outcomes ( output, investment limits and returns ) of the compliance supervision approach.
* Monitoring process : To conduct market monitoring, regardless of the monitoring method, monitoring is carried out according to the following processes: Remote monitoring (analyzing and evaluating the activities of insurance companies based on collected information, warning and early identification of risks) and on-site monitoring (checking and inspecting right at the enterprise).
* Supervision content: Supervision of investment capital (charter capital, compulsory reserve fund, voluntary reserve fund, unused profits from previous years, especially idle capital from capital reserve (DPNV) - essentially money from insurance customers that the insurance company temporarily manages); Investment structure (assets with investment activities) and profit margin. DPNV is essentially money from insurance customers that the insurance company temporarily manages.
2. Current status of financial investment supervision of life insurance companies
Investment activities of life insurance companies in the Vietnamese insurance market are under the management and supervision of the Insurance Supervision and Management Department under the Ministry of Finance. The life insurance market supervision model is an institutional supervision model, suitable for the development of the Vietnamese financial market in general and the life insurance market at the present time.
In addition to legal documents, Vietnam is gradually moving towards applying the principles and standards of insurance supervision issued by the International Association of Insurance Supervisors (IAIS). However, the principles and standards of supervision issued by IAIS are mainly applied to countries that conduct market supervision according to the risk-based supervision method . The application of the principles of insurance supervision in Vietnam is only limited because Vietnam is currently applying the compliance supervision method. The inspection and supervision of insurance enterprises is carried out according to plan with the aim of supporting insurance enterprises to correctly understand and comply with legal regulations.
The process of monitoring investment activities of DNBHNT is carried out in both remote monitoring and on-site monitoring (direct inspection).
Regarding remote monitoring, in the period of 2011-2015, the Insurance Supervision and Management Department has conducted monitoring of 100% of financial investment activities of life insurance companies regarding regulations on compliance with investment capital sources and investment structure. Investment violations are still scattered in life insurance companies, these violations are discovered through inspections or are monitored through audited financial reports. Common violations of life insurance companies are: lending but not recovering the loan after the term; entrusting the investment fund management company but not monitoring the entrustment contract well; even loan interest and late payment interest at the end of the year are not recorded in financial operating revenue .
According to the report of the supervisory agency, the investment activities of life insurance enterprises in the period of 2011 - 2015 were generally safe, in compliance with the law with investment assets mainly concentrated in government bonds and deposits at credit institutions and loans under insurance contracts (HĐBH) accounting for about 60% to 90% of total investment capital. High-risk investment forms such as real estate and loans accounted for a very small proportion of 6% - 8% of total investment capital.
Investment proportion of each investment group divided by risk level
Unit: %
Lecturer of Faculty of Finance and Banking
Life insurance activities have been officially implemented in Vietnam since 1996, which has been 20 years. In addition to the main business of insurance business, life insurance companies also carry out investment activities from idle capital when they have not yet had to fulfill their payment obligations to customers according to the contract. However, because the investment capital is mainly formed from the insurance premiums contributed by participants, the inspection and supervision of financial investment activities of life insurance companies is of great significance in preserving the fund. In the scope of this article, the author will mention the issue of inspection and supervision by the State Management Agency on financial investment activities of life insurance companies.
1. Overview of Financial Investment Monitoring of Life Insurance Companies
Life insurance and financial investment of life insurance companies
Life insurance is a type of insurance that includes commitments whose implementation depends on the life expectancy of a person . The characteristic of insurance business is that insurance premiums are collected first and insurance payment commitments are made later. In addition, the insurance term of life insurance contracts is long-term, so the revenue collected from insurance premiums will not have to be spent immediately (compensation, insurance payments) but will be idle for a relatively long period of time, so life insurance companies can use this idle money for investment. Life insurance companies use idle money from equity and collected insurance premiums and some other sources of capital to provide capital to the economy as a financial intermediary through the financial market in the form of bank deposits, securities purchases or equity contributions.
Thus, Financial investment of DNBHNT is the use of idle capital by enterprises to invest in investment fields according to the law .
Supervise financial investment activities of DNBHNT
From a macro perspective, the investment activities of insurance companies in general and life insurance companies in particular are subject to inspection and supervision by supervisory agencies (Insurance Supervision and Management Department, Insurance Supervision and Management Department, Insurance Supervision and Management Department or Financial Services Supervision Commission under the Ministry of Finance or the State Bank or the Government). These supervisory agencies will be under different levels of authority depending on the supervisory model chosen by the countries such as: Institutional supervisory model; Functional supervisory model; Twin peak supervisory model; Integrated supervisory model: Including full integration and partial integration.
* Monitoring method : Currently, there are two methods of monitoring investment activities in the world: Compliance monitoring method is a monitoring method based on the Law (analyzing indicators from business and investment activities from financial reports) and comparing with monitoring indicators according to the provisions of law. Risk-based monitoring method is a method of quantifying the scale of risks arising from the business situation and management capacity of the insurance company based on a synchronous assessment to detect weaknesses of the enterprise in the past and future (using quantitative analysis models, early warning, risk assessment).
Risk-based supervision focuses on the quality of investment management ( the investment process from policy setting, implementation and monitoring of investments) rather than the investment outcomes ( output, investment limits and returns ) of the compliance supervision approach.
* Monitoring process : To conduct market monitoring, regardless of the monitoring method, monitoring is carried out according to the following processes: Remote monitoring (analyzing and evaluating the activities of insurance companies based on collected information, warning and early identification of risks) and on-site monitoring (checking and inspecting right at the enterprise).
* Supervision content: Supervision of investment capital (charter capital, compulsory reserve fund, voluntary reserve fund, unused profits from previous years, especially idle capital from capital reserve (DPNV) - essentially money from insurance customers that the insurance company temporarily manages); Investment structure (assets with investment activities) and profit margin. DPNV is essentially money from insurance customers that the insurance company temporarily manages.
2. Current status of financial investment supervision of life insurance companies
Investment activities of life insurance companies in the Vietnamese insurance market are under the management and supervision of the Insurance Supervision and Management Department under the Ministry of Finance. The life insurance market supervision model is an institutional supervision model, suitable for the development of the Vietnamese financial market in general and the life insurance market at the present time.
In addition to legal documents, Vietnam is gradually moving towards applying the principles and standards of insurance supervision issued by the International Association of Insurance Supervisors (IAIS). However, the principles and standards of supervision issued by IAIS are mainly applied to countries that conduct market supervision according to the risk-based supervision method . The application of the principles of insurance supervision in Vietnam is only limited because Vietnam is currently applying the compliance supervision method. The inspection and supervision of insurance enterprises is carried out according to plan with the aim of supporting insurance enterprises to correctly understand and comply with legal regulations.
The process of monitoring investment activities of DNBHNT is carried out in both remote monitoring and on-site monitoring (direct inspection).
Regarding remote monitoring, in the period of 2011-2015, the Insurance Supervision and Management Department has conducted monitoring of 100% of financial investment activities of life insurance companies regarding regulations on compliance with investment capital sources and investment structure. Investment violations are still scattered in life insurance companies, these violations are discovered through inspections or are monitored through audited financial reports. Common violations of life insurance companies are: lending but not recovering the loan after the term; entrusting the investment fund management company but not monitoring the entrustment contract well; even loan interest and late payment interest at the end of the year are not recorded in financial operating revenue .
According to the report of the supervisory agency, the investment activities of life insurance enterprises in the period of 2011 - 2015 were generally safe, in compliance with the law with investment assets mainly concentrated in government bonds and deposits at credit institutions and loans under insurance contracts (HĐBH) accounting for about 60% to 90% of total investment capital. High-risk investment forms such as real estate and loans accounted for a very small proportion of 6% - 8% of total investment capital.
Investment proportion of each investment group divided by risk level
Unit: %
| Risk Level | 2011 | 2012 | 2013 | 2014 | 2015 |
| 1. Low risk (TG at credit institutions, government bonds, corporate bonds with guarantees) | 73.5 | 66.8 | 89.1 | 88.5 | 89.7 |
| 2. Medium risk (Unsecured corporate bonds, corporate capital contributions, securities investment, investment trusts, other) | 19 | 26.2 | 4.6 | 5.9 | 5.5 |
| 3. High risk (real estate, lending) | 7.5 | 7 | 6.3 | 5.6 | 4.8 |
| Total investment | 100 | 100 | 100 | 100 | 100 |
Source: Insurance Supervisory Authority.
With such an investment capital allocation structure, life insurance companies have ensured the safety principle in accordance with legal regulations, although capital investment is still focused on certain investment portfolios.
Regarding on-site supervision activities, during the period of 2011-2015, the Insurance Supervision and Management Department continuously conducted thematic inspections of selected life insurance companies. In 2015, the Insurance Supervision and Management Department completed thematic inspections of 05 life insurance companies (Generali, Phu Hung Life, PVI Sun Life, VCLI, Vietinbank Aviva) on provisioning for technical reserves, solvency margin, exploitation activities, appraisal and payment of insurance benefits, investment activities, and accounting work. In 2016, 03 life insurance companies (Prudential, Dai-Ichi, Cathay) were inspected. The inspection results contributed to helping life insurance companies understand the relevant legal regulations. The inspected enterprises reviewed and improved their organization and operations according to the recommendations of the Insurance Supervision and Management Department.
3. Evaluation of financial investment monitoring activities of life insurance companies
Results achieved
The analysis of the current situation shows that the supervision of the state management agency on financial investment activities of life insurance is carried out fully, in accordance with the supervision model according to the compliance method . The establishment of the Department of Insurance Supervision and Management has demonstrated the position and role of the supervision agency in the market. Supervision activities are increasingly improved and improved in quality, inspections are focused, handling is close and timely. Supervision has promptly guided and corrected life insurance enterprises to increase compliance with the law and prevent profiteering. At the same time, review, recommend, and amend shortcomings in policies and mechanisms and strengthen management capacity.
Existence and limitations
In addition to the achieved results, the inspection and supervision activities of state management agencies on financial investment activities of life insurance enterprises still have certain limitations. From the perspective of enterprises, the supervision of investment activities for most life insurance enterprises only stops at complying with the investment fields permitted by law and calculating profit indicators, while from the perspective of state management, the supervision agency only focuses on remote supervision through the financial reporting system sent periodically. On-site supervision activities are mainly concentrated at the head office and have not been carried out at branches. The frequency of on-site supervision is still low. Inspections and audits are mainly for detection and punishment, not for detection and prevention. Therefore, supervision activities have not met the scale and complexity of the market.
--------------------------
References
1. National Assembly (2012), Law on Insurance Business , promulgated on December 9, 2000
3. IAIS (2005), Standard on disclosures regarding investment risks and performance for insurers and reinsurers.
Website
1. www.mof.gov.vn
2. www.iaisweb.org
With such an investment capital allocation structure, life insurance companies have ensured the safety principle in accordance with legal regulations, although capital investment is still focused on certain investment portfolios.
Regarding on-site supervision activities, during the period of 2011-2015, the Insurance Supervision and Management Department continuously conducted thematic inspections of selected life insurance companies. In 2015, the Insurance Supervision and Management Department completed thematic inspections of 05 life insurance companies (Generali, Phu Hung Life, PVI Sun Life, VCLI, Vietinbank Aviva) on provisioning for technical reserves, solvency margin, exploitation activities, appraisal and payment of insurance benefits, investment activities, and accounting work. In 2016, 03 life insurance companies (Prudential, Dai-Ichi, Cathay) were inspected. The inspection results contributed to helping life insurance companies understand the relevant legal regulations. The inspected enterprises reviewed and improved their organization and operations according to the recommendations of the Insurance Supervision and Management Department.
3. Evaluation of financial investment monitoring activities of life insurance companies
Results achieved
The analysis of the current situation shows that the supervision of the state management agency on financial investment activities of life insurance is carried out fully, in accordance with the supervision model according to the compliance method . The establishment of the Department of Insurance Supervision and Management has demonstrated the position and role of the supervision agency in the market. Supervision activities are increasingly improved and improved in quality, inspections are focused, handling is close and timely. Supervision has promptly guided and corrected life insurance enterprises to increase compliance with the law and prevent profiteering. At the same time, review, recommend, and amend shortcomings in policies and mechanisms and strengthen management capacity.
Existence and limitations
In addition to the achieved results, the inspection and supervision activities of state management agencies on financial investment activities of life insurance enterprises still have certain limitations. From the perspective of enterprises, the supervision of investment activities for most life insurance enterprises only stops at complying with the investment fields permitted by law and calculating profit indicators, while from the perspective of state management, the supervision agency only focuses on remote supervision through the financial reporting system sent periodically. On-site supervision activities are mainly concentrated at the head office and have not been carried out at branches. The frequency of on-site supervision is still low. Inspections and audits are mainly for detection and punishment, not for detection and prevention. Therefore, supervision activities have not met the scale and complexity of the market.
--------------------------
References
1. National Assembly (2012), Law on Insurance Business , promulgated on December 9, 2000
3. IAIS (2005), Standard on disclosures regarding investment risks and performance for insurers and reinsurers.
Website
1. www.mof.gov.vn
2. www.iaisweb.org
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