Issue of June 2023 – Notable changes of the Law on Insurance Business 2022

Dear Valued Clients,

The Law on Insurance Business No. 08/2022/QH15 was passed and promulgated by the National Assembly on June 16, 2022 (“Law on Insurance Business 2022”). This is an important legal document and is expected to create a new development step for the insurance market of Vietnam in the upcoming time. The Law on Insurance Business 2022 takes effect from January 1, 2023.

1. Implementation of Vietnam’s international commitments

In order to implement Vietnam’s international commitments, the Law on Insurance Business 2022 has added provisions for the establishment of foreign reinsurers’ branches in Vietnam and the percentage of capital ownership interests of foreign investors in insurers.

Accordingly, the Law on Insurance Business 2022 affirms that foreign investors may have an ownership interest in shares or contributed capital that makes up as high as 100% of the charter capital of an insurer or reinsurer[1] in order to create clarity, consistent with Vietnam’s commitments at the WTO and signed Free Trade Agreements in the field of insurance services. Vietnam does not limit the percentage of capital contributed by foreign parties.

2. Insurance contracts

Besides implementing international commitments, in order to ensure consistency, and synchronization with the relevant legal system, the Law on Insurance Business 2022 has also amended, and supplemented provisions related to insurance contracts such as cancellation of insurance contracts[2], invalidation of insurance contracts[3], unilateral termination of the insurance contracts[4], abolition of regulations on statute of limitations for instituting a lawsuit, time that contract liability arises, etc. to ensure consistency with the Civil Code 2015 and to make it easy to apply in practice. At the same time, the Law on Insurance Business 2022 clearly classifies the types of insurance contracts corresponding to the types of insurance[5]; specifying the insured objects and insured interests for each type of insurance contract; enhances the responsibility of the subjects participating in the insurance contract in providing information[6].

In addition, the Law on Insurance Business 2022 also conducts supplement regulations on the principles of conclusion and execution of insurance contracts[7]; the right to agree to enter into many types of insurance contracts[8]; supplement time to consider participating in life insurance,… to ensure the right to self-negotiation between the parties, in conclusion, insurance contracts. Regarding dispute resolution, the Law on Insurance Business 2022 has added provisions on the dispute resolution mechanism through mediation, arbitration, or Court[9].

It can be seen that the Law on Insurance Business 2022 clearly stipulates the responsibility of providing information to the insurer, which requires the policyholder to carefully read the insurance rules, conditions, and terms as well as explanation clearly inform the policyholder about the insurance benefits, the terms of disclaimer clauses and the rights, obligations of the policyholder when concluding the contract. This clause shall limit the cases of disputes caused by policyholders who have not been explained the terms, and conditions in the contract, especially if the risks are excluded.

3. General provisions for the investment of insurers, reinsurers, and foreign branches in Vietnam

This is one of the new approaches of the Law on Insurance Business 2022. Investments made by insurers, reinsurers, foreign branches in Vietnam[10] must adhere to the following principles[11]:

• Ensure safety, liquidity, and efficiency; comply with law and self-responsibility rules applied to investment activities;
• Technical provisions may be used as investments in Vietnam only, except those specified in Article 100.2(b) of the Law on Insurance Business 2022;
• It is prohibitory that borrowed funds are used for investment and fiduciary investment in securities, real estate business, or contribution of capital to other enterprises;
• It is prohibitory that investment accounting for 30% of the portfolio of investments in companies belonging to the same group of companies having mutual ownership relationship is made. This prohibition clause shall not apply to deposits made at credit institutions and outward investment funds existing in the form of the establishment of companies or establishment of foreign branches in the receiving foreign countries;
• Investments made in return for those of shareholders or members contributing capital or persons associated with these shareholders or members contributing capital are not allowed according to the provisions of the Law on Enterprise, except in case of deposits made at transaction offices of shareholders or members that are credit institutions;
• Purchase of corporate bonds issued to serve certain purposes of restructuring of loans of issuing companies is not allowed;
• In the case of fiduciary investments, trustees must be licensed to perform fiduciary investment activities falling within the scope of fiduciary investment.

In addition, regarding the general provisions on investment, the Law on Insurance Business 2022 stipulates that insurers, reinsurers, and foreign branches in Vietnam are not allowed to investment in real estate business, except in the following cases[12]: (i) purchasing stocks of real estate businesses listed on the securities market, fund certificates of public funds; (ii) purchasing, investing in or owning real property used as business offices, locations or treasure vaults for direct uses for their insurance business; (iii) leasing out unoccupied business establishments under their control or management; (iv) seizing real property by managing or disposing of mortgage bonds, or recovering loans secured by real property within 03 years from the lien date.

The strict regulations on insurers, reinsurers, foreign branches in Vietnam not to invest in real estate business in order to be consistent with the provisions of the Law on Real Estate Business 2014 and the Law on Credit Institutions 2010. At the same time, because this is also a very high-risk field, such regulations are required to ensure that insurers can afford to pay and ensure the interests of policyholders. This regulation will take effect from January 1, 2028[13].

4. Outward investment of insurers, reinsurers

Outward investments made by insurers, reinsurers must not only ensure compliance with the general regulations on investment as prescribed in Article 99 of the Law on Insurance Business 2022, but must also ensure compliance with the following provisions[14]:

• Each outward investment must ensure conformance to the capital adequacy and solvency requirements of insurers or reinsurers as outward investors;
• Each outward investment must conform to the law on insurance business, the law on investment, and law on foreign exchange management;
• Each outward investment must be made in the own name of the insurance company or reinsurance company as the outward investor;
• Outward investment funds, investment assets, revenues, and expenses related to outward investments must be managed and monitored separately;
• Using sums of money and/or property of domestic policyholders to compensate for any losses to or deficits in funds for outward investment is prohibited unless otherwise provided in law;
• Each outward investment shall be subject to application for the written consent from the Ministry of Finance prior to commencement.

5. Stop deducting Insured person protection Fund

From January 1, 2023, insurers and foreign branches in Vietnam shall stop deducting and paying the Insured person Protection Fund. This means that the Law on Insurance Business 2022 has abolished the Insured person Protection Fund. The reason for this change is that previously, this Fund has existed for 12 years but has never been used and is unlikely to have to be used. Therefore, according to Article 98 of the Law on Insurance Business 2022, there are no longer provisions on the Insured person protection fund, but only the Reserve Fund as follows:

• Insurers, reinsurers, or foreign branches in Vietnam must establish compulsory reserve funds to supplement equity and ensure conformance to solvency requirements.
• Each year, a compulsory reserve fund shall receive 05% of the total after-tax profit set aside until it meets the maximum limit prescribed in the Government’s regulations.

In addition to the compulsory Reserve Fund, insurers, reinsurers, and foreign branches in Vietnam may set up other reserve funds that receive fiscal years’ after-tax profits set aside according to charters of insurers, reinsurers, or organizational and operational statutes of foreign branches in Vietnam[15].

6. Finance, accounting, and financial reporting

One of the important changes affecting the business of insurers is in the capital. Instead of leveling as before, the Law on Insurance Business 2022 follows the direction of clearly classifying each type of capital of insurers and reinsurers during business operations[16]; supplement requirements that insurers and reinsurers must always maintain a capital adequacy ratio[17] to ensure capital corresponding to the size and risk level of the basic risk groups. The new regulation is expected to create conditions for enterprises with good financial status and sound governance to develop and promptly correct enterprises with poor performance in financial management and risk management.

Besides, the Law on Insurance Business 2022 has also supplemented regulations requiring annual independent audits of Financial statements, Reports on the separation of equity sources, and premium sources, and Reports on the assessment of capabilities payments and risks[18].

7. Temporary coverage in life insurance

The insurer shall offer temporary coverage to the policyholder upon receiving the insurance proposal and advance premiums from the policyholder. Insurance terms, sum insured, and terms and conditions of temporary coverage shall be negotiated between the insurer and the policyholder. Temporary coverage is terminated after the insurer accepts or refuses insurance, or unless otherwise agreed[19]. 

8. Time limits for payment of insurance indemnity and coverage

In case of the occurrence of the policy event, the insurer or the foreign non-life insurer’s branch shall pay insurance indemnity or coverage within the time limit agreed upon in the insurance contract. In the absence of any agreement on the time limit, the insurer or the foreign non-life insurer’s branch shall pay insurance indemnity or coverage within the time limit of 15 days of receipt of all valid documents concerning a request for payment of insurance claims and coverage[20].

According to the provisions of Article 31.2 of the Law on Insurance Business 2022, if the insurer or the foreign non-life insurer’s branch makes late payment of insurance claims or coverage, the amount of interest on the overdue payment must be paid in proportion to the period of late payment. The interest rate of the late payment shall be determined according to the agreement between parties in accordance with the Civil Code.

9. Provision of insurance services and products online

The Law on Insurance Business 2022 has supplemented regulations on providing insurance services and products online[21]. Accordingly, organizations and individuals that are allowed to provide insurance services and products online include (i) Insurers, branches of foreign non-life insurers, and mutuals providing microinsurance products; (ii) Insurance agents; (iii) Insurance brokerage companies.

In which, insurers, branches of foreign non-life insurers, insurance brokerage companies and mutuals providing microinsurance products can, at their discretion, decide on the method of providing insurance products and services online. In contrast, insurance agents can provide insurance services and products online only if these insurance services and products fall within the insurance agent contract scope.

Insurers, branches of foreign non-life insurers, insurance agents, insurance brokerage companies and mutuals providing microinsurance products providing insurance products and services online shall be responsible to policyholders if such provision of these insurance services and products prejudices legitimate rights and interests of policyholders. Organizations and individuals entering insurance contracts online shall be responsible for providing honest and accurate information as stipulated in Article 22 of the Law on Insurance Business 2022.

As usual, we hope you find this Legal Update helpful and look forward to working with you in the upcoming time.

Kind regards,

ENT Law LLC

The full version of this Legal Update can be found here.

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[1] Article 68 Law on Insurance Business 2022.

[2] Article 20.1(c) and Article 21.1(dd) Law on Insurance Business 2022.

[3] Article 25 Law on Insurance Business 2022.

[4] Article 27 Law on Insurance Business 2022.

[5] Article 15.1 Law on Insurance Business 2022.

[6] Article 22 Law on Insurance Business 2022.

[7] Article 16 Law on Insurance Business 2022.

[8] Article 15.2 Law on Insurance Business 2022.

[9] Article 32 Law on Insurance Business 2022.

[10] Article 2.2 Law on Insurance Business 2022: “Branches of foreign non-life insurers, foreign reinsurers’ branches (hereinafter referred to as foreign branches in Vietnam).”

[11] Article 99.2 Law on Insurance Business 2022.

[12] Article 99.3(a) Law on Insurance Business 2022.

[13] Article 156.2 Law on Insurance Business 2022.

[14] Article 100.3 Law on Insurance Business 2022.

[15] Article 98 Law on Insurance Business 2022.

[16] Article 94 Law on Insurance Business 2022.

[17] Article 95 Law on Insurance Business 2022.

[18] Article 105 Law on Insurance Business 2022.

[19] Article 36 Law on Insurance Business 2022.

[20] Article 31.1 Law on Insurance Business 2022.

[21] Article 14 Law on Insurance Business 2022.