Life insurance still facing crisis

The crisis in the life insurance sector is in its third year without any sign of ending as the numbers of new contracts and agents continue to fall.

Meanwhile, life insurance companies haven’t sat together yet to confront the fierce competition of other capital raising channels in the market, such as banks and the stock market.

According to the Vietnam Insurance Association, the 2006 premium of life insurance firms reaches nearly VND8,500 billion (US$531.25 million), up by 4.34% compared to 2005.

Of this number, the total premium from new contracts is VND1,289 billion ($80.56 million), equivalent to 97.6% of 2005, the lowest level since 2000.

Vietnamese people are abandoning life insurance and this fact is seen through the number of new contracts.

In 2006, the number of new contracts (for major life insurance products only) is 488,000, a fall of 17.1% over 2005. This fall means that the premiums collected in the years after 2006 will be low.

In addition, the number of cancelled contracts has been increasing. Clients canceling their life insurance contracts means that they will not continue to pay more money and suffer losses because they feel that life insurance products are less attractive than banking deposits or investing in stocks. In 2006, 431,023 contracts were canceled.

However, the major problem that threatens the development of life insurance companies is not the reduction of revenue growth, but the departure of agents.

Last year AIA had 8,632 agents, a reduction of up to 52.28% compared to 2005. The figures are 21,529 and 15.44% for Bao Viet Nhan Tho; 2,821 and 24.21% for Manulife; 20,980 and 44.53% for Prudential. Dai-ichi Life saw the lowest reduction of agents, with 2.44%. Only ACE Life had the number of its agents increase in 2006.

Notably, around 60% of the current agents are new ones. The change of agents can affect the quality of customer care services and the trust of customers in life insurers.

One of the reasons that have made customers neglect life insurance is that life insurance products are still simple and unattractive.

Life insurers now offer around 100 products but most of them are still death insurance adding savings. Vietnamese people don’t want to buy insurance for accidents or death while savings products have too low dividends.

Life insurance companies mainly invest premiums into bonds to gain safety so the profit they earn is only 12-13% per year. As a result, dividends paid to clients by life insurance firms is up to 6-8% per year only, much lower than banking interest rates and securities.

In Asia, life insurance is no longer based on death insurance and savings products but ‘revolutionary’ products such as insurance-investment or retirement insurance (as a support for compulsory social insurance).

In Vietnam, insurance-investment products (depending on contracts signed with clients, insurance firms can use part of the premium to invest in investment funds to bring higher profit for insurance buyers) have been prepared by some foreign-invested insurance companies for years but they have not been applied yet.

There are two reasons. The first is the lack of a legal framework. Only recently the Finance Ministry approved a document on the supply of life insurance-investment products. An official of the Finance Ministry said that these were new products and the ministry needed time to evaluate them.

However, some said that the Finance Ministry wanted to wait till Bao Viet Nhan Tho was ready to provide this product to allow the offer of this product in Vietnam. This product is considered a breakthrough for life insurance firms, while Bao Viet is under the aegis of the Finance Ministry so the ministry can’t let foreign companies be in advance of Bao Viet.

The lateness in offering this product to the market is perhaps not because it is too complicated but the intention of management agencies.

The second is Vietnam still has too few investment funds. Insurance firms can work with several funds like VF1, PRUBF1 and several unlisted funds. Insurance-investment products don’t allow insurance companies to directly invest in stocks so they may have to establish funds PRUBF1 of Prudential.

When will the life insurance market regains its growth? It is unclear. In the crisis, there are still businesses that gain high growth rate like ACE Life but the scale of ACE Life is too small, accounting for 0.62% of the life insurance market only (statistics by December 31, 2006).

Source: VNE