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On July 2, 2014 the Ministry of Finance and the State Bank of Vietnam issued Joint Circular 86/2014/TTLT-BTC-NHNNVN (Joint Circular 86) to shake up Vietnam’s fledgling bancassurance industry. The country’s bancassurance model was previously regulated by Vietnam’s general insurance laws, which did not adequately differentiate between ordinary insurance players and banks or credit institutions participating in selling insurance products as agents.
Joint Circular 86, in addition to making this distinction, marks the first circular that specifically governs agent activities provided by banks and credit institutions to life insurers.
The changes come at a time when bancassurance has quickly developed in recent years. However, despite this growth, the results from the perspective of insurers have been less than ideal, as sales penetration though banks remains low compared with many other countries.
Despite both banks and life insurers benefiting from the regime, participation remains limited and not all players have jumped onto the opportunity to seize a larger slice of the insurance market (for insurers) and revenue stream (for banks and credit institutions). The reason stems largely from the government’s tight regulatory controls over mandatory insurance agent credentials, which has left participation often commercially unfeasible.
The newly passed Joint Circular 86 is expected to bring forth welcome changes and loosen these controls that have frequently made participation in bancassurance more trouble than it was worth.
The strain on resources pre-Joint Circular 86
The current insurance laws require prospective insurance agents to undergo rigorous training regimes and be suitably qualified before they may sell insurance policies (specifically, life insurance). These checks are closely overseen by the Ministry of Finance and are implemented as a way of ensuring that the conduct of insurance agents is held to a high standard.
Insurance agents, under the Law on Insurance Business, have to obtain a certificate from the Ministry of Finance before they may sell insurance. Guiding regulations prescribe a minimum of 48 hours of intensive training (divided into 24 hours for basic information and knowledge about insurance and 24 hours for insurance products) before a certificate may be issued. The training time applicable to agents wishing to sell universal life insurance policies and unit-linked products is much longer. In addition to this first training course, insurance agents are required to periodically attend follow-up training in order maintain their position of an insurance agent.
Before Joint Circular 86, bank employees selling bancassurance products were also subject to these controls. This was despite bank employees often already being tertiary qualified and having background knowledge of the financial industry. This is in contrast to insurance agents who, under the Law on Insurance Business, only need to have at least civil capacity and to be of at least 18 years old at the time of entering into the insurance agency contract with insurers.
Furthermore, the insurance policies offered by the banks are often straightforward in nature compared to the multiple bespoke policies directly offered by life insurance companies. Therefore, for bank staff, little is gained from these mandatory training programmes.
The law’s failure to distinguish bank staff for the purpose of bancassurance has placed unreasonable strain on banks’ human resources. In order to participate, bank employees have to forgo work for several days to undertake training. Many banks were reluctant to take this unnecessary hit to their resources and as a result, have expressed general frustrations over the impractical restriction.
New exceptions under Joint Circular 86
The new Joint Circular 86 partially eliminates these impracticalities. While bank staff will still require an insurance agent certificate, the circular now creates a specific distinction between bank staff engaged in bancassurance and ordinary insurance agents. Thanks to this recognition, the circular considerably cuts down the amount of training required before bank staff may sell insurance policies.
Under Joint Circular 86, bank staff will only be required to undergo four hours of intensive training for each insurance product (and 16 hours for investment-linked insurance products). In terms of ongoing training commitments, staff members selling unit-linked insurance policies will need to engage in at least three hours of training per quarter. This shortened intensive training period is made even more accessible by the fact that training in terms of basic information and knowledge about insurance may now be carried out online or other mediums/approaches permitted by law.
Other highlights of Joint Circular 86
In addition to cutting training times, Joint Circular 86 provides other welcome changes to the bancassurance industry.
For example, the current laws list out a set of activities that, when carried out in aggregate, will be considered insurance agent activities. Joint Circular 86 only requires banks to carry out either one of those activities in order for them to be considered as carrying out “agency activities” under the law. These are either:
- referring clients who are interested in insurance policies to life insurers so they may approach the client themselves
- introducing and offering insurance products to clients
- arranging for insurance policies to be signed
- collecting insurance premiums
- dealing with claim requests
This means, for example, when a bank solely carries out client referral activities, this may be considered as engaging in agency activities and will be subject to insurance commissions. This loosening of the scope of agency activities is expected to generate greater interest and incentive for banks to enter into agency contracts with insurers to earn commissions for client referral work.
However, while banks appear to be the major winners under Joint Circular 86, they will also be subject to greater supervision and restrictions. Current insurance laws treat banks carrying out bancassurance as “organisations conducting insurance agency activities” such that their personnel directly conducting insurance agency activities must satisfy conditions required for individual agents.
Accordingly, anti-competition laws will apply to individual agents such that an insurance agent will be prohibited from acting for more than one insurer at a time without written approval from the relevant insurers. Joint Circular 86 specifically requires that banks, as organisations conducting agency activities, must obtain approval from the life insurer if they wish to carry out agency activities for another life insurer. This requirement imposes a stricter control on banks engaged in agency activities.
Furthermore, banks will have to compensate and indemnify life insurers for any damage suffered by the life insurers as a result of the bank staff’s defaults during their engagement in agency activities. The indemnity provision is particularly noteworthy because while the labour laws govern the relationship between the bank and its employees, the laws on insurance business govern the conduct of individual agents conducting insurance activities for an insurer.
Finally, Joint Circular 86 creates greater information transparency, as banks will be able to provide client information to the life insurers for actuarial works and product design (subject to privacy laws). This is very likely a key rationale for the inclusion of provision (Article 12) requiring credit institutions, banks and life insurers to bear responsibility for keeping all client information confidential as required by law.
An optimistic direction
The full recognition of the bancassurance structure has been positively received by both banks and insurers, as it removes one of the key roadblocks inhibiting bank participation. In addition to lightening the burden on resources of existing bancassurance providers, the circular’s enactment also paves way for greater access by smaller banks to another revenue stream in the form of selling insurance policies.
It is hoped that Joint Circular 86, which comes into effect from September 1, 2014, will reinvigorate Vietnam’s bancassurance regime to not only propel the country’s insurance industry forward, but also to promote new and much-needed revenue streams for the country’s banks.