Apart from industry-specific difficulties, the trend of interest rates going down will also make inroads into insurers’ profitability.

Bancassurance grinds to a halt The insurance industry has lately faced mounting challenges. Insurance companies in Vietnam currently follow a two-pillar business model, with their revenue mainly coming from the insurance business itself and from financial investment. Their insurance business this year has to some extent subdued due to bancassurance hitting the rock bottom and the people tightening their belt, forcing insurers to make a marked shift to financial investment, expecting to gain more profits from securities trading, bank deposits and investment trust. At Bao Viet Insurance for example, the company’s leaders pin high hopes on financial investment in the second half of this year as most of its financial investments have yielded better returns against last year. The company is also seeking to restructure its portfolio, targeting to invest more in bonds issued by commercial banks to optimize profits. At the Military Insurance Corporation, financial investments including bond holding currently account for 10% of its profit-generating assets, including investments in manufacturing and financial enterprises. According to the company’s leadership, the issuers of such bonds have always serviced the bonds in due time and have collateral three times bigger than the value of their bond issues. While some large-scale insurers mentioned above have maintained a positive outlook on the short-term business, in reality most insurers are seeing huge challenges on the horizon. The first challenge comes from bancassurance that is feared to be coming to a dead halt. Earlier, banks often signed exclusive agreements with insurers to offer bancassurance products. This channel has proven to be fertile ground for insurers to attract more policy-holders who are clients of banks owing to the convenient and fast services and the trust of such clients in banks. However, in the wake of many irregularities concerning bancassurance as recently revealed by the Ministry of Finance’s inspectors, especially wrongdoings by advisors at banks, the bancassurance channel has almost been blocked. First, a big problem that has yet to be settled is the high proportion of insurance policies being canceled. At many insurance companies, the bancassurance channel has once generated up to 50% of new policies and premiums. However, as these policies are not secured out of customers’ demand or willingness, the rate of cancellation after the first year amounts to some 70% at some insurers. Second, at many banks, the approval of a preferential loan in recent years has often been conditional on the signing of an insurance policy. However, in this year’s first half, authorities have got tough on those banks that coerced borrowers to sign insurance contracts, adversely affecting the growth of the insurance market. Finally, the media influence including social media impacts over the rampant situation of bank clients being talked into buying insurance products without obtaining honest advice has led to a heightened caution among potential customers when considering insurance contracts. A blow from falling interest rates Apart from industry-specific difficulties, the downtrend of interest rates will also make inroads into the profitability of insurers active in either the life or non-life segment, since interest accounts for a significant proportion of an insurer’s profit. The average deposit rate at banks in the first half this year fell by 1.5 to 2.0 percentage points against the end of last year, and is poised to fall further in the coming time as the State Bank of Vietnam seeks to further step up its accommodative policy. Such a move will affect insurers’ financial returns in the second half this year at the earliest, or early next year. Data show that deposits at banks account for a larger share in the assets of insurers. At Bao Viet Insurance, short-term financial investments as of March 31, 2023 totaled VND117 trillion and accounted for 53.1% of its total assets, while long-term financial investments amounted to VND84 trillion, or 38.2% of total assets. Overall, financial investments accounted for 91.3% of the insurer’s total assets. In its statement, Bao Viet Insurance reported that most of the VND114 trillion of its short-term financial investments were deposits shorter than one year, while long-tenor deposits totaled VND80 trillion out of the VND84 trillion worth of its long-term financial investments. As such, the company will feel greater pressure when interest rates go down further. Other insurers also find themselves in the same boat. BIDV Insurance Corporation as of March 31, 2023 had VND4,200 billion being short-term deposits at banks and VND681 billion as long-term deposits. Bao Minh Insurance also reported VND3,237 billion as short-term deposits as of March 31, while PVI had up to VND6,079 billion at banks as short-term deposits and VND4,828 billion as long-term deposits as of the given date. Apart from business hardships, the insurance industry also faces low liquidity when it comes to the trading of their stocks on bourse, except BVH of Bao Viet and BMI of Bao Minh. For non-life insurers, a great deal of their premiums come from enterprises in other economic sectors, and given economic uncertainties now, their premiums from shipping and transport will also be adversely affected. However, certain non-life insurers strong in other segments like fire or construction insurance will have better business opportunities as public investment is being accelerated.