DECISION

PROMULGATING THE SYSTEM OF SUPERVISORY INDICATORS FOR INSURERS

THE MINISTER OF FINANCE

Pursuant to the Law on Insurance Business dated 9 December 2000;
Pursuant to Decree No. 77/2003/ND-CP of the Government dated 1 July 2003 on the functions, duties, powers and organizational structure of the Ministry of Finance;
Pursuant to Decree No. 42/2001/ND-CP of the Government dated 1 August 2001 providing guidelines for implementation of a number of articles of the Law on Insurance Business;
Pursuant to Decree No. 43/2001/ND-CP of the Government dated 1 August 2001 on the financial regime for insurers and insurance brokers;
Pursuant to Decision No. 175/2003/QD-TTg of the Prime Minister of the Government dated 29 August 2003 approving the strategy for development of the Vietnamese insurance market from year 2003 to year 2010;
Pursuant to Circular No. 71/2001/TT-BTC of the Ministry of Finance dated 28 August 2001 providing guidelines for implementation of Decree No. 42 mentioned above; and pursuant to Circular No. 72/2001/TT-BTC of the Ministry of Finance dated 28 August 2001 providing guidelines for implementation of the financial regime for insurers and insurance brokers;
On the proposal of the Director of the Insurance Department,

DECIDES:

Article 1. To issue with this Decision the system of supervisory indicators for insurers.

Article 2. The system of supervisory indicators for insurers issued with this Decision shall apply to all insurers operating pursuant to the Law on Insurance Business No. 24/2000/QH-10 dated 9 December 2000.

Article 3. Insurers shall be responsible to calculate the supervisory indicators and to forward the results to the Ministry of Finance at the same time as they are required by the current regulations to forward their annual financial reports.

If the results of an insurer’s calculations using the indicators contain unusual fluctuations, the insurer must immediately report same to the Ministry of Finance with an explanation of the factors causing the fluctuations, and take prompt measures to regularize and remedy the fluctuations.

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Article 5. This Decision shall be of full force and effect after fifteen days from the date of its proclamation in the Official Gazette. The system of supervisory indicators for insurers shall apply as from the 2003 financial year.

Article 6. The Director of the Insurance Department, the head of the Office of the Ministry of Finance and heads of other units concerned shall be responsible to inspect and supervise implementation of this Decision.

FOR THE MINISTER OF FINANCE
DEPUTY MINISTER




Le Thi Bang Tam

SYSTEM OF SUPERVISORY INDICATORS FOR INSURERS
(Issued with Decision No. 153/2003/QD-BTC of the Minister of Finance dated 22 September 2003)

I. GENERAL PROVISIONS

1. Objectives of putting into practice the system of supervisory indicators for insurers:

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2. Applicable entities:

The system of supervisory indicators for insurers shall apply to insurers operating pursuant to the Law on Insurance Business No. 24/2000/QH-10 dated 9 December 2000, comprising: State insurance enterprises; shareholding insurance companies; mutual insurance organizations; joint venture insurance enterprises; and insurance enterprises with 100% foreign owned capital.

II. SYSTEM OF SUPERVISORY INDICATORS FOR INSURERS

1. Supervisory Indicators applicable to Non-Life Insurers:

GROUP OF INDICATORS ON GENERAL OPERATIONS

1.1 Indicator on changes in capital sources and funds

The extent of movement in capital sources and funds between the previous year and the current year is an important indicator determining the level of improvement or worsening of an insurer’s financial capacity in any one year.

This indicator shall be calculated as follows:

Indicator:

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=

Difference between capital sources and funds in the current year and in the previous year

Capital sources and funds in the previous year

1.2 Indicator of total premium revenue over capital sources and funds

The capital sources and funds of an insurer have the role of creating reserve funds to cover losses which are larger than average and which are too large to pay from the professional reserves. This indicator, namely total premium revenue over capital sources and funds, assesses the degree of sufficiency of these reserve funds (excluding reinsurance). The larger the value of this indicator the greater the insurer’s risk that its capital sources and funds will be unable to cope with any unusual fluctuations in losses.

This indicator shall be calculated as follows:

Indicator of total premium revenue over capital sources and funds

=

Total premium revenue

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1.3 Indicator of net premium revenue over capital sources and funds

The capital sources and funds of an insurer have the role of creating reserve funds to cover losses which are larger than average. This indicator, namely net premium revenue over capital sources and funds, assesses the degree of sufficiency of these reserve funds (including reinsurance). The larger the value of this indicator the greater the insurer’s risk that its capital sources and funds will be unable to cope with any unusual fluctuations in losses.

This indicator shall be calculated as follows:

Indicator of net premium revenue over capital sources and funds

=

Net premium revenue

Capital sources and funds

1.4 Indicator of movement in net premium revenue

Large changes in net premium revenue over a number of years are often a sign of instability in the business operations of an insurer. A sudden increase in premium revenue can be a sign that an insurer is hurriedly selling new types of insurance or hurrying into new operational sectors without considering the business consequences. Side by side with that, a sudden increase in premium revenue can also be a sign that an insurer is trying to increase cash flow so as to discharge its liability to make indemnity payments on contracts previously entered into. A large drop in premium revenue can be a sign that an insurer has stopped selling some types of products and curtailed the scope of the insurance it provides due to large losses in one type of product or due to loss of its market share to competitors.

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Indicator of movement in net premium revenue

=

Net premium revenue in current year
 less
 Net premium revenue in previous year

Net premium revenue in previous year

1.5 Indicator of additional capital over capital sources and funds

The use of fixed reinsurance contracts in order to obtain additional capital may be a sign that an insurer’s capital sources and funds are insufficient. If the greater part of an insurer’s capital sources and funds have been formed from items being additional capital received from reinsurance, then the insurer’s solvency may be effected if reinsurers fail to co-operate or run into financial difficulty.

This indicator shall be calculated as follows:

Indicator:

Additional capital over capital sources and funds

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Additional capital

Capital sources and funds

In which:

Additional capital = Commission from reinsurance ceded divided by Premiums of reinsurance ceded multiplied by 40% of Premiums of reinsurance ceded

1.6. Indicator of indemnity ratio

The indemnity ratio is one of the indicators which shows the quality of an insurer’s operation and risk management. It is one of the two factors which make up the combined ratio indicator, and it substantially effects the insurance business results of an insurer (excluding results from investment activities). A high indemnity ratio may cause an insurer to suffer a loss in its insurance business activities which in turn will effect the financial capacity of the insurer.

This indicator shall be calculated as follows:

Indicator of indemnity Ratio

=

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Net earned premium

1.7 Indicator of ratio of insurance business operational expenses

The expenses ratio is one of the indicators which shows the ability of an insurer to be competitive by keeping expenses at a reasonable level but still running an effective business. The expenses ratio is one of the two indicators (the indemnity ratio being the other) which form the combined ratio, and therefore effects the insurance business results of an insurer (excluding results from investment activities). A high expenses ratio will reduce an insurer’s competitiveness and will also have a disadvantageous effect on profit made from the insurance business activities of the insurer.

This indicator shall be calculated as follows:

Indicator of ratio of operational expenses of insurance business

=

Total operational expenses of insurance business

Net premium revenue

GROUP OF INDICATORS ON PROFIT

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The combined ratio is the most comprehensive indicator for knowing the insurance business results of an insurer (excluding results from financial investment activities). In the long term, the insurance business results of an insurer is the principal and decisive factor for the financial stability and solvency of an insurer. This indicator is the combination of the two indicators being the indemnity ratio, and the ratio of insurance business operational expenses.

This indicator shall be calculated as follows:

Indicator of Combined Ratio

=

Indemnity ratio

+

Ratio of insurance business operational expenses

1.9. Indicator of investment profit rate

This indicator of the investment profit rate assesses the effectiveness of the asset investment activities of an insurer, and is an important factor contributing to the general profit of an enterprise. This indicator also shows the general quality of an insurer’s investment portfolio.

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Indicator of investment profit rate

=

2 x Net income from investment activities in the current year

Cash plus investment assets in the current year and in the previous year less Net income from investment activities in the current year

GROUP OF INDICATOR ON LIQUIDITY

1.10 Indicator of debts over liquid assets

This indicator of debts over liquid assets is the gauge of an insurer’s ability to satisfy the financial demands made on it. This indicator also resolves satisfactorily the question whether an insurer would be able to pay out all its insureds if the insurer had to be compulsorily dissolved.

This indicator shall be calculated as follows:

Indicator of debts over liquid assets

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Total debts

Liquid assets

1.11 Indicator of premium debts over capital sources and funds

This indicator of premium debts over capital sources and funds shows the level of dependency of an insurer’s solvency on one type of asset which is usually not convertible into cash (receivables being original premiums) in the case of an enterprise being dissolved. In addition, this indicator is also relatively effective in the classification of enterprises which are operating healthily on the one hand and those which have problems.

This indicator shall be calculated as follows:

Indicator of premium debts over capital sources and funds

=

Receivables being original/base premiums

Capital sources and funds

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1.12 Indicator of indemnity reserve over net earned premium

This indicator compares the relationship between the indemnity reserve actually established and net earned premium, in order to verify whether or not the insurer has set up a reserve which is adequate to meet the claims for which it is liable.

This indicator shall be calculated as follows:

Indicator of indemnity reserve over earned premium

=

Indemnity reserve

Net earned premium

2. Supervisory Indicators applicable to Life Insurers:

GROUP OF INDICATORS ON GENERAL OPERATIONS

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The extent of movement in capital sources and funds between the previous year and the current year is an important indicator determining the level of improvement or worsening of an insurer’s financial capacity in a year.

This indicator shall be calculated as follows:

Indicator on changes in capital sources funds

=

Difference between capital sources and funds in the current year and in the previous year

Capital sources and funds in the previous year

2.2. Indicator of ratio of insurance business operational expenses

The business expenses ratio (excluding expenses being commission) is one of the indicators which shows the ability of an insurer to be competitive by keeping expenses at a reasonable level but still running an effective business. A high expenses ratio will reduce an insurer’s competitiveness and will also have a disadvantageous effect on profit made from the insurance business activities of the insurer.

This indicator shall be calculated as follows:

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=

Business expenses (excluding commission)

Net premium revenue

2.3. Indicator of ratio of insurance commissions

This indicator of the ratio of insurance commissions is made up of three indicators: namely the ratio of insurance commissions in the initial year, the ratio of insurance commissions on renewals, and the ratio of insurance commissions on one-off premium payment contracts. This indicator identifies the level of commission paid to agents of an insurer as compared to the insurer’s premium revenue.

This indicator shall be calculated as follows:

Indicator of ratio of insurance commissions in initial year

=

Insurance commissions in initial year

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Indicator of ratio of insurance commissions on renewals

=

Insurance commissions in second year

+

Insurance commissions on renewals

Premium revenue from renewals

Indicator of ratio of insurance commissions on one-off premium payment contracts

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Insurance commissions on one-off premium payment contracts

One-off premium payments

2.4 Indicator of ratio of payment of assured sums2

This indicator shall be calculated as follows:

Amount of assured sums paid ± Increase (decrease) in the mathematical reserve and indemnity reserve

Indicator of ratio of payment of assured sums

=

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In which: Profit from investments from reserves: i x (Vo + V1) x ½

 (i): Investment interest rate based on the interest rate for 10 year Government bonds.

 (Vo): Mathematical reserve and indemnity reserve at the beginning of the period.

 (V1): Mathematical reserve and indemnity reserve at the end of the period.

2.5 Indicator of ratio of retained contracts

This indicator shall only be applied in order to calculate the ratio of retained contracts being individual insurance contracts, and shall not apply to group insurance contracts or to contracts for which the premium is paid on one occasion. The ratio of retained contracts may be calculated separately for whole of life insurance products and for combined insurance. This indicator of ratio of retained contracts shall be used to assess the quality of an insurer’s operations.

This indicator shall be calculated as follows:

Ratio of retained contracts

=

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Total premium revenue in the previous year

GROUP OF INDICATORS ON OPERATIONAL CHANGES

2.6. Indicator of changes in the structure of insurance products

This indicator, being changes in the structure of insurance products, shows the average change in the percentage of total premium figure for each type of insurance product. The higher the value of this indicator the larger the fluctuations in an insurer’s structure of insurance products, therefore requiring the insurer to take appropriate management methods so that always remains in control of the situation and ensures the stability of its operations.

This indicator shall be calculated as follows:

Insurance product

Premium in current year
(1)

Percentage of total premium in current year
(2)

Premium in previous year
(3)

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Column (2) less Column (4) %
(5)

I. Individual insurance contracts

(a) Whole of life insurance

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(b) Endowment insurance

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(d) Combined insurance

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(e) Periodical payments insurance

II. Group insurance contracts

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(a) Whole of life insurance

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(c) Death benefit insurance

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(d) Combined insurance

(e) Periodical payments insurance

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III. Total premium figure

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2.7 Indicator of changes in asset structure

This indicator, being changes in asset structure, shows the average change in the percentage value of each type of asset. The higher the value of this indicator the larger the fluctuations in an insurer’s asset structure, therefore requiring the insurer to take appropriate management methods so that it always remains in control of the situation and ensures the stability of its investment activities.

This indicator shall be calculated as follows:

Type of asset

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Percentage of total asset value in current year
(2)

Asset value in previous year
(3)

Percentage of total asset value in previous year
(4)

Column (2) less Column (4) %
(5)

1. Government bonds

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Under 1 year

From 1 to 5 years

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From 5 to 10 years

Above 10 5 years

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2. Company bonds

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Under 1 year

From 1 to 5 years

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From 5 to 10 years

Above 10 5 years

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3. Listed shares

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4. Unlisted shares

5. Lending secured by mortgage

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6. Real property being head office

7. Other real estate

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8. Lending under insurance contracts

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9. Joint venture capital contribution

10. Investments in associated companies

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11. Deposits

12. Cash and short-term investments

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13. Other investments

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14. Total value of assets

15. Total value of index (column 5)

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2.8. Indicator of changes in reserves

This indicator, namely changes in reserves, expresses the difference as a percentage between the figure for the reserves in the current year and the figure for the reserves in the previous year. The indicator being the changes in reserves for each year is calculated by dividing the items for increased reserves on individual insurance contacts by the total amount for renewal premiums plus one-off premiums paid on individual insurance contracts.

This indicator shall be calculated as follows:

Indicator of mathematical reserve, current year

=

Item being increase in the mathematical reserve in the current year

Renewal premiums

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One-off premiums in current year

Indicator of reserves in previous year

=

Item being increase in the mathematical reserve in the previous year

Renewal premiums

+

One-off premiums in the previous year

Indicator of changes in reserves

=

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-

Indicator of reserves in previous year

GROUP OF INDICATORS ON LIQUIDITY

2.9. Indicator of liquidity

The liquidity indicator compares total debts with liquid assets (cash and all assets which are readily convertible into cash).

This indicator shall be calculated as follows:

Liquidity indicator

=

Total debts

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2.10 Indicator of ratio of investments in associated companies

This indicator of the ratio of investments in associated companies is calculated as a percentage, being the figure for the value of assets invested in associated companies (including invested capital and receivables from associated companies) over the figure for the insurer’s capital sources and funds. Associated companies means an entity within a Corporation’s system, or any one section [or department] which via one or more intermediary organizations either directly or indirectly controls, or is controlled by, or is under the regular control of the company preparing the report. An associated company may be a head company, a subsidiary company, a member company, a joint venture company or a limited liability company. The higher this indicator of the ratio of investments in associated companies, the lower the liquidity of the insurer.

This indicator shall be calculated as follows:

Indicator of Ratio of investments in associated companies

=

Investments in associated companies

+

Receivables from associated companies

Capital sources and funds

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2.11 Indicator of credit solvency

This payment [or settlement] indicator is calculated as a percentage, being the figure for the capital sources and funds determining the credit solvency margin of the insurer over the figure being the minimum credit solvency margin as stipulated in the current regulations. The capital sources and funds in order to determine the solvency margin are capital sources plus funds less the figure for capital contribution in other insurers and irrecoverable debts. The minimum solvency margin is the total of 4% of the insurance reserves plus 0.1% of the sums insured which carry risks (applicable to contracts with a term of less than 10 years) or plus 0.3% of the sums insured which carry risks (applicable to contracts with a term of over 10 years).

This indicator shall be calculated as follows:

Indicator of credit solvency

=

Capital sources and funds determining the solvency margin

Minimum solvency margin

2.12 Indicator of adjusted capital sources and funds over total debts

This indicator of adjusted capital sources and funds over total debts is one of several indicators which assess an insurer’s financial capacity. Adjusted capital sources and funds means the value of an insurer’s capital sources plus funds after they have been adjusted downwards [by subtracting] non-liquid assets.

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Adjusted capital sources plus funds and funds over total debts

=

Indicator of adjusted capital sources

Total debts

GROUP OF INDICATORS ON PROFIT

2.13 Indicator on profit

The profit indicator is the most comprehensive indicator for showing the operational results of an insurer (including the results from financial investment activities).

This indicator shall be calculated as follows:

Profit indicator

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Profit (also including profit from investments)

Net premium revenue

+

Profit from financial operations

2.14 Indicator of assets investment profit rate

This indicator of assets investment profit rate shall be used to assess the effectiveness of the insurer’s assets investment portfolio. A low result on this indicator is a sign that the insurer has many unprofitable assets (for example receivables, fixed assets and so on).

This indicator shall be calculated as follows:

Assets investment profit rate

=

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Previous year’s assets

+

Current year’s assets

-

Profit from financial operations in the current year