VietNamNet Bridge – Scores of foreign insurers are keen to jump into Vietnam’s insurance market through forming joint ventures with local partners or purchasing stakes in local firms. But will this strategy pay dividends?

Vietnam’s young, growing insurance market is attracting considerable foreign interest.

Hurdles await foreign firms looking to enter Vietnam’s insurance market – but many foreign players are ready for the challenge.

Under Ministry of Finance regulations, foreign businesses wanting to set up a life insurance company in Vietnam must have had a representative office in the country for at least three years. So, setting up a joint venture or buying a stake in an existing domestic firm would prove an easier option for foreign companies willing to take the plunge.

Japanese insurance investors in particular are showing great interest, particularly as Asia’s population ages. For example, in late 2012 Japanese life insurer Sumitomo took the seat of HSBC in leading local insurer Bao Viet Holdings through purchasing an 18 per cent stake.

Vietnam’s third life insurance joint venture PVI Sun Life began operations in early 2013 after local outfit PVI Holdings and Canadian partner Sun Life Financial joined forces with a 51 and 49 per cent share respectively.

Earlier, Vietcombank-Cardif Life Insurance (VCLI) was founded in 2008 with VND600 billion ($28.5 million) in chartered capital jointly contributed by Vietcombank, France’s BNP Paribas Assurance and domestic partner SeABank. The VietinBank-Aviva joint venture was founded two years ago with an equal shared investment from the two joint venture parties.

MetLife and the Bank of Investment & Development of Vietnam (BIDV) in late July signed a Memorandum of Understanding (MoU), which paves the way for the establishment of a joint venture life insurance company in Vietnam. The two sides are in discussion to finalise the business plan and expects those discussions to conclude by the end of the year.

In the non-life insurance segment a slew of joint ventures already exists, featuring heavy hitters such as Bao Viet Tokio Marine (Bao Viet Holdings has a 51 per cent stake and Japan’s Tokio Marine 49 per cent), Samsung Vina (founded in 2002 with 50-50 capital contribution by Vinare and Samsung Fire & Marine, United Insurance Company of Vietnam (UIC) which was founded in 1997 between Bao Minh, Japan’s Sompo Japan Insurance and LIG Insurance Limited from Korea.

Modest market share

Some foreign financial and banking groups have also stepped into the Vietnamese market by forming joint ventures, but sometimes with moderate success.

In the non-life insurance market, with the exclusion of Samsung Vina which has cornered a market share surpassing 3 per cent, the market share of all remaining joint ventures and other small non-life insurers reached just 17.5 per cent. Around 80 per cent of the market share has already been corralled by major firms such as Bao Viet Holdings, PVI Holdings, Bao Minh, Post and Telecommunications Joint Stock Corporation (PTI), Petrolimex Insurance Corporation (PJICO), BIC, Military Insurance Company (MIC), and US-owned Liberty Insurance, according to 2013’s first quarter preliminary figures.

The market share for life insurance ventures remains modest with just 8 per cent of new insurance premiums and around 3.4 per cent of total market revenue share.

A number of factors account for this poor performance. As newcomers it often takes eight years for these ventures to reach break-even point and different corporate governance approaches between local and foreign partners is another factor.

One insurance expert who used to work for Bao Minh-CMG said it could not find a common management voice as the parties had an even capital contribution split. When Japan’s Dai-ichi Life took over Bao Minh-CMG in 2007, the latter was in third place in local insurance market in terms of operational scope, just behind Bao Viet and Prudential Vietnam. However, looks were deceiving as this expansive network had low operational efficiency in parallel to poor information technology infrastructure and spotty standards.

After Dai-ichi Life took over and changed the management apparatus, the venture constantly posted upbeat business results and its market share surpassed 8 per cent in 2012, up from just 4.8 per cent in 2007.

Regular governance conflicts have prompted some foreign partners to increase their capital contributions in order to gain a bigger voice in joint venture operations. But, more capital does not always equate to immediate results - especially when their local counterparts are state-owned enterprises. For instance, France’s AXA Group more than once voiced its desire to raise its ownership in Bao Minh Insurance Corporation, but its proposals were not accepted. With its current 16.6 per cent stake in Bao Minh, AXA has little scope to influence local management.

These limitations have deterred some foreign insurance groups from dropping anchor in Vietnam. For example, Italy’s Generali Group has jumped into the Chinese and Indian insurance markets via forming ventures with local partners and have proved very successful. But, when it came to Vietnam it was happy to set up a wholly foreign-owned life insurance business and willingly accepted the three year representative office requirement to avoid potential complications with engaging a local firm.

Whether other foreign insurers take this path is open to debate. However, one thing is for certain – Vietnam’s insurance market is very much on foreign investors’ radars.

Source: VIR