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THE MINISTRY OF FINANCE
———
SOCIALIST REPUBLIC OF VIET NAM
Independence – Freedom – Happiness
———-
No. 153/2003/QD-BTC

Hanoi, September 22, 2003

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.

Article 4. The Insurance Department shall be responsible to analyse and assess the operating results of insurers via the system of supervisory indicators for insurers, and to conduct checks and take supervisory measures in accordance with law.

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:

The system of supervisory indicators for insurers is a tool to assist the Administrative Authority for Insurance to monitor and check the status of business operations of insurers and whether insurers are complying with the State’s policies and laws, aimed at early detection of circumstances in which insurers could be in danger of becoming insolvent so that prompt measures can be taken to overcome the danger and so that the lawful interests of insurance participants can be protected. The system of supervisory indicators for insurers is also a tool to assist insurers to themselves monitor their own business operations and to realise when unusual circumstances have arisen so that they can take prompt steps to resolve negative issues or to develop positive issues.

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:

Changes in capital sources and funds = 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
Capital sources and funds

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.

This indicator shall be calculated as follows:

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 = 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 = Retained indemnities on claims payable
± increase/decrease in the Indemnity Reserve
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

1.8. Indicator of combined ratio

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.

This indicator shall be calculated as follows:

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 = 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

GROUP OF INDICATORS ON PROFESSIONAL RESERVES

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

2.1. 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 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:

Indicator of ratio of business expenses = 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
Premium revenue from new policies

 

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 = 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 =
Net revenue (net premium revenue + Interest on investments from reserves)

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 contract

 

 

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