Circular No. 156/2007/TT-BTC dated December 20, 2007 of the Ministry of Finance providing guidelines for implementation of Decree 46/2007/ND of the Government dated 27 March 2007 on financial regime applicable to insurers and insurance brokers

CIRCULAR

PROVIDING GUIDELINES FOR IMPLEMENTATION OF DECREE 46-2007-ND-CP OF THE GOVERNMENT DATED 27 MARCH 2007 ON FINANCIAL REGIME APPLICABLE TO INSURERS AND INSURANCE BROKERS

Pursuant to the Law on Insurance Business 24-2000-QH10 dated 9 December 2000;

Pursuant  to  Decree  46/2007/ND-CP  of  the  Government  dated  27  March  2007  on  the  financial  regime applicable to insurers and insurance brokers ("Decree 46");

Pursuant to Decree 77/2003/ND-CP of the Government dated 1 July 2003 on functions, duties, powers and organizational structure of the Ministry of Finance;

Pursuant to instructions from the Prime Minister in Official Letter 7195-VPCP-KTTH dated 11 December 2007 on issuing a Circular for implementation of Decree 46;

The Ministry of Finance provides the following guidelines on the financial regime applicable to insurers and insurance brokers:

I. GENERAL PROVISIONS

1. This Circular provides guidelines on the financial regime applicable to insurers and insurance brokers established, organized and operating pursuant to the Law on Insurance Business.

2. Insurers and insurance brokers shall be responsible to comply with the provisions in this Circular and with other relevant laws on finance.

3. Chairmen  of  boards  of  management,  chairmen  of  members'  councils,  company  chairmen,  and general directors (directors) of insurers and of insurance brokers shall be responsible before the law and before the State administrative body for implementing the regime on financial management of enterprises.

4. The Ministry of Finance shall guide and facilitate insurers and insurance brokers to implement the provisions of this Circular and of other relevant laws on finance, and shall take measures to strictly deal with any enterprise which breaches the law.

II. CHARTER CAPITAL

1. Provisions on charter capital of insurers and insurance brokers shall be implemented in accordance with article 5 of Decree 46.

2. After an enterprise has been issued with a licence for establishment and operation, the amount held in  the  escrow  account  at  a  bank  as  stipulated  in  article 7.1  of  Decree 45-2007-ND-CP  of  the Government dated 27 March 2007 providing guidelines for implementation of the Law on Insurance Business (hereinafter referred to as Decree 45) shall be remitted to become paid-up capital of the insurer or insurance broker and shall be used in accordance with the provisions on charter capital of enterprises stipulated in this Circular and in other relevant laws.

3. The paid-up charter capital of an insurer or insurance broker shall be the amount actually contributed by the owner to the charter capital of the enterprise.

4. Insurers  and  insurance  brokers  must,  throughout  the  whole  course  of  their  operation,  constantly maintain their paid-up charter capital at no less than the level specified in article 4 of Decree 46.

5. The  amount  of  paid-up  charter  capital  of  an  insurer  or  of  a  broker  must  correspond  with  the operational contents, scope and geographical area of the enterprise as follows:

5.1 If  during  the  process  of  conducting  business,  equity  [owner's  capital]  in  the  insurance  or  broking enterprise is less than the level of legal capital, then the enterprise must add to its charter capital to ensure that equity is not less than legal capital.

5.2 A  non-life  insurer  whose  paid-up  charter  capital  is  equal  to  its  legal  capital  shall  be  permitted  to conduct business in primary insurance of all types of non-life insurance except for aviation insurance, petroleum insurance, and satellite insurance.  In order to conduct business in one or all of these latter types of insurance, the enterprise must add to its paid-up charter capital so that it is one hundred (100) billion Vietnamese dong more than the amount of its legal capital.

5.3 An  insurance  broker  which  simultaneously  conducts  business  in  primary  insurance  broking  and reinsurance  broking  must  supplement  its  paid-up  charter  capital  so  that  it  is  four  (4) billion Vietnamese dong more than the amount of its legal capital.

5.4 An insurer whose paid-up charter capital is equal to the amount of its legal capital shall be permitted to open a maximum of twenty (20) branches and representative officers; and each time it opens a new branch or representative office, the insurer must supplement its paid-up charter capital by ten (10) billion dong.

6. The following provisions on supplementing charter capital shall apply to an insurer or broker which was established, organized and operated prior to the date on which Decree 46 took effect1:

6.1 In the case of an enterprise which does not change its operational contents, scope and geographical area,  it  must  implement  the  provisions  in  clause 5  above  and  supplement  paid-up  charter  capital within a time limit of three (3) years from the date on which Decree 46 took effect.

6.2 In  the  case  of  an  enterprise  which  does  change  its  operational  contents,  scope  and  geographical area,  it  must  immediately  implement  the  provisions  in  clause 5  above  and  supplement  paid-up charter capital.

7. Within a time-limit of six (6) months from the date on which this Circular takes effect, any insurer or insurance  broker  whose  paid-up  charter  capital  is  less  than  the  level  of  paid-up  charter  capital stipulated in this Circular must prepare and send the Ministry of Finance a plan to supplement charter capital in accordance with clause 6 above, and thereafter such enterprise must implement such plan.

III. INSURANCE RESERVES

1. Insurance reserve means the amount of money which an enterprise must set aside for the objective of  paying  out  its  insurance  liabilities  determined  in  advance  and  arising  from  insurance  contracts which it has entered into.

2. With respect to non-life insurers:

2.1 Non-life insurers must establish various insurance reserves in accordance with article 8 of Decree 46.

2.2 Non-life insurers shall be permitted to select and register with the Ministry of Finance a method of establishing insurance reserves in accordance with the guidelines provided in clause 2.4 below. If an enterprise  applies  a  different  method  of  establishing  insurance  reserves,  then  it  must  be  able  to ensure a higher reserving result and must have written approval from the Ministry of Finance prior to application.

2.3 A non-life insurer may not change its method of establishing insurance reserves in the same fiscal year.  Where an insurer changes its method of establishing insurance reserves for the following fiscal year, it must propose same to the Ministry of Finance which must provide written approval prior to application.

2.4 Methods of establishing insurance reserves for non-life insurance:

2.4.1 Unearned premium reserve:

(a) Method of establishing the reserve as a percentage of total premiums:

+ In the case of insurance products for goods in transit by road, sea, river, rail and air: equal to twenty- five (25) per cent of the total retained premiums for this insurance product of the fiscal year.

+ In the case of other insurance products: equal to fifty (50) per cent of the total retained premiums for the insurance product of the fiscal year.

(b) Method of establishing the reserve in accordance with a coefficient of the term of insurance contracts:

+ The 1/8 method: This method assumes that premium from all contracts arising in a quarter of the insurer is evenly distributed to the months in that quarter, or put another way all insurance contracts in a specific quarter are assumed to be valid in the middle of that quarter. The reserve for unearned premiums shall be calculated by the formula:

Unearned premium reserve = Retained premiums x Proportion of unearned premiums.

For example:

The reserve for unearned premiums as at 31 December 2007 shall be calculated as follows:

In the case of insurance contracts with a term of one year and still effective as at 31 December 2007:

In the case of insurance contracts with a term above one year, the proportion of unearned premiums under the above formula will have a denominator equal to the term of the insurance contract (the number of years) multiplied by 8. Therefore the reserve for unearned premiums as at 31 December 2007 in the case of insurance contracts with a term of two years and still effective as at 31 December 2007 shall be calculated as follows:

+ The 1/24 method assumes that premium from all contracts arising in a month of the insurer is evenly distributed  over  the  month,  or  put  another  way  all  insurance  contracts  in  a  specific  month  are assumed  to  be  valid  in  the  middle  of  that  month.  The  reserve  for  unearned  premiums  shall  be calculated by the formula:

Unearned premium reserve = Retained premiums x Proportion of unearned premiums.

For example:

The reserve for unearned premiums as at 31 December 2007 shall be calculated as follows:

In the case of insurance contracts with a term of one year and still effective as at 31 December 2007:

In the case of insurance contracts with a term above one year, the proportion of unearned premiums under the above formula will have a denominator equal to the term of the insurance contract (the number of years) multiplied by 24. Therefore the reserve for unearned premiums as at 31 December 2007 in the case of insurance contracts with a term of two years and still effective as at 31 December 2007 shall be calculated as follows:

(c) Method of establishing premium reserve on a daily basis:  This method may be applied to calculate a reserve for unearned premiums on insurance contracts with whatever term, by using the following comprehensive formula:

Unearned  premium  reserve  shall  equal  (Retained  premium  x  Number  of  remaining  insured  days under the insurance contract) divided by Total number of insured days under the insurance contract.

2.4.2 Indemnity reserve2:

(a) Method of establishing this reserve based on each claim file:   According to this method, a non-life insurer must establish two types of reserve:

+ A reserve for payment of unresolved claims, made for each type of insurance product by the method of estimating the amount of pay-out for each claim for which the insurer is liable, and notified or made but unresolved at the end of the fiscal year.

+ A reserve for payment of losses which have arisen and for which the insurer is liable, but claims are not yet notified or made. This reserve must be established for each product by the following formula:

Reserve for payment of losses which have arisen but for which claims have not yet been notified or made for the current fiscal year = (Total indemnity for claims  unmade at the end of the last three consecutive fiscal years) divided by (Total indemnity for losses arising in the last three consecutive fiscal years) x Indemnity for losses arising in the current fiscal year x (Net revenue from business operations of the current fiscal year) divided by (Net revenue from insurance business operations of the previous fiscal year) x (Average delay in making claims of current fiscal year) divided by (Average delay in making claims of previous fiscal year).

In which:

- Indemnity for losses arising in any one fiscal year shall be indemnity for losses actually paid out in the year plus the reserve for claims unresolved at the end of that year.

- The average delay in making claims shall be the average period from the date loss occurs until the date the insurer receives notice of loss or a claim (calculated as a number of days).

(b)Method of establishing an indemnity reserve in accordance with the coefficient of arising indemnity:

This method shall apply to establish an indemnity reserve for each product based on the principle of using  data  on  indemnity  in  previous  years  in  order  to  calculate  coefficients  of  arising  indemnity  in order to forecast what the non-life insurer will have to pay out in the future. Therefore the non-life insurer  must analyse  past data  to ensure  that  payment  of  indemnity  over  the  years complies  with fixed regulations and does not fluctuate abnormally.

For  example: The  indemnity  reserve  in  accordance  with  the  coefficient  of  arising  indemnity  for  a specified product as at 31 December 2007 shall be calculated as follows:

Step 1: Statistics on all indemnity pay-outs actually made up to 31 December 2007 and distributed to the year of the loss and to the year of payment are set out in the following table (the data in the table is for illustrative purposes only):

Unit: Million dong

According to the above statistical table on indemnity (see line for year 2000):

- The actual indemnity pay-out in 2000 (first year of indemnity) for losses occurring in 2000 is 5,445 million dong.

- The actual indemnity pay-out in 2001 (second year of indemnity) for losses occurring in 2000 is 3,157 million dong.

- The actual indemnity pay-out in 2002 (third year of indemnity) for losses occurring in 2000 is 2,450 million dong.

Statistics  on  indemnity  in  the  following  years  for  losses  occurring  in  2000  shall  be  calculated  the same as above until there is no more indemnity arising. In this example, after year 2007 (eighth year of indemnity) there is no indemnity payable for losses occurring in 2000.

Statistics on indemnity for losses occurring in each year 2001 through to 2007 shall be calculated the same as for year 2000 above. The number of years for which statistics need to be kept will depend on the length of the period from the date the loss occurred until indemnity has been paid out in full. Normally liability insurance will have a greater number of such years than say property insurance.

Step 2: Make the above table into a table of statistics on accumulated indemnity pay-outs, in which the accumulated indemnity pay-out of any one year shall be total actual pay-outs of that year plus those of the previous years:

Unit: Million dong

According to the above statistical table on accumulated indemnity pay-outs (line for year 2000):

- The accumulated indemnity pay-out in 2000 (first year of indemnity) for losses occurring in 2000 is 5,445 million dong.

- The accumulated indemnity pay-out in 2001 (second year of indemnity) for losses occurring in 2000 is 3,157 million dong + 5,445 million dong = 8,602 million dong.

- The accumulated indemnity pay-out in 2002 (third year of indemnity) for losses occurring in 2000 is 2,450 million dong +  8,602 million dong = 11,052 million dong.

Step 3: Calculate  the  coefficient  of  arising  indemnity  over  the  years  by  dividing  the  accumulated indemnity pay-out for a later year by that of the previous year:

Then calculate the average coefficient of indemnity from the first year to the second year, from the second year to the third year and so on, by calculating the average value of the coefficient in each column in the above table.

Step 4:  Use the average coefficient of indemnity calculated in step 3 above in order to calculate the accumulated indemnity pay-out of each year for losses occurring in 2000, 2001 etc. up to 2007 (the figures in bold print below):

Unit: Million dong

According to the table (looking at the line for year 2007):

- The accumulated indemnity pay-out in 2008 (second year of indemnity) for losses occurring in 2007 is 15,162 million dong x 1.625 = 24,638 million dong (1.625 is the average coefficient of indemnity from the first to the second year).

- The accumulated indemnity pay-out in 2009 (third year of indemnity) for losses occurring in 2007 is 24,638 million dong x 1.236 = 30,453 million dong (1.236 is the average coefficient of indemnity from the second to the third year).

- The accumulated indemnity pay-out in 2010 (fourth year of indemnity) for losses occurring in 2007 is 30,453 million dong x 1.163 = 35,417 million dong (1.163 is the average coefficient of indemnity from the third to the fourth year).

- The accumulated indemnity pay-out for each year for losses occurring in years 2006, 2005 down to year 2000 shall be calculated the same as it was for year 2007.

Step 5: Calculate the indemnity reserve:

The indemnity reserve as at 31 December 2007 shall be calculated by taking the total estimated pay- out  for  losses  occurring  in  all  years  2000  through  to  2007,  less  total  actual  pay-outs  for  all  such losses calculated up to 31 December 2007, in which:

-The  total  estimated  pay-out  for  losses  occurring  in  all  years  2000  through  to  2007  is  simply  the accumulated indemnity pay-out for the eighth year of indemnity in the table above.

-The total actual pay-outs for all losses occurring in all years 2000 through to 2007 calculated at 31 December 2007 is simply the accumulated indemnity figure for the year in the diagonally adjacent box in the table above.

Unit: Million dong

Therefore, on the basis of the above statistical data on indemnity, the estimated indemnity reserve for products being researched as at 31 December 2007 will be 58,469 million dong.

2.4.3 Large loss fluctuation reserve:

With respect to the reserve for payment of large fluctuations in losses, contributions shall be made annually until the balance in the reserve is equal to one hundred (100) per cent of premiums actually retained in the fiscal year of the insurer. Contributions  made  annually  shall  be  from  three  (3)  to  five  (5)  per  cent  of premiums actually retained.

3. With respect to life insurers:

3.1 Life  insurers  must  establish  various  insurance  reserves  in  accordance  with  article  9  of  Decree  46 which must be certified by the appointed actuary.

3.2 Life insurers shall be permitted to select and register with the Ministry of Finance a method and basis of establishing insurance reserves in accordance with the guidelines provided in clause 3.4 below. If an enterprise applies a different method and basis of establishing insurance reserves, then it must be able to ensure a higher reserving result and must have written approval from the Ministry of Finance prior to application.

3.3 A life insurer may not change its method and basis of establishing insurance reserves in the same fiscal year. Where an insurer changes its method and basis of establishing insurance reserves for the following fiscal year, it must propose same to the Ministry of Finance which must provide written approval prior to application.

3.4 Methods of establishing life insurance reserves:

3.4.1 Actuarial reserve 3:

(a) The method of establishing this reserve shall be in accordance with the net premium valuation method adjusted by the Zillmer coefficient of three (3) per cent of insured sums. The adjusted net premium used to calculate  this  reserve  must  not  be  higher  than  ninety  (90)  per  cent  of  premium actually collected.

(b) Actuarial reserving calculated by this net premium method as adjusted by Zillmer 3% shall follow this principle:

Actuarial reserve = Present value of total insurance liabilities payable in future - (less) Present value of total net premiums collectible in the future adjusted by the Zillmer coefficient of 3% of insured sums.

(c) Life insurers shall use the following basis to calculate actuarial reserves:

- Mortality table CSO 1980 in the Appendix to this Circular.

- A  maximum  technical  interest  rate  equal  to  eighty  (80)  per  cent  of  the  ten  (10)  year  Government bond interest rate at the most recent date before establishing the reserve.

(d) Actuarial reserves will be deemed equal to zero (0) if the result after calculations using the above- mentioned method and bases is a negative number.

3.4.2 Unearned premium reserve: This shall apply the same as to non-life insurance contracts.

3.4.3 Indemnity reserve 4:

This reserve shall be established by the "each file method" on the basis of statistics of sums payable under each of the files for claims made on the insurer but not resolved at the end of the fiscal year.

3.4.4 Profit distribution reserve:

This  reserve  shall  only  be  applicable  to  contracts  with  accumulated  dividends  distributable  in insurance contract years and shall be calculated by the following formula:

Profit distribution reserve = (Total dividends declared to policy holders in fiscal year) plus (Accumulated value of unpaid dividends declared to policy holders in previous fiscal years).

3.4.5 Balance reserve:

Annual contributions shall be made up until the time when this reserve is equal to five (5) per cent of the premiums collected in the fiscal year of an insurer. The rate of annual contributions shall be one (1) per cent of the before-tax profit of the insurer.

IV. CAPITAL INVESTMENT

1. Insurers  shall  carry  out  investment  of  capital  in  accordance  with  the  provisions  of  Section  3  of Chapter II of Decree 46.

2. Owner's capital of an insurer or insurance broker equivalent to the legal capital of the enterprise may only be invested within Vietnam and shall not be permitted to be used to invest in any of the forms being lending to or re-investing with shareholders or related persons as defined in article 4 of the Law on Enterprises except for banks deposits.

3. That part of owner's capital [equity] of an insurer equivalent to the minimum solvency margin may be invested as stipulated in article 4 of Decree 46 the same as idle capital from insurance reserves but shall not be permitted to be used to invest in any of the forms being lending to or re-investing with shareholders or related persons as defined in article 4 of the Law on Enterprises except for banks deposits.

4. Offshore investments by insurers and insurance brokers may be made in accordance with the current regulations on offshore investment, must be made in the name of the enterprise, and there must be written approval from the Ministry of Finance prior to investment.

5. Insurers and insurance brokers must account separately for investments from owner's capital and for investments from idle capital from insurance reserves, ensuring that the recording of invested assets is conducted uniformly.

V. SOLVENCY OF INSURERS

1. An insurer must always maintain solvency during the operation of insurance business in accordance with the provisions of article 15 of Decree 46.

2. An insurer shall be deemed to be in danger of insolvency when its solvency margin is less than the minimum solvency margin.

3. Minimum solvency margins:

3.1 The minimum solvency margin of a non-life insurer shall be the greater of the following two calculations:

+ Twenty five (25) per cent of the total premiums actually retained at the time of determination of the solvency margin;

+ Twelve point five (12.5) per cent of the total primary insurance premiums plus reinsurance premiums at the time of determination of the solvency margin.

In the case of ceded reinsurance contracts which fail to satisfy the conditions on ceded reinsurance stipulated by the Ministry of Finance, the minimum solvency margin shall be one hundred (100) per cent of the primary premiums for such contracts.

3.2 The minimum solvency margin of a life insurer shall be:

3.2.1 In the case of contracts of life insurance with a term of five (5) years or less, four (4) per cent of the insurance reserves and one tenth of one (0.1) per cent of the sums insured which carry risks.

3.2.2  In the case of contracts of life insurance with a term of over five (5) years, four (4) per cent of the insurance reserves and three tenths of one (0.3) per cent of the sums insured which carry risks.

Sums insured which carry risks means the difference between the sums insured of effective policies and total reserves.

4. The solvency margin of an insurer means the difference between asset value and debts payable by the insurer at the time of determination of the solvency margin. Assets shall be calculated as follows when calculating the solvency margin:

4.1 The total accounting value of all of the following assets may be used when calculating the solvency margin:

4.1.1 Cash items, bank deposits, items of money currently being remitted, and Government bonds.

4.1.2 Assets corresponding to investment linked insurance policies.

4.2 The total accounting value of the following assets shall be excluded when calculating the solvency margin:

4.2.1 Capital contributions in order to establish other insurers from equity of the insurer in question.

4.2.2 Assets corresponding to the welfare and rewards fund (if any).

4.2.3 Bad  debts  which  are  deemed  by  law  to  be  irrecoverable  after  deducting  contributions  to  the equivalent bad debts reserve.

4.2.4 Intangible fixed assets, except for computer software.

4.2.5 Expenses paid in advance, non-guaranteed loans [lending], provisional items paid, office equipment and apparatus, and items which are recoverable but only internally.

4.2.6 Outstanding  premiums  including  premiums  on  accepting  reinsurance  which  are  more  than  two (2) years overdue, after deducting contributions to the corresponding bad debts reserve as stipulated by law.

4.2.7 Lending to or reinvesting with shareholders or related persons as defined in article 4 of the Law on Enterprises, except for bank deposits.

4.3 Part of the accounting value of the following assets shall be excluded when calculating the solvency margin:

4.3.1 Investment assets as follows:

(a) Guaranteed enterprise bonds: 1% of the accounting value shall be excluded;

(b) Non-guaranteed enterprise bonds:  3% of the accounting value shall be excluded;

(c) Listed shares: 15% of the accounting value shall be excluded;

(d) Unlisted shares: 20% of the accounting value shall be excluded;

(dd) Direct investment in real estate which the enterprise itself uses: 8% of the accounting value shall be excluded;

(e) Direct investment in real estate in order to lease out, and guaranteed commercial lending: 15% of the accounting value shall be excluded;

(g) Capital contributions to other enterprises which are not insurers: 20% of the accounting value shall be excluded.

4.3.2 Debts receivable:

(a) Outstanding  premium  and  premium  on  accepting  reinsurance  which  is  collectable  and  which  has been outstanding for a period from 90 days up until less than 1 year, after excluding contributions to the  equivalent  bad  debts  reserve  in  accordance  with  law:  30%  of  such  debts  collectable  shall  be excluded;

(b) Outstanding  premium  and  premium  on  accepting  reinsurance  which  is  collectable  and  which  has been  outstanding  for  a  period  from  1  year  up  to  2 years,  after  excluding  contributions  to  the equivalent  bad  debts  reserve  in  accordance  with  law:  50%  of  such  debts  collectable  shall  be excluded.

4.3.3 Tangible fixed assets, and intangible fixed assets being computer software and goods in store:  25% of the accounting value shall be excluded.

4.3.4 Other assets: 15% of the accounting value shall be excluded.

VI.  REVENUE AND EXPENSES OF INSURERS

1. Revenue:

1.1 Revenue of an insurer means amounts receivable as stipulated in article 20 of Decree 46, comprising:

1.1.1 Revenue  from  insurance  business  activities  being  primary  insurance  premiums;  revenue  from reinsurance  accepted;  commissions  from  ceding  reinsurance;  revenue  from  fees  for  provision  of agency services including loss surveys, evaluation of compensation, making claims on third parties, or salvage following total loss settlements; revenue from fees for loss surveys excluding surveys for internal cost accounting member entities within the one independent cost accounting insurer, after deducting  amounts  payable  which  reduce  revenue  such  as  refunds  of  insurance  premiums, reductions  of  insurance  premiums,  premiums  on  ceding  reinsurance,  refunds  of  premiums  for reinsurance accepted, reductions of premiums for reinsurance accepted, refunds of commissions on ceding reinsurance, and reductions of commissions on ceding reinsurance.

1.1.2 Revenue from financial activities:  revenue received from investments as stipulated in Section 3 of Chapter II of Decree 46; revenue received from trading securities; interest received on the amount of the security deposit; revenue earned from leasing out assets, and other revenue as stipulated by law.

1.1.3 Revenue from other activities: proceeds from sale or liquidation of fixed assets; bad debts which had been written-off but are recovered, and other revenue as stipulated by law.

1.2 Principles for calculation of revenue:

1.2.1 Revenue from insurance business activities means amounts receivable in a period, which shall be calculated on the following principles:

- The insurer shall account for primary insurance premiums in revenue at the point of time when the insurance liability of the insurer to the purchaser of insurance arises as stipulated in article 15 of the Law on Insurance Business, and specifically as follows:

+ The  insurer  shall  account  for  revenue  when  an  insurance  contract  has  been  entered  into  by  the insurer  with  the  purchaser  of  insurance,  or  when  there  is  evidence  that  the  insurer  has  agreed  to insure and the purchaser has paid premium.

+ The  insurer  agrees  for  the  purchaser  of  insurance  to  owe  premium:  In  this  case  the  insurer  shall account as revenue whatever sum the purchaser of insurance owes, even though the purchaser has not yet paid premium.

+ The  insurer  agrees  for  the  purchaser  of  insurance  to  pay  premium  periodically:  In  this  case  the insurer shall account in revenue for the corresponding periods or for the periods arising during which premium  is  payable;  but  shall  not  account  premium  as  revenue  when  the  period  for  payment  as agreed has not yet been reached.

+ In  the  case  of  co-insurance,  the  insurer  shall  account  in  revenue  for  primary  insurance  premium when it is allocated at the co-insured ratio.

- The insurer shall account in revenue for premium for accepting reinsurance, commission for ceding reinsurance  and  other  income  from  ceding  reinsurance  when  the  reinsurance  payment  slip  is certified. If the insurer agrees with the party ceding reinsurance on payment of premium periodically, then  the  insurer  shall  account  for  the  premium  in  revenue  in  the  corresponding  periods  or  in  the periods  when  reinsurance  premium  arises,  but  shall  not  account  premium  as  revenue  when  the period for payment by the party ceding reinsurance has not yet been reached.

- Other income shall be recognized as soon as it arises from any economic activity and there is proof that  the  relevant  party  has  agreed  to  pay,  irrespective  of  whether  or  not  the  insurer  has  received payment.

- With respect to amounts payable which reduce revenue: The insurer shall account for and deduct such amounts from revenue as soon as they arise from any economic activity and there is proof that the parties have agreed on payment, irrespective of whether or not the insurer makes a payment.

1.2.2 Revenue from financial activities means amounts receivable in the fiscal year.

1.2.3 Income arising from other activities means proceeds from sales of goods or services after deducting reductions in price or returns of goods (supported by proper documents) for which clients agreed to pay, irrespective of whether or not the insurer receives the revenue.

2. Expenses:

Expenses of an insurer means amounts payable or which must be allocated in a period as stipulated in article 21 of Decree 46, comprising:

2.1 Business operational expenses:

2.1.1  Compensation  payments  for  claims  with  respect  to  primary  insurance  (payments  for  claims  with respect  to  primary  non-life  insurance,  and  payments  of  insurance  proceeds  with  respect  to  life insurance),  and  compensation  payments  for  reinsurance  accepted  after  deducting  amounts receivable  in  order  to  reduce  expenditure  such  as  compensation  received  for  cessions, compensation  recovered  from  third  parties,  and  proceeds  from  goods  dealt  with  or  one  hundred (100) per cent recoveries.

2.1.2 Payments into insurance reserves as provided in Section III of this Circular.

2.1.3 Payments of insurance and broker's commission as stipulated in clause 6 of Section IV of Circular 155/2007/TT-BTC of the Ministry of Finance dated 20 December 2007.

2.1.4 Expenses of loss assessment as stipulated in article 26 of Decree 45.

2.1.5 Expenses for agency fees for provision of services for loss assessment, evaluation of compensation or making claims on third parties.

2.1.6 Expenses for dealing with one hundred (100) per cent recoveries.

2.1.7  Expenses  incurred  for  management  of  insurance  agents  such  as  training,  recruiting,  granting bonuses and rewards to agents, and other payments as agreed in contracts with the agents.

2.1.8  Expenses  for  prevention  and  limitation  of  losses  but  not  to  exceed  two  (2)  per  cent  of  premiums actually received in a fiscal year as stipulated in article 25.2 of Decree 45.

2.1.9  Expenses  for  assessment  of  risks  of  items  insured,  including  expenses  for  tasks  of  gathering information, surveying and assessing items to be insured.

2.1.10 An  allocation  of  five  (5)  per  cent  of  total  premiums  collected  annually  for  compulsory  fire  and explosion insurance and used as funding for anti-fire and anti-explosion activities; an allocation of at least  two  (2)  per  cent  of  premiums  collected  annually  for  compulsory  motor  vehicle  civil  liability insurance  and  used  for  the  road  safety  fund;  and  other  allocations  for  funding  for  professional insurance activities as stipulated by law.

2.1.11 Other expenses and amounts allocated as stipulated by law.

2.2 Expenses of financial operations means amounts payable in the fiscal year, comprising:

2.2.1 Expenses incurred for investment activities in accordance with Section 3 of Chapter II of Decree 46.

2.2.2 Investment income payable to life insurance policyholders in accordance with commitments in such policies.

2.2.3 Costs of leasing out assets.

2.2.4 Expenses for bank charges for banking procedures, payment of interest on loans.

2.2.5 Other expenses and amounts allocated as stipulated by law.

2.3. Expenses of other operations means amounts payable in the fiscal year, comprising:

2.3.1 Expenses of sale or liquidation of fixed assets.

2.3.2 Expenses of recovery of bad debts which had been written-off but are now recovered.

2.3.3 Other expenses and amounts allocated as stipulated by law.

3. Other provisions on revenue and expenses of insurers:

Insurers must comply with other relevant laws on other revenue and expenses of insurers in addition to the provisions in clauses 1 and 2 above.

VII.  REVENUE AND EXPENSES OF BROKERS

1. Revenue:

Revenue of an insurance broker means amounts as stipulated in article 24 of Decree 46, comprising:

1.1 Revenue from insurance broking activities being revenue from insurance brokerage commission after deducting refunds and reductions of insurance brokerage commission.

1.2 Revenue from financial activities being revenue received from trading securities; interest received on deposits and on loans; revenue earned from leasing out assets, and other revenue as stipulated by law.

1.3 Revenue  from  other  operations  being  proceeds  from  sale  or  liquidation  of  fixed  assets;  and  bad debts which had been written off but are recovered.

2. Expenses:

2.1 Expenses of an insurance broker means amounts as stipulated in article 25 of Decree 46, comprising:

2.1.1 Expenses being expenses of insurance broking activities and expenses of purchasing professional indemnity insurance.

2.1.2 Expenses  of  financial  activities  being  expenses  of  leasing  out  assets;  and  bank  charges,  and payment of interest on loans.

2.1.3 Expenses of other activities being expenses of sale and liquidation of fixed assets; and expenses of recovery of bad debts which had been written off.

3. Insurance brokers must comply with other relevant laws on other revenue and expenses of insurance brokers in addition to the provisions in clauses 1 and 2 above.

VIII. SEPARATION OF FUNDS AND DISTRIBUTION OF SURPLUS IN LIFE INSURANCE

1. Separation of owners' funds and policyholders' funds:

1.1 A  life  insurer  must  separate  and  also  account  separately  for  owner's  capital  and  for  premiums collected from purchasers of insurance (hereinafter abbreviated to owner's funds and policyholders' funds respectively).

1.2 Policyholders'  funds  must  be  further  separated  into  policyholders'  funds  entitled  to  distribution  of dividends,  and  policyholders'  funds  not  entitled  to  distribution  of  dividends. Depending on the requirements of the Ministry of Finance and of the life insurer itself, these funds may be separated further into sub-category funds.

1.3 The separation of assets, capital sources, revenue and expenses, and business operational results of each fund must be done in a fair, appropriate and objective manner.

1.4 The assets forming a policyholders' fund shall be used to discharge the obligations and to pay the expenses relating to business transactions of such fund. An insurer shall not be permitted to use assets of a policyholders' fund in order to pay fines for a breach of law or for a contractual breach by such life insurer.

1.5 Any transaction regarding the assets, capital sources, revenue or expenses directly relating to any one fund  shall be  recorded  separately  for  such  fund. The appointed actuary of the insurance enterprise shall be responsible to ensure that transactions which relate to a number of funds shall be collated and allocated to each fund on a fair and appropriate basis.  An enterprise must confirm and register with the Ministry of Finance its principles for allocation, prior to applying them. The Ministry of Finance must provide approval to any changes in these principles.

1.6 Life insurers shall be responsible to report on the separation and maintenance of owner's funds and of policyholders' funds in accordance with law.

2. Ensuring solvency of policyholders' funds:

2.1 Throughout the entire operational period, a life insurer must ensure the solvency of each policyholders' fund. If any deficit appears in a policyholder's fund (namely the asset value of the fund is  less  than  the  level  of  its  liabilities),  then  the  enterprise  shall  be  responsible  to  supplement  the deficit in the policyholders' fund from the owners' fund.  If a policyholder's fund has a surplus (i.e. the difference between the assets  and  liabilities  of  the  fund  is  a  positive  number), then  the  enterprise may refund part or all of the money which was previously supplemented into the fund on condition that such refund does not impact on the solvency of the owners' fund.  All of these transactions must be certified by the appointed actuary of the enterprise.

2.2 If a life insurer maintains a number of owners' funds, then it shall not be permitted to use the surplus in any one such fund to supplement a deficit in another owners' fund.

2.3 An  insurer  must  make  a  written  record  of  all  transactions  relating  to  supplementing  a  deficit  in  a policyholders' fund from [assets in] the owners' fund, and similarly of any transaction relating to the refund of such sum from the policyholders' fund to the owners' fund.

3. Distribution of surplus in life insurance:

3.1 If a policyholders' fund entitled to distribution of dividends has a surplus at the end of the fiscal year, the life insurer may use a part or all of such surplus to distribute to policyholders in the fund and to the owner after receiving ratification from the appointed actuary of the enterprise. The undistributed surplus of a policyholders' fund shall be left in the fund for the purpose of ensuring stability of future surplus distributions.

3.2 A life insurer may choose the method for distributing surplus in the policyholders' fund in the form of paying cash to policyholders, paying accumulated dividends, or increasing sums insured, [and shall] submit  same  to  the  Ministry  of  Finance  for  approval.  Any  method  of  distributing  surplus  in  a policyholders' fund must ensure that the policyholders receive no less than seventy (70) per cent of profits received, and must also ensure fairness as between all the policyholders.

IX. PROFIT AND DISTRIBUTION OF PROFIT

1. Profit  and  distribution  of  profit  of  insurers  and  insurance  brokers  shall  be  in  accordance  with  the provisions of Chapter V of Decree 46.

2. Insurers shall only be permitted to distribute residual profit in accordance with law after they have satisfied the regulations on solvency.

X. FINANCIAL MANAGEMENT, INTERNAL AUDITING, AND INDEPENDENT AUDITING OF INSURERS AND BROKERS

1. Financial  management  of  a  shareholding  insurance  company  and  of  a  shareholding  insurance broking company must ensure the following principles:

1.1 Charter capital structure:

1.1.1 Any one shareholder being an individual may own a maximum of 10% of the charter capital.

1.1.2 Any one shareholder being an organization may own a maximum of 20% of the charter capital.

1.1.3 Any one shareholder and related persons of such shareholder may own a maximum of 20% of the charter capital.

1.1.4 Ownership  of  shareholding  in  excess  of  the  above-mentioned  ratios  must  be  approved  by  the Minister of Finance on the basis of the national interest.

1.1.5 Founding shareholders must jointly own a minimum of 50% of the charter capital on establishment of the enterprise, of which the founding shareholders being organizations must jointly own a minimum of 50% of the total number of shares of founding shareholders. This restriction shall be rescinded after the expiry of three (3) years from the date on which the enterprise is issued with its licence for establishment and operation.

1.2 A related person means any organization or individual with the direct or indirect relationship with the shareholder stipulated in article 4.17 of the Law on Enterprises.

2. Insurers and brokers must implement management and supervision in accordance with the provisions in article 36.2 of Decree 46.

2.1 The  formulation  of  self-management  and  self-regulatory  rules  including  finance  rules,  investment rules, internal control and audit rules, and other equivalent procedural rules by an insurer or broker must ensure the following:

2.1.1 The operation of the enterprise complies with the law on finance applicable to insurers and brokers.

2.1.2 Prevention  and  limitation  of  financial  risks  of  an  insurer  or  broker  must  ensure  that  the  value  of investment assets corresponds to liabilities and the special risks of the enterprise.

2.1.3 There must be a clear deliniation of the responsibilities of managers and executives of the enterprise, of staff, and of relevant agents.

2.1.4 There must be clear rules on taking disciplinary action when there are errors or breaches.

2.2 Insurers and brokers must implement their rules on self-management and self-regulation, and they must conduct checks and supervision on a periodical and one-off basis of compliance with the rules within the enterprise.

2.3 The rules on self-management and self-regulation; and the periodical and extraordinary reports on supervision of implementation of such rules; and reports on dealing with breaches must be stored in a written form in order to service checks, inspection, management and supervision of the enterprise.

3. Internal control rules of insurers and brokers:

3.1 Insurers and brokers must undertake internal control activities.

3.2 The basic principles of internal control shall be as follows:

3.2.1  Independence:  internal  control  activities  must  be  independent  from  executive  and  professional activities of the enterprise.

3.2.2 Objectivity: internal control activities and activities of internal auditors must be objective, honest and fair, and practitioners must not be prejudiced when conducting internal audit tasks.

3.2.3 Professionalism: internal auditors must be people with  professional  skills  and  the  necessary qualifications  for  conducting  internal  audits,  and  they  must  not  concurrently  hold  positions  or undertake  work as other experts within or for an insurance or insurance broking enterprise.

3.3 The work of internal audit shall include checks and assessments:

3.3.1 Internal auditors must check and assess the level of completeness, validity and effectiveness of the internal control and internal audit systems.

3.3.2 They  must  check  the  applicability,  validity  and  effectiveness  of  rules  for  identifying  risks  of  the enterprise, methods for measuring such risks, and risk management methods.

3.3.3 They must check and assess the system of management information and the system of financial information.

3.3.4 Internal auditors must check and assess the completeness, truthfulness, promptness, and level of accuracy of the system of accounts charts and of financial reporting.

3.3.5  Internal  auditors  must  check  and  assess  the  regimes  ensuring  compliance  with  the  law,  with  the regulations on establishment of reserves, the regulations on investment, the regulations on solvency of the enterprise, and ensuring compliance with all internal rules and procedures, professional rules and professional ethics.

3.3.6 Internal auditors must undertake other tasks relevant to the functions and duties of internal auditors.

3.3.7 Insurers and brokers must formulate professional ethics rules and must ensure that such rules are complied with during internal audit work.

3.4 Within a time-limit of six (6) months from the date on which this Circular takes effect, insurers and insurance brokers must report to the Ministry of Finance on their having implemented the provisions on internal audit in this Circular.

4. The annual financial statements of insurers and of insurance brokers must be audited by an independent auditor legally operating in Vietnam, and the auditor must certify the following main financial matters:

4.1 Applicable to insurers:

Activities being acceptance of and ceding reinsurance, establishment of reserves, solvency, commissions, revenue and expenses, profit and distribution of profit, investments made from equity, investments  made  from  reserves,  fixed  assets  and  depreciation,  items  receivable,  debts  payable, equity,  expenses  for  capital  construction  in  progress;  and  separation  of  funds  and  distribution  of surplus from policyholders' funds in the case of a life insurer.

4.2 Applicable to brokers:

Revenue  and  expenses,  profit  and  distribution  of  profit,  investments  made,  fixed  assets  and depreciation,  items  receivable,  debts  payable,  equity,  and  expenses  of  capital  construction  in progress.

IX. REPORTING REGIME

Insurers and insurance brokers shall be responsible to prepare and submit financial statements, statistics reports and professional reports in accordance with the applicable laws.

1. Financial statements:

1.1 Insurers  and  insurance  brokers  shall  carry  out  financial  finalization,  comply  with  all  regulations relating to financial statements, and prepare and submit reports to the State financial authority, to the statistics authority and the tax authority in accordance with the applicable laws.

1.2 Balance sheets,  profit  and  loss  statements,  cash  flow  statements  and  explanations  of  financial statements prepared in accordance with the law on accounting must be certified by an independent auditor licensed to operate in Vietnam.

1.3 Insurers and brokers must prepare and submit financial statements to the Ministry of Finance on a quarterly and annual basis, enclosing a soft copy.

2. Statistics reports and professional reports: Insurers and insurance brokers shall prepare and submit the  following  statistics  reports  and  professional  reports  to  the  Ministry  of  Finance  on  a  monthly, quarterly [and/or] annual basis, enclosing a soft copy:

2.1 With respect to non-life insurers:

2.1.1 Report on monthly operational results in Form 1-PNT.

2.1.2 Report on premium revenue on a quarterly and annual basis in Form 2-PNT.

2.1.3 Report on economic indicators on a quarterly and annual basis in Form 3-PNT.

2.1.4 Report on claims paid on a quarterly and annual basis in Form 4-PNT.

2.1.5 Report on establishment of insurance reserves on a quarterly and annual basis in Forms 5-PNT(A) and 5-PNT(B).

2.1.6 Report on investment activities from owner's capital on a quarterly and annual basis in Form 6- PNT(A).

2.1.7 Report on investment activities from insurance reserves on a quarterly and annual basis in Form 6- PNT(B).

2.1.8 Report on solvency on a quarterly and annual basis in Form 7-PNT.

2.1.9 ASEAN Report on an annual basis in Form 8-PNT.

2.2 With respect to insurers specializing in reinsurance, in addition to the above reports in Forms 5-PNT, 6-PNT(A) and (B), 7-PNT and 8-PNT, the following reports shall be prepared and submitted:

2.2.1 Report on reinsurance premium revenue on a quarterly and annual basis in Form 1-TBH.

2.2.2 Report on reinsurance compensation payments on a quarterly and annual basis in Form 2-TBH.

2.3 With respect to life insurers:

2.3.1 Report on monthly operational results in Form 1-NT.

2.3.2 Report on the number of life insurance contracts and sums insured of life insurance on a quarterly and annual basis in Form 2-NT.

2.3.3 Report on life insurance premium revenue on a quarterly and annual basis in Form 3-NT.

2.3.4 Report on payment of life insurance proceeds on a quarterly and annual basis in Form 4-NT.

2.3.5 Status report on rescinded contracts of life insurance on a quarterly and annual basis in Form 5-NT.

2.3.6 Report on establishment of insurance reserves on a quarterly and annual basis in Forms 6-NT(A) to 6-NT(E).

2.3.7 Report on investment activities from owner's capital on a quarterly and annual basis in Form 7-NT(A).

2.3.8 Report on investment activities from insurance reserves on a quarterly and annual basis in Form 7- NT(B).

2.3.9 Report on solvency on a quarterly and annual basis in Form 8-NT.

2.3.10 ASEAN Report on an annual basis in Form 9-NT.

2.4 With respect to brokers: Report [on insurance brokerage operations] on a quarterly and annual basis in Form 1-MGBH.

3. Time-limits:

3.1 Monthly reports: Insurers must prepare and submit monthly reports to the Ministry of Finance no later than fifteen (15) days after the last day of the month.

3.2 Quarterly reports: Insurers and brokers must prepare and submit quarterly reports to the Ministry of Finance no later than thirty (30) days after the last day of the quarter.

3.3 Annual  reports:  Insurers  and  brokers  must  prepare  and  submit  annual  reports  to  the  Ministry  of Finance no later than ninety (90) days after the last day of the fiscal year.

4. In addition to the reports mentioned in clauses 1 and 2 above, the Ministry of Finance may require an insurer or broker to provide supplementary reports on operational status and financial status in order to service statistical and market analysis work.

5. Inspection and supervision of compliance with the financial regime:

Boards of management and general directors (directors) of insurers and brokers shall be responsible to give an account of related financial matters at the request of State administrative bodies when the latter exercise State administration in accordance with law.

5.1 Insurers  and  brokers  shall  themselves  be  responsible  for  the  accuracy  and  truthfulness  of  their financial  statements,  statistics  reports  and  professional  reports.  Financial inspection  shall  be conducted in the following ways:

5.1.1 Periodic or random inspections.

5.1.2  Inspections  of  each  specialized  area,  depending  on  the  requirements  for  the  work  of  financial management.

5.2 Insurers and brokers in breach of the State financial regime shall be dealt with in accordance with law.

XII. PUBLIC ANNOUNCEMENT OF INFORMATION BY INSURERS

1. The items within the financial statements of an insurer or broker which must be publicly announced on  an  annual  basis  are  the  annual  report  (Form 1-CBTT)  and  summarized  financial  statements (Form 2-CBTT).  The public announcement of these items must be accompanied by the opinion of an independent auditor.

2. Insurers  and brokers  must make  a  public  announcement  of  the  above-mentioned  items  from  their annual financial statements in three (3) consecutive editions of a central newspaper and of a local newspaper in the locality where the enterprise has its head office. In addition to the above, an insurer or a broker may make its own decision on further public announcements of such items on its website; in publications; in written notices to the State administrative bodies; by making an announcement at a press conference; or by making an announcement on central or local radio stations.

3. Insurers  and  brokers  must  make  the  above-mentioned  public  announcement  within  a  time-limit  of one hundred and twenty days (120 days) from the end of the fiscal year.   Within ten (10) business days from the date of the public announcement, the insurer or broker must send the original or a notarized copy of the announcement to the Ministry of Finance.

4. Insurers and brokers must implement the regime on public announcement of information promptly and  accurately  in  accordance  with  law.  Any  insurer  or  broker  which  changes  the  contents  of information  already  announced  must  do  so  correctly  in  accordance  with  the  provisions  and procedures stipulated in clauses 1, 2 and 3 above, and must enclose an explanation of the reasons for the change.

XIII. ORGANIZATION OF IMPLEMENTATION

1. This Circular shall be of full force and effect after fifteen (15) days from the date of its publication in the Official Gazette.

2. This Circular shall replace Circular 99/2004/TT-BTC of the Ministry of  Finance  dated  19  October 2004  implementing  Decree  43/2001/ND-CP  of  the  Government  dated  1  August  2001  providing detailed regulations for implementation of a number of articles of the Law on Insurance Business.

3. Shareholding  insurance  companies  and  shareholding  insurance  broking  companies  issued  with  a licence  for  establishment  and  operation  prior  to  the  date  on  which  this  Circular  takes  effect  must adjust  the  structure  of  their  charter  capital  for  compliance  with  the  provisions  in  section X  of  this Circular within a time limit of three (3) years as from the date on which Decree 46 took effect6.

4. Any  problems  or  difficulties  during  implementation  should  be  reported  promptly  to  the  Ministry  of Finance for its consideration and resolution.