Competition becoming fierce in non-life insurance market

Besides the turnover figure of 8,241 billion dong and growth rate of 28 percent in the first six months of 2010 (according to the Vietnam Insurance Association – VIA), the competition continues to happen, despite harsh lessons on the losses of insurance business in the years of 2008 and 2009. The main reason for those losses was cutting premium rates and widening coverage to win contracts.

Representative of a non-life insurance company on condition of not to be named admitted that the competitive situation in Vietnam’s non-life insurance market becomes increasingly difficult to control. While in life insurance sector, the majority is 100 percent foreign owned companies or joint ventures, using international technology standards for premium calculation programmes, it is different in non-life insurance sector. Nineteen out of 28 non-life insurance firms in the market are Vietnamese; the market grows spontaneously without specific criteria to determine the premium rates. The premium offered for a service is usually based on market experience and strategy of each company to win the market shares.

Meanwhile, as a precedent, the new small firms, in order to ensure the targets of winning customers and market shares, have no other choice than lowering the premium rates to the non-technical level. This has affected strongly the healthy competition between firms, broken the technical criteria in determining the premium. It some times affects the customers themselves, since low premium rates do not mean good quality customer service as well as safe reinsurance policy to ensure the solvency of the business in the event of large losses.
general director of a top 10 insurance company shared that while the premiums of some products of this company have been priced at a very close to the reserve prices before being applied, other companies even set their prices at 20 to 30 percent lower.

A representative of another insurance firm disclosed that premium rate for construction and installation insurance has declined by 20 to 30 percent compared to the premium applied for the same product five years ago; premium applied for all risk property insurance also fell by about 30 to 40 percent.
Similarly, the premiums applied for motor vehicle insurance and personal accident insurance have gone down by 30 to 40 percent, 50 percent lower than the average premium rates offered in other countries in the region. However, for technical assets insurance, since the calculation of premium rate depends on the standard charge which meet technical requirements of the reinsurance companies in overseas, the competition of this product line thus is still in the limit and controllable.

This representative added that regarding motor vehicle and personal accident insurance policies, insurance firms are more active in pricing, since the risks of these products are covered in their reserve funds. Additionally, these two major products account for large proportion of total revenue of insurance firms (over 40 percent). Thus, they are the segments that have the most intense premium competition.

In fact, many factors should be put in consideration, if calculating premium is based on technical standards. Those factors include the nature and location of each risk, history of losses of the product and the customer, reinsurance programmes, and business strategy of each insurance business. If only focusing on winning customers and bypassing the technical elements, the business would surely suffer losses. Certainly, some businesses had to compete by lowering costs when they first entered the market, in order to achieve the target of market shares and source of customers. However, after having a certain stable number of customers, and developing towards a sustainable direction, the business must focus on efficiency. On the current non-life insurance market of Vietnam, only 50 percent of the firms are profitable from their original insurance side. Most other businesses use incomes from investment activities to offset losses of the insurance business. Businesses in top 10 have shifted from developing by scale to developing towards efficiency and sustainability. Therefore, the competition by lowering premium charges will not last for long and is not the long-term effective competition method.

Moreover, businesses can hardly offer premium rates lower than the risk level of Vietnam’s market. VIA warned that it is easy to lowering premiums, but extremely difficult to increase them. Increasing premium leads to lower turnover, customers losing, and may break the competition law if the firms simultaneously push up premium rates. – Dau tu chung khoan

Tags: non-life insurance market, Vietnam insurance, Vietnam insurance industry, Vietnam insurance market

Posted by VBN on Aug 25 2010. Filed under Insurance. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry