Vietnam: What is the concept of technical reserve for life insurance? What are the regulations on the method and basis for setting aside technical reserves for life insurance?
What is the concept of technical reserve in Vietnam?
Pursuant to the provisions of Clause 1, Article 97 of the Law on Insurance Business 2022, the concept of technical reserve is defined as follows:
Technical reserve is a sum of money that an insurance company, reinsurance company, or foreign branch in Vietnam needs to set aside to serve the purposes of paying for insured liabilities that may arise from insurance contracts that have already been entered into.
What does the technical reserve for life insurance in Vietnam include?
Pursuant to the provisions of Clause 2, Article 40 of Decree 46/2023/ND-CP, the technical reserve for life insurance in Vietnam includes:
- Mathematical reserve: Used to pay out claims for the liabilities as committed upon the occurrence of insured events.
- Unearned premium reserve: Used to pay out claims that will arise during the validity of the insurance policy in the following year;
- Claim reserve: Used to satisfy those claims that have not been reported, or have been reported to the company but not yet resolved or paid at the end of the fiscal year;
- Profit distribution reserve: Used to pay the profit that the insurer has agreed with the insurance policyholder in the insurance policy;
- Reserve to secure committed interest rates: Used to secure the committed interest rates that the insurer/reinsurer/branch pays customers as agreed in the universal life insurance and retirement insurance policies;
- Equalization reserve: Used to pay out claims when the insured event occurs due to large fluctuations in the risk ratio and technical interest rate.
What are the regulations on the method and basis for setting aside technical reserves for life insurance in Vietnam?
Pursuant to the provisions of Article 41 of Decree 46/2023/ND-CP on the method and basis for setting aside technical reserves for life insurance in Vietnam as follows:
Technical reserve | Method and basis for setting aside |
Mathematical reserve for term life insurance, pure endowment insurance, endowment insurance, whole life insurance, and annuities | Life insurers, life reinsurers, branches of foreign life reinsurers may actively choose the method of setting aside mathematical reserve for insurance policies with a term of more than 1 year to meet their future insurance liabilities such as: Gross premium valuation reserve, net premium valuation reserve, Zillmer adjustment, or other methods in conformity with international practice; - Basis for setting aside reserves of the methods at Point a, Clause 1 of this Article, includes: Mortality Table CSO1980, technical interest rates based on average interest rates of Government bonds for the period of at least 10 years, and other technical bases corresponding to each insurance product. |
Mathematical reserve for universal life insurance products, unit-linked insurance, retirement insurance, and mathematical reserve includes: | - Insurance loss reserve: The higher of the two reserves, as calculated by the unearned premium method or the cash flow method, to meet the liability from future claims it will have to pay out on during the term of the policy; - Technical reserve for the universal life insurance is calculated based on: Either the cash surrender value of universal life insurance policies plus a reserve for paying out expected claims in a period upon the occurrence of insured events, or total value of the universal life insurance policies. The insurer is responsible for evaluating and selecting the method of setting aside a technical reserve for the universal life insurance to meet the liabilities committed under the insurance policy; - Technical reserve for the unit-linked insurance, including: Total number of units of the policyholder on the date of valuation multiplied with the buying price of the units; Total insurance premium received from the policyholder on the date of valuation, less charges imposed on the policyholder, this remaining amount is used to buy unrealized units; - Technical reserve for retirement insurance is total value of the retirement insurance account on the date of setting aside the reserve; - Reserve for other insurance benefits, except insurance risk benefits and investment benefits. |
Unearned premium reserve | To be calculated based on the gross premium valuation in a method specified in clause 1 Article 39 of Decree 46/2023/ND-CP as for insurance policies with the term of 1 year or less, including: - ratio of reserve to total premium; or - the coefficient of the insurance policy term. |
Claim reserve will be set aside based on | - Statistics on claims; - Claims ratio. |
Profit distribution reserve includes | - Reserve for disclosed profits is the sum of cash amounts or the present value of disclosed accumulated dividends distributed to among policyholders until the current fiscal year and unpaid; - Reserve for undisclosed profits: Reserve for undisclosed profits is set aside to pay profits to be distributed to policyholders in the future. This reserve is equal to assets of the policyholder fund less the fund’s debts, supporting fund of the owners, and profits that have been distributed in the current year. |
Reserve to secure committed interest rates: | In case the investment market fluctuates or the expected investment returns from insurance premiums are lower than the committed interest rates, the insurer shall set aside a reserve to secure committed interest rates. The reserve amount is equal to the difference between the expected investment return from the insurance premium and the committed interest rates of the insurer to the customer as agreed in the insurance policy. |
The equalization reserve | The equalization reserve is set aside based on the percentage of profit before tax of the life insurer, life reinsurer, or branch of foreign life reinsurer. |
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