Customers at a Bao Viet Holdings’ office in the northern city of Hai Phong. (Photo: VNA) It isfeasible for insurers to continually increase profits this year as the majorityof their investment portfolios are bank savings and government bonds, whoseinterest rates are forecast to remain at high levels in the year.
According tothe current legal regulations, insurers have to use at least 70% of theircapital to deposit at banks or buy government bonds to ensure the insurers’capital safety. Therefore, the current high interest rates of the two channelsare an advantage for insurers to increase their profits.
As theinterest rate hike trend is forecast to remain in 2023, financial activities ofinsurance companies are expected to continually record positive results thisyear.
The USFederal Reserve (Fed) last year raised interest rates by a total of 4.25-4.5%per year to curb inflation, the highest rate since January 2008. Fed isexpected to continue increasing interest rates in the first quarter of 2023.
The Fed’sinterest rate hike caused the money flows to change. Investors have graduallywithdrawn in most of the emerging and frontier countries and returned to theUS. This pushed the US dollar Index to 104.2 points on December 27 last year,up by 8.6% compared to the beginning of 2022.
Facing thepressure of local currency devaluation, as well as the withdrawal of investmentflows, most countries have had to raise interest rates. Vietnam is noexception, especially when the market is thirsty for capital with the creditgrowth increasing faster than the capital mobilisation growth. To cope with thedifficulties, the State Bank of Vietnam (SBV) increased policy interest ratestwice in September and October 2022, by 1% per year each time.
Under theSBV’s move, the interest rates for 12-month term deposits at banks in 2022increased by 2-4% per year on average. For example, the 12-month interest rateat BIDV is currently 7.4% per year from 5.5% at the beginning of 2022. Similarly,the rate rose from 5% to 9.1% per year at VPBank, from 5.8% to 8.9% per year atSacombank, from 5.5% to 7.4% per year at Vietcombank.
The savingsinterest rates are forecast to remain high or even increase higher in thenext six months to 12 months.
As interestrates are high, borrowing costs are expensive, and economic growth is slowing.It is currently a tough time for most businesses. However, this is anopportunity for businesses, including insurance companies, which own a largeamount of cash.
Statisticsof seven listed insurance companies, including Bao Viet Holdings (BVH), BaoMinh Insurance Corporation (BMI), Petrovietnam Insurance Corporation (PVI),Vietnam Reinsurance Corporation (VNR), Post and Telecommunications InsuranceCorporation (PTI), Petrolimex Insurance Company (PGI) and Military InsuranceCorporation (MIG), showed by the end of the third quarter of 2022, thecompanies had more than 127.5 trillion VND in cash. The cash was short-termfinancial investments with mainly short-term bank savings, which accounted forsome 42% of the companies’ total assets.
As theshort-term savings interest rates of banks have been consecutively adjusted up,especially at the end of September and October last year, the 127.5 trillion VNDshort-term financial investments of the insurers have earned significantprofits.
According toexperts, the financial revenue of insurers often depends on the interest ratesof the market. When interest rates increased, the financial revenue of theinsurers increases and vice versa.
Data from VietDragon Securities Company (VDSC) also showed interest rates tended to go up inthe 2009-11 period. They then slowed in the 2011-15 period, and increasedagain since 2016.
Thefinancial revenue of insurers was also under the same move in the periods. Thefinancial revenue of three typical insurance companies, including BVH, BMI andPVI, also increased from 2009 to 2011, when the interest rates rose in thedomestic market. In the period of interest rate decline in 2012-2015, thefinancial revenue of the insurers slowed before increasing again in the 2017-2019period.
In fact,besides the insurance business segment, the financial revenue of insurancecompanies is often high compared to their total pre-tax profit. Specifically,at BVH, in the 2008-2021 period, the insurer’s ratio of financial revenue topre-tax profit averaged 339.7%. The ratio at BMI and PVI was 102.5% and 150.7%,respectively.
According toNgo Viet Trung, Director of the Ministry of Finance’s Insurance SupervisionAdministration, despite difficulties and challenges of the economy after theCOVID-19 pandemic, insurance companies adapted proactively and flexibly,helping the country’s insurance market maintain a good growth rate in 2022.
As ofDecember 12, 2022, insurance premiums in Vietnam increased 15.1%year-on-year to more than 251.3 trillion VND, of which 68.2 trillion VND wasfrom non-life insurers and 183.10 trillion VND from life insurers.
By December12, the total assets of insurance companies grew by 14.51% against thebeginning of the year to 811.31 trillion VND, while equity reached 162.81trillion VND, up 3.83%.
The numbersare positive in the current context, Trung noted, adding insurance companieshave actively improved their competitiveness and expanded their operationarea./.
VNA
