Improvement of Life Insurance Policyholders’ Protection Corporation with Emphasis on Consistency with the Vietnamese Market

6 ) m od el (7 ) m od el (8 ) m od el (9 ) m od el (1 0) D ep en de nt v ar ia bl e M ac ro c ov er ag e ra te Ex pl an at or y V ar ia bl e 1 La bo r: W L: M -W 65 o ve r 65 o ve r 65 o ve r Pa ra m et er -0 .1 14 71 0. 15 04 4 -0 .1 60 74 -0 .0 38 69 0. 08 16 0 t-v al ue -1 2. 96 78 11 .5 13 9 -4 .4 48 1 -0 .7 83 8 4. 37 71 Ex pl an at or y V ar ia bl e 2 － － G D P( 1) G D P( D ) La bo r: W Pa ra m et er － － 0. 00 01 3 0. 00 06 0 -0 .0 90 58 t-v al ue － － 10 .3 27 7 4. 85 57 -9 .3 64 9 C on st an t t er m 8. 35 95 4 -1 .1 15 03 1. 47 92 1 1. 45 31 9 6. 10 98 7 t-v al ue 17 .0 72 5 -3 .8 09 7 6. 48 86 3. 80 98 9. 03 13 A dj us te d fo r d eg re es o f f re ed om R 2 0. 68 46 4 0. 63 08 2 0. 77 20 3 0. 57 98 8 0. 74 54 6 St an da rd e rr or o f t he m ea n 0. 71 95 4 0. 77 85 2 0. 61 17 8 0. 83 04 9 0. 64 64 4 m od el (1 1) m od el (1 2) m od el (1 3) m od el (1 4) m od el (1 5) D ep en de nt v ar ia bl e M ac ro c ov er ag e ra te Ex pl an at or y V ar ia bl e 1 65 o ve r L: M -W La bo r: M La bo r: W L: M -W Pa ra m et er 0. 10 10 5 0. 10 00 5 -0 .0 22 51 -0 .0 63 28 0. 08 19 6 t-v al ue 5. 65 80 7. 79 46 1 -1 .2 32 3 -6 .5 90 8 7. 11 16 Ex pl an at or y V ar ia bl e 2 L: M -W G D P( D ) G D P( 1) G D P( 1) G D P( 1) Pa ra m et er 0. 11 52 1 0. 00 03 0 0. 00 00 8 0. 00 00 5 0. 00 00 5 t-v al ue 9. 10 80 3 6. 70 10 6 11 .7 09 73 7. 50 78 0 9. 38 36 5 C on st an t t er m -1 .5 17 32 -0 .5 89 61 2. 39 21 6 4. 63 80 7 -0 .6 57 20 t-v al ue -5 .9 11 0 -2 .3 98 2 1. 64 86 7. 48 07 -3 .1 95 1 A dj us te d fo r d eg re es o f f re ed om R 2 0. 73 78 1 0. 76 60 0 0. 71 76 0 0. 81 75 5 0. 82 79 2 St an da rd e rr or o f t he m ea n 0. 65 60 8 0. 61 98 1 0. 68 09 0 0. 54 72 9 0. 53 15 1 m od el (1 6) m od el (1 7) m od el (1 8) m od el (1 9) m od el (2 0) D ep en de nt v ar ia bl e LN (M ac ro c ov er ag e ra te ) Ex pl an at or y V ar ia bl e 1 G D P( 1) La bo r: W L: M -W 65 o ve r L: M -W Pa ra m et er 0. 83 04 5 -6 .9 37 76 2. 64 78 1 -0 .4 48 24 1. 90 90 7 Ta bl e 3: E st im at io n re su lts o f m ac ro c ov er ag e ra te s Journal of Economics and Development Vol. 17, No.2, August 201523 m od el (1 ) m od el (2 ) m od el (3 ) m od el (4 ) m od el (5 ) D ep en de nt v ar ia bl e M ac ro c ov er ag e ra te Ex pl an at or y V ar ia bl e 1 65 o ve r G D P( L) G D P( D ) G D P( 1) La bo r: M Pa ra m et er 0. 18 11 2 0. 00 00 0 0. 00 05 1 0. 00 00 8 -0 .1 24 83 t-v al ue 8. 08 11 1. 03 05 10 .4 02 7 13 .9 57 7 -4 .6 57 6 Ex pl an at or y V ar ia bl e 2 － － － － － Pa ra m et er － － － － － t-v al ue － － － － － C on st an t t er m 0. 02 86 1 2. 01 46 3 1. 17 20 0 0. 61 13 0 11 .5 77 96 t-v al ue 0. 10 30 12 .1 19 9 9. 06 18 4. 64 29 5. 67 73 A dj us te d fo r d eg re es o f f re ed om R 2 0. 45 50 8 0. 00 08 1 0. 58 20 2 0. 71 56 8 0. 21 18 3 St an da rd e rr or o f t he m ea n 0. 94 58 4 1. 28 07 9 0. 82 83 9 0. 68 32 2 1. 13 75 3 m od el (6 ) m od el (7 ) m od el (8 ) m od el (9 ) m od el (1 0) D ep en de nt v ar ia bl e M ac ro c ov er ag e ra te Ex pl an at or y V ar ia bl e 1 La bo r: W L: M -W 65 o ve r 65 o ve r 65 o ve r Pa ra m et er -0 .1 14 71 0. 15 04 4 -0 .1 60 74 -0 .0 38 69 0. 08 16 0 t-v al ue -1 2. 96 78 11 .5 13 9 -4 .4 48 1 -0 .7 83 8 4. 37 71 Ex pl an at or y V ar ia bl e 2 － － G D P( 1) G D P( D ) La bo r: W Pa ra m et er － － 0. 00 01 3 0. 00 06 0 -0 .0 90 58 t-v al ue － － 10 .3 27 7 4. 85 57 -9 .3 64 9 C on st an t t er m 8. 35 95 4 -1 .1 15 03 1. 47 92 1 1. 45 31 9 6. 10 98 7 t-v al ue 17 .0 72 5 -3 .8 09 7 6. 48 86 3. 80 98 9. 03 13 A dj us te d fo r d eg re es o f f re ed om R 2 0. 68 46 4 0. 63 08 2 0. 77 20 3 0. 57 98 8 0. 74 54 6 St an da rd e rr or o f t he m ea n 0. 71 95 4 0. 77 85 2 0. 61 17 8 0. 83 04 9 0. 64 64 4 m od el (1 1) m od el (1 2) m od el (1 3) m od el (1 4) m od el (1 5) D ep en de nt v ar ia bl e M ac ro c ov er ag e ra te Ex pl an at or y V ar ia bl e 1 65 o ve r L: M -W La bo r: M La bo r: W L: M -W Pa ra m et er 0. 10 10 5 0. 10 00 5 -0 .0 22 51 -0 .0 63 28 0. 08 19 6 t-v al ue 5. 65 80 7. 79 46 1 -1 .2 32 3 -6 .5 90 8 7. 11 16 Ex pl an at or y V ar ia bl e 2 L: M -W G D P( D ) G D P( 1) G D P( 1) G D P( 1) Pa ra m et er 0. 11 52 1 0. 00 03 0 0. 00 00 8 0. 00 00 5 0. 00 00 5 t-v al ue 9. 10 80 3 6. 70 10 6 11 .7 09 73 7. 50 78 0 9. 38 36 5 C on st an t t er m -1 .5 17 32 -0 .5 89 61 2. 39 21 6 4. 63 80 7 -0 .6 57 20 t-v al ue -5 .9 11 0 -2 .3 98 2 1. 64 86 7. 48 07 -3 .1 95 1 A dj us te d fo r d eg re es o f f re ed om R 2 0. 73 78 1 0. 76 60 0 0. 71 76 0 0. 81 75 5 0. 82 79 2 St an da rd e rr or o f t he m ea n 0. 65 60 8 0. 61 98 1 0. 68 09 0 0. 54 72 9 0. 53 15 1 m od el (1 6) m od el (1 7) m od el (1 8) m od el (1 9) m od el (2 0) D ep en de nt v ar ia bl e LN (M ac ro c ov er ag e ra te ) Ex pl an at or y V ar ia bl e 1 G D P( 1) La bo r: W L: M -W 65 o ve r L: M -W Pa ra m et er 0. 83 04 5 -6 .9 37 76 2. 64 78 1 -0 .4 48 24 1. 90 90 7 t-v al ue 30 .2 99 7 -2 8. 55 29 20 .6 12 7 -2 .8 15 0 8. 29 70 Ex pl an at or y V ar ia bl e 2 － － － G D P( 1) G D P( D ) Pa ra m et er － － － 0. 93 71 0 0. 22 86 3 t-v al ue － － － 20 .3 34 64 3. 74 75 7 C on st an t t er m -3 .2 07 80 12 .1 61 10 -3 .2 96 30 -3 .1 79 32 -2 .9 97 85 t-v al ue -2 8. 68 03 28 .8 83 6 -1 9. 55 83 -2 9. 56 07 -1 7. 14 14 A dj us te d fo r d eg re es o f f re ed om R 2 0. 92 25 4 0. 91 36 1 0. 84 62 7 0. 92 90 1 0. 86 87 9 St an da rd e rr or o f t he m ea n 0. 13 70 7 0. 14 47 6 0. 19 31 0 0. 13 12 2 0. 17 84 0 m od el (2 1） m od el (2 2） m od e （ 23 ） m od el （ 24 ） D ep en de nt v ar ia bl e LN (M ac ro c ov er ag e ra te ) Ex pl an at or y V ar ia bl e 1 L: M -W La bo r: W La bo r: W L: M -W Pa ra m et er 0. 97 01 6 -3 .4 05 39 -3 .2 35 33 0. 90 11 1 t-v al ue 6. 24 07 -7 .5 71 2 -6 .7 70 2 5. 44 28 Ex pl an at or y V ar ia bl e 2 G D P( 1) G D P( 1) G D P( 1) G D P( 1) Pa ra m et er 0. 57 44 7 0. 45 65 0 0. 50 85 7 0. 63 36 0 t-v al ue 12 .2 94 0 8. 51 97 6. 96 24 9. 29 51 Ex pl an at or y V ar ia bl e 3 － － 65 o ve r 65 o ve r Pa ra m et er － － -0 .1 40 36 -0 .1 71 94 t-v al ue － － -1 .0 48 0 -1 .1 88 5 C on st an t t er m -3 .4 35 42 4. 19 99 2 4. 19 99 2 -3 .4 35 42 t-v al ue -3 4. 92 8 4. 27 66 4. 27 66 -3 4. 92 83 A dj us te d fo r d eg re es o f f re ed om R 2 0. 94 83 4 0. 95 55 1 0. 95 55 7 0. 94 86 2 St an da rd e rr or o f t he m ea n 0. 11 19 4 0. 10 38 8 0. 10 38 1 0. 11 16 4 N ot e: T he n am e of e xp la na ti on v ar ia bl es a re s im pl ifi ed a s be lo w : • no m in al G D P ( lo ca l c ur re nc y ba si s) : G D P (L ); n om in al G D P ( do ll ar b as is ): G D P (D ) • no m in al G D P p er c ap it a (U SD b as is ): G D P (1 ); la bo r pa rt ic ip at io n ra te o f m en : L ab or : M • la bo r p ar tic ip at io n ra te o f w om en : L ab or : W , t he d iff er en ce in la bo r p ar tic ip at io n ra te b et w ee n m en a nd w om en : L : M -W , r at io o f o ve r 6 5 pe op le to p op ul at io n in n at io n: 6 5 ov er So ur ce : A ut ho r’ c al cu la ti on b as ed o n da ta fr om : Sw is s R e (2 00 4, 2 01 3) ; T he L if e In su ra nc e A ss oc ia ti on o f J ap an ; L if e In su ra nc e F ac t B oo k (1 97 9- 20 12 ). Journal of Economics and Development Vol. 17, No.2, August 201524 of Model 21 shows a higher similarity to the actual value than that of Model 22. The markets of coverage-based insurance in Japan and Ko- rea are likely to grow as their estimated values exceed the actual values. On the other hand, the Taiwanese market may have become an excessively expanded market as its estimated value is lower than the actual value. Because the estimated value of Vietnam is almost equal to the actual value, the predicted value would be obtained by natural extrapolation. Let’s have a rough estimate of the size of the coverage based insurance market in Viet- nam for the next decade, using Model 21 and Model 22. Nominal GDP, one of the explan- atory variables is divided into GDP deflator and real GDP. From the viewpoint of suppli- ers, the growth rate of the latter is comprised of three elements: (1) growth rate of population; (2) growth rate of capital; and (3) technolog- ical innovation. To obtain extrapolation val- ues, the author assumes that the total growth rate, consisting of the capital growth rate and the technological innovation will decline 0.1% each year from 4.5% to 3.5% 10 years later in 2022, because the total growth rate of Vietnam in 2011 is 4.8% and in a downward trend over the past decade. The population increase is as- Figure 5: Estimation of macro coverage rate Source: Author’ calculation based on data from: Swiss Re (2004, 2013); The Life Insurance Association of Japan; Life Insurance Fact Book (1979-2012). 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 Ja pa n 19 80 19 81 19 82 19 83 19 84 19 85 19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 K or ea 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 T ha ila nd 2 00 4 20 05 20 06 20 07 20 08 20 09 20 10 20 11 V ie tn am 2 00 1 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 T ai w an 2 00 1 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 Actual macro coverage rate Estimated value by Model 22 Estimated value by Model 21 Times Journal of Economics and Development Vol. 17, No.2, August 201525 sumed to be at 1.1% each year, the same as the current level. The growth rate of the consum- er price index is used as the GDP deflator. The deflator is assumed to increase by 8% because the consumer price index increased about 9% on average over the past decade. Consequently, the GDP growth rate of Vietnam in fiscal year 2022 will be 4.7% and the growth rate of the nominal GDP will be 12.5%. The author expects that difference of la- bor force participation rates between men and women in Vietnam follows the pattern of Japan, and will widen by 0.1% each year based on the level of Vietnam (one-third of Japan) compared to the gap growth rate of Japan at 2.8% during the period from 1961 to 1971. Using these ex- trapolation values, the macro coverage rate of Vietnam will increase from 0.18 times in 2012 to a level of between 0.37 times (Model 22) and 0.42 times (Model 21, Estimation 2) 10 years later (in 2023). It is highly likely that the cov- erage-based insurance market will significantly expand in Vietnam in line with rising incomes. When considering the Life Insurance Policy- holders’ Protection Fund in Vietnam, its system should be designed on the premise that the cov- erage-based insurance market will grow in the future. 6. Improvements of the Life Insurance Policyholders’ Protection Corporation in Vietnam In the light of the experience of the Protec- tion Corporation of Japan as stated in Sections 1 and 2, and the estimation of Vietnamese fu- ture life insurance market as stated in Section 4, the Policyholders’ Protection Fund of Viet- nam, at present, seems to have the following four issues. Firstly, it should be ensured that the insur- ance contracts of a bankrupt insurance compa- ny are taken over by a savior insurance compa- ny so that those contracts are maintained. The indemnification levels at the time of bankruptcy are differently defined for the different types of products. The indemnification level for deposit based products is calculated as 90% of the pol- icy reserves to be paid as cash surrender value at the time of the bankruptcy (the balance of ac- count for investment-based insurance) whereas the indemnification for coverage-based prod- ucts is the amount equivalent to the premium corresponding to the period from the time of the bankruptcy to the maturity date of the rele- vant policy. As for coverage-based products, it is highly likely that policyholders may not be able to purchase new products with the same coverage as before since the premiums would increase according to the aging population and health conditions even if the premiums for the remaining period are refunded. As discussed in the previous section, the focus of the household budget is going to shift from savings to cov- erage, and the market of coverage-based prod- ucts is highly likely to rapidly increase in the future. A unique property of life insurance not found in other financial products rests not on deposit function but on coverage function, and, therefore, if a private insurance company fails to fulfill its coverage function, the government will eventually have to play the role of using its welfare policy as it is thought to be a public issue. The financial resources required for cov- erage-based products seem to be smaller than those for deposit-based products, so it is desir- able to change to lay emphasis on the indemni- fication of coverage-based insurance products. Journal of Economics and Development Vol. 17, No.2, August 201526 In Japan, the indemnification rate of policy re- serves for contracts with higher assumed inter- est rates is set to be below 90% to give priority to the protection of coverage-based products The second point is how to secure financial resources for the Protection Fund. Life insur- ance companies provide their contributions to the deposit system every year in advance un- til the total amount reaches 3% of their total assets. The funds deposited like this, however, are not enough if insurance companies fall into bankruptcy in series like those that happened in Japan. This is why new systems are needed to increase the burden of policyholders and bor- row funds temporarily from external sources. Furthermore, it is important to enable the in- jection of public funds in preparation for the need of a larger amount of funds, although the probability of the occurrence is low. In Japan, during the period from April 2006 to March 2009 when the bankruptcy risk of insurance companies surged, a regulation was enforced to allow the Protection Corporation to receive financial support from the government in an amount exceeding 460 billion yen which was contributed by the private sector. Government guarantees were also available for private debts as appropriate. Furthermore, policyholders of a bankrupt insurance company are certainly victims who should be relieved, but at the same time, are responsible for having selected the insurance company. It is necessary to not only reduce policy reserves but also to lower assumed in- terest rates which should be reflected in future amounts of coverage. The financial resource of the Protection Fund comes from policyholders of sound insurance companies, and their bur- den should be lightened as much as possible, whereas an increase in the burden on policy- holders of bankrupt insurance companies is un- avoidable. A reduction of assumed interest rates leads to a decrease in the coverage amounts of de- posit-based insurance contracts, which con- sequently protect coverage-based insurance contracts rather than deposit-based insurance contracts. As analyzed in Section 4, the Viet- namese market of coverage-based products is likely to achieve explosive growth;, the focus of the Protection Corporation on the protection of coverage-based insurance contracts is high- ly consistent with the market in the future. In Japan, in order to squeeze down the costs re- quired for bankruptcy processing, the assumed interest rates are cut from 3 to 5.5% of the orig- inal interest rates to about 1%, as shown in the line of “Assumed Interest Rates after Reduc- tion” in Table 1. As a matter of course, before imposing a heavier burden on policyholders including re- ductions in policy reserves and assumed inter- est rates, sufficient information must be made available to consumers so that they are able to select an appropriate insurance company. It is necessary to ensure that insurance companies disclose their information. In other words, a full-fledged information disclosure system ap- plicable to insurance companies must be devel- oped as a prerequisite to the establishment of a policyholder protection system under which policyholders are required to share the burden. The Insurance Business Act of Japan im- poses information disclosure on insurance companies, and they must prepare disclosure documents to describe their businesses and as- Journal of Economics and Development Vol. 17, No.2, August 201527 sets each year. The disclosure documents are available not only on the websites of respective insurance companies but are also kept in their head offices, branches, field offices and other business sites so that the information is easily accessed by various policyholders. In order to encourage life insurance companies to disclose further information, the Life Insurance Associ- ation has established the “Disclosure Criteria” that require insurance companies to voluntari- ly disclose items that are deemed necessary as well as the items specified by the law. Thirdly, to reduce the costs necessary for the contract transfer, the Protection Fund is re- quired to have the skills needed for the evalu- ation of goodwill value and assets to the sat- isfaction of a savior life insurance company, which are to be performed after the calculation of the shortfall of the bankrupt insurance com- pany and estimation of expected earnings that a savior insurance company would gain from the transfer. The Protection Fund should start now developing human resources with such expertise. Fourthly, Vietnam must establish an effective system for judging the soundness of insurance companies in order to detect any bankruptcy of an insurance company in advance and respond to it at an early stage, while developing the sys- tem of the Protection Fund. Solvency margin requirements were established under the law in 2007 in Vietnam; still, the key point is to con- tinuously validate the existing prudential regu- lations and reflect any changes in the market on the soundness index. 7. Conclusion The life insurance market in Vietnam is small in size at present, however, it is highly likely to experience a rapid expansion, mainly in the coverage-based insurance market, in line with the future economic growth of the country. The current approach of the Protection Fund in which insurance contracts are terminated just by paying compensation to the policyholders should be replaced by a new one in which it lays emphasis on the characteristics of the mar- ket in the future and operates on the premise that it “takes over contracts” of bankrupt in- surance companies. In particular, the establish- ment of a protection fund system based on the continuation of coverage is important for cov- erage-based products, and would enhance the confidence of consumers in life insurance. This proposition is applicable not only to Vietnam but also to other Asian countries in which life insurance markets are going to show huge expansion. The author hopes that the Life Insurance Policyholders’ Corporation of Viet- nam will serve as a model for other countries and would be grateful if this paper makes some contribution to it. References　 Finance Service Agency (2008), Bankruptcy of Yamato Life, Policy reports, pp. 1-9. Kubo H. (2005), The new current and future image of life insurance business in Japan, Chikura Publishing Co. Tokyo. Swiss Re (2004), World insurance in 2003. Swiss Re (2013), World insurance in 2012.