However, the State Bank of Vietnam (SBV) has repeatedly cautioned commercial banks (CBs) against forcing insurance on people who need loans.
Banks as insurance agents
The State Bank of Vietnam has told all the banks to review the whole system and strictly punish those bank employees who force customers to buy insurance, which is not really necessary for them, before issuing them a loan.
This is not the first time SBV has given such an order. Yet for several years now a large number of bank employees are continuing to sell Life Insurance policies to customers seeking loans, as bancassurance is a huge temptation for banks. During the first quarter of 2022 for instance, consolidated pre-tax profits at VPBank reached VND 11,146 bln, an almost threefold year-on-year increase with a considerable profit coming from the prepaid fee by AIA Life Insurance Co., Ltd. under an exclusive insurance agreement.
Previously, similar big business deals have been signed. In late 2020 for instance, VietinBank entered into an exclusive 16-year agreement which permitted the bank to distribute Manulife Company products for an estimated fee of USD 250 mln for four years. ACB also signed an exclusive agreement with Sun Life Vietnam Co., Ltd. for a fee of up to USD 370 mln phased over a period of 15 years, which is around VND 560 bln per year, beginning in 2021. Vietcombank has also agreed to work with FWD for 15 years for a total fee of about VND 9,000 bln.
A statistic report by Yuanta Securities Vietnam shows that bancassurance made up 37% of the fee income of the listed banks in 2021. It is expected that bancassurance income will be about 50% of the total fee income of the entire banking system in 2025. These figures indicate that bancassurance is lucrative for banks. In return, they have to guarantee sales for insurance companies. This is why banks have been so active in selling insurance products in recent years. Statistics by the Insurance Association of Vietnam (IAV) show that the total insurance sales in 2021 reached VND 217,000 bln, of which new sales were VND 49,500 bln and insurance sales through the bancassurance channel made up 39% of the total new sales.
Studies show that the worldwide bancassurance sales totaled USD 1,300 bln in 2021, and Vietnam made up only 0.1% of the global bancassurance market. The big difference means there is plenty of room for bancassurance to grow. By nature, bancassurance services benefit four parties, namely, the insurance companies, banks, customers, and the nation. In the economic restructuring plan for the 2021 to 2025 period, regarding the development of the insurance market, the Government aims at having 15% of the population on life insurance by 2025, which was only 11% in 2021. The life insurance and non-life insurance sales are expected to reach 3.5% GDP in 2025, when it was only 2.7% in 2020 and about 3.3% in 2021.
However, most customers do not clearly understand the benefits of insurance policies. In an effort to encourage customers to buy insurance products through the bancassurance channel, several banks offer interest rates which are 0.2% to 0.8% lower than ordinary rates if customers agree to buy life insurance products. Some banks are short of credit room and tell customers that they will provide loans if customers agree to buy insurance products worth between three and five percent of their total loan and say that it is part of the bank rules. This has led customers to be forced to buy insurance products worth at least 5% or even 10% of their loans.
Banks use a trick to force customers to buy insurance products, and customers also have a way to deal with it. Lots of customers have chosen to cancel insurance packages purchased through the bancassurance channel after paying the first-year premium. The subsequent cancellation does not affect the loans, and the borrowers consider the insurance purchase as a fee for the loans they take out.
The limited credit room for the year 2022 has resulted in a raging thirst for capital everywhere, with increased interest rates, making it extremely hard for borrowers. In addition, borrowers are forced to pay a premium for an insurance policy, causing them to bear an unnecessary burden. In contrast, the bank employees are responsible for the sale of insurance, but only a few employees fully understand the insurance products and can give useful and correct advice to the customers. Most of them simply want to sell insurance to fulfill their responsibility. Worse still, some bank employees have made it an obsession, and have had to quit or change their jobs because they cannot stand the pressure of the work.