The Insurance and Reinsurance Law Review: Cambodia
The insurance market in Cambodia is entering its seventh stage of development and is still improving.
The first stage began in 1992 with the introduction of the Law on Insurance,2 which can be viewed as the rebirth of the insurance industry after many years of war. Three companies obtained licences within the subsequent three years.3 However, most of the business consisted of acting as insurance brokers and almost no risks were retained in the country. The Law on Insurance was abrogated in 2000 and again in 2014. The new Law was promulgated on 4 August 2014.4 Any references to the Law on Insurance in this chapter refer to the 2014 version.
The second stage required the government to strengthen the industry by the design of two main tools: a new law in 2000 to increase the solvency and capital requirements, and the establishment of a state-owned reinsurance company.5 The latter also had the purpose of retaining part of the reinsurance premiums in Cambodia6 and to offer a local reinsurance option to the Cambodian insurers. Following this new law, two general insurance companies obtained their licences in 20077 and in 2015.8
In the third stage, banks' affiliated insurance companies entered the market from 2007 to 2009,9 as the fast-growing banking industry required insurance to cover the assets provided as collateral. This stage is currently reinvigorated thanks to three financial groups proposing bank, general insurance and life insurance services.10
Until 2010, the market was limited to non-life insurance businesses (i.e., general insurance and reinsurance), but continued to maintain low retention rates.
The fourth stage occurred in 2011. General insurance companies could have satisfied themselves in playing a limited role, providing standardised and limited insurance policies to the urban middle class while still getting a profit at the level of their investments.11 However, the government considered it a priority to offer access to insurance to the rest of the population. Without waiting for a new law, and on the basis of non-governmental organisations' experiences12 and comparative studies, it passed one temporary ministerial order to start micro-insurance in Cambodia. After the Ministry of Economy and Finance (MEF) granted the first micro-insurance licence,13 seven others followed in quick succession from 2014 to 2017,14 which were mainly in health and life, often in partnership with micro-finance institutions. The first life micro-insurers played a very strong role in promoting insurance. A micro-insurance business is sustainable only by selling products to the mass market; micro-insurers have opted to use the three best methods available to promote their insurance policies to those in Cambodia who can afford to pay a small amount of premium: by using micro-finance institutions (MFIs) networks, selling to companies and factories, and retailing through mobile technology.
The first method consists of using the very wide MFI networks to propose credit-life insurance by paving the way for bancassurance activity. This approach was fruitful but has been jeopardised by a series of new regulations mainly originating from the National Bank of Cambodia.15
This strategy also generated something unexpected: it opened up a new business opportunity for the non-bank affiliated general insurance companies, which identified risks that they were financially able to underwrite by themselves.
This unexpected competition in their own market (the indigent population) led micro-insurers to the second method, which was to start competing with general insurers in the general insurers' own market by selling group personal accident and group health insurance policies to companies and factories to cover their employees. The viability of this last segment was endangered by the National Social Security Fund (NSSF), which since 2016 has covered healthcare of employees, in addition to work-related accidents. Since the end of 2017, it has been compulsory for every employer to contribute to the NSSF for both accident and health schemes. Recently, the government issued a sub-decree putting in place a pension scheme, details of which are mentioned in the seventh stage below.
The third method used by micro-insurers to target the poor is to work with telecommunication operators to sell insurance products using mobile technology. Even with the worldwide leader in insurance products operating here, using mobile technology for insurance distribution (i.e., Bima), micro-insurers are facing competition from other general and, recently, life insurance companies in this area.
The fifth stage began in 2012 and led to the introduction of the life insurance industry, which was a significant move in the market and recognised by the government as necessary. To introduce life insurance, the government relied on two main pillars: the new regulation (passed in 2014) and the establishment of a state-owned life insurance company.16
While non-life insurance companies, like other industries in Cambodia, remain mainly regional in their shareholding (including companies from Singapore, Indonesia, Thailand, Malaysia, Hong Kong and Vietnam), leading worldwide life insurance companies entered into the Cambodian market soon after life insurance was introduced in 2012 and the flow of companies has been steady since then. The MEF granted licences to Manulife,17 Prudential,18 AIA19 and Dai-Ichi Life,20 while four Asean life insurers obtained their own licences.21 A Malaysian insurance participant, Etiqa Group, entered the Cambodian life and general insurance market earlier in 2019.
Life insurers have undoubtedly become the main participants in the insurance industry; by investing a lot, through the mounting of large advertising campaigns, they have generated new interest for insurance in the general population. Since 2013, life insurers have experienced exponential growth, with endowment policies accounting for 84 per cent of the market share in 2020, while term life increased from 4 per cent to 5 per cent between 2019 and 2020.22
The sixth stage of development started in 2017 and is concomitant with the massive Chinese investments in the Kingdom and the will of several local tycoons involved in the financial industry to diversify their investment to insurance concerning both general23 and life activities.24
The seventh stage commenced in January 2021 with the Law on the Organisation and Functioning of the Non-Banking Financial Services Authority (the NBFSA Law), establishing a new independent regulatory authority for the non-bank financial system, including the entire insurance system in Cambodia; the NSSF is also putting in place a long-awaited pension scheme, which was previously only available to public servants.
On 4 March 2021, the government issued Sub-Decree No. 32 on the Social Security Scheme on Pension for All Persons Governed under the Labour Law. According to this Sub-Decree, employers, or owners, of all establishments and enterprises that have at least one or more worker or employee have a duty to register with the NSSF pension scheme within 30 days of the date the Sub-Decree came into force, except for those who have already registered their health insurance scheme and employment injury scheme with the NSSF.
Employers and owners are responsible for the registration of their workers and employees with the NSSF within the first three days of their employment. In addition, the pension scheme contribution will be borne by both the employers, or owners, and the workers or employees. For the first five years, the contribution payment will be equivalent to 4 per cent of the worker or employee's salary, of which 2 per cent will be borne by the employer or owner and the remaining 2 per cent by the worker or employee. The contribution will be made on a monthly basis, and the employers or owners have the duty to collect and pay into the NSSF bank account both their portion of the contribution and the portion due from the workers or employees, no later than the 15th of the following month, and to submit a report to the NSSF on the number of their workers or employees, no later than the 20th of the following month.
Insurance intermediation has grown very slowly. Until 2007,25 only one insurance agent and one insurance broker were duly registered. But since 2015, Cambodia has been facing an unstoppable flow of new brokers.26 In 2020, about 80 insurers and other insurance operators were registered with the MEF. Although bancassurance suffers from inconsistencies between banking, and insurance regulations and practices, many banks, MFIs, financial leasing companies, as well as telecommunication operators, have been granted insurance agent licences.27 However, the number of insurance agents operating as a main activity remains very low and has even decreased because of onerous legal requirements.
With the exception of the General Insurance Association of Cambodia, which was established in 2005 and became the Insurance Association of Cambodia in 2013 (to include life and micro-insurers), brokers are also seeking to establish an association to protect the interests of their profession.
Despite the fact that the insurance market is still nascent, Cambodia has many assets, even if pitfalls exist. The following are key assets of the Cambodian insurance market:
- Cambodia has an insurance penetration rate of only 10 per cent of the population,28 and its middle class is the fastest growing in the Association of Southeast Asian Nations;
- a very fast premium growth rate of 20 per cent per year during the past 15 years, the significance of which should nevertheless be minimised because of the very low amount of premiums (US$143 million in 2017 compared to US$113.6 million in 2016), and which has largely been boosted by the very recent life insurance segment. As at the third quarter of 2020, there was growth of 8.2 per cent in insurance premiums compared to 25 per cent in 2019 (US$201.7 million compared to US$245.8 million in 2019 and US$196.4 million in 2018).29 However, the life insurance segment slowed down within the first three quarters in 2019 and in the third quarter of 2020, with an increase of 7 per cent in 2019 but only 2.8 per cent in the third quarter of 2020, compared to the 35 per cent increase seen in 2018.30 Although the insurance market continues to develop positively in Cambodia, growth has fallen because of covid-1931 and a very strict interpretation of the law applicable to bancassurance.
- very few businesses subscribe to insurance policies to cover their risks and when they do it is generally through a fire insurance policy that the banks require for granting loans;32
- while some foreign businesses are covered in Cambodia through their worldwide policies, any risk in Cambodia must be underwritten by a duly authorised insurance company. Sanctions were drastically increased with the Law on Insurance, but unauthorised insurance activity remains an issue; and
- more generally, the existing legal framework offers notable incentives that foreign investors might not be entitled to in neighbouring countries. This includes no restriction on foreign ownership, no local joint venture requirement, free repatriation of benefits, no exchange control and minimum currency risk owing to a highly dollarised economy.
Along with these opportunities and the government's best efforts to promote the industry, this chapter will examine some of the main concerns that actors are facing, mainly owing to the very recent, and sometimes not fully detailed, insurance legislation.
i Insurance regulator
The MEF has always been the authority competent to issue regulations and to manage and control the conduct of insurance businesses. An insurance business is not clearly defined by law, but the term is widely interpreted.
Until 2021, insurance supervision was delegated to the Insurance and Pension Division of the General Department of Financial Industry, which also managed an Insurance Industry Development Fund for promoting, supporting and encouraging the dissemination of interests in insurance to the public.
Although the Insurance Strategic Plan 2011–2020 foresaw the establishment of an independent insurance commission by 2020, it contained no plan to merge the regulatory bodies of the insurance business (i.e., the MEF), the securities market (i.e., the Securities and Exchange Commission of Cambodia) and the banking sector (i.e., the National Bank of Cambodia) under only one supervising authority.
Promulgated on 16 January 2021, the NBFSA Law has not only created a specific regulatory body for the insurance sector, but also aims to regulate and supervise the non-banking financial sector in Cambodia, including the insurance and national social security sectors.
Purpose of the NBFSA Law
The non-banking financial sectors covered by the NBFSA Law are: insurance, private pensions, the securities exchange, social security, public administration, accounting and auditing, real estate, pawnshop and collateral contributions.
The purpose of this new Law is to improve and ensure the efficiency of the management, monitoring and development of the non-banking financial sector, and promotion of the development and use of financial technology in the non-banking financial sector.33
Non-Banking Financial Services Authority areas of competence
Under the NBFSA Law, the new Non-Banking Financial Services Authority (NBFSA) will be competent to propose development policies and strategies to the government; to determine, monitor and follow up strategic plans and action plans; to improve market confidence, support investors and prevent non-bank financial crime; to improve financial stability; and to promote financial development.34 The Law specifies that the NBFSA will perform its duties independently.
Internal structure of the NBFSA
The NBFSA will be managed by the NBFSA Council composed of several members, including the Minister for Economy and Finance (who will be the chairman of the Council), other representatives of the MEF, representatives of the National Bank of Cambodia, the Ministry of Justice, the Ministry of Commerce, and the Council of Ministers, as well as general secretaries and experts. The effective composition of the Council shall be determined by sub-decree.35
The NBFSA comprises, and has oversight of, eight specialised entities, including the Insurance Regulator of Cambodia (IRC). As an NBFSA regulator, the IRC has regulatory functions to perform in accordance with the provisions in force, as well as a separate budget and authority for the exercise of its functions. It is led by a chairperson, assisted by a vice chair as necessary. The IRC is vested with the powers of the MEF as stipulated in the Law on Insurance and other provisions relevant to the insurance sector.36
ii Non-admitted insurers
Any entity that carries out an insurance activity, except notably a reinsurance activity, is required to operate through a licence granted by the MEF. This rule applies to insurance companies, micro-insurance companies, insurance agents and brokers and loss adjusters. The Law on Insurance created two important rules. First, to combat illegal insurance activities the Law has drastically increased its related sanctions. Underwriting insurance businesses without a licence will be fined between 50 million and 100 million riels. Recidivism by an entity is sanctioned at four times this rate. Recidivism by a natural person is sanctioned at two times this rate, a period of one to five years' imprisonment, or both. Second, the Law allows for further sub-decrees to provide for licensing exceptions, but for the time being there are none.
It also should be noted that the MEF requires a reinsurance company to have an equivalent Standard & Poor's rating of at least AA+. Since this requirement is no longer really practical, the MEF is revising it. A former ministerial order required a rating of BBB-.
According to the law, there are only two ways to distribute insurance products: through a duly licensed insurance agent or through a broker. The law does not mention the possibility of an insurance company's staff distributing products, but the MEF has admitted it is permissible and a ministerial order even provides a specific authorisation for life insurance companies' staff to be sellers. Even if the regulation does not mention group insurance policies, the MEF considers that a compulsory group insurance policy is an insurance policy in itself; therefore, the policyholder, acting for a group of insureds, is not considered to be an insurance intermediary. The MEF also understands that a pure referrer does not require a licence since they do not act on behalf of the insurance contract parties.37
However, distribution of insurance through a third party is particularly difficult because of the requested minimum capital deposit of US$10,000 for agents and US$50,000 for brokers. Therefore, life insurers who used to distribute through a wide network of individual agents have had no choice other than to recruit employees, known as consultants. The employment relationship must be real, otherwise the insurer may be heavily sanctioned under the insurance, the tax and the labour regulations.
Furthermore, bancassurance, which is essential for micro-insurers, life insurers and to some extent to general insurers, is generally not permitted, because of the National Bank of Cambodia's position stating that those can only refer insurers and cannot act on their behalf. According to the above, acting as referrer only, these establishments should not be required to obtain a licence from the MEF. But surprisingly, the MEF requires them to obtain an agent licence. Therefore, insurance companies have no other choice than having their own staff (not agent for the reason outlined above) in the banks and MFIs' premises, which drastically increases the acquisition cost.
There are no restrictions on outsourcing activities that are not subject to licensing.
According to the Law on Insurance, there are four kinds of insurance companies: life insurance, general insurance, micro-insurance and reinsurance. Both general and life insurance companies may conduct health and micro-insurance businesses. However, this provision requires urgent clarification, as it seems to exclude micro-insurers from offering micro-health insurance and, further, seems to indicate that a life insurance company can provide any micro-general insurance business, and vice versa. According to a temporary ministerial order that will be amended by a future sub-decree, a micro-insurance company is currently not permitted to cover risks exceeding US$5,000 and exceeding a period of 12 months.38
The Law on Insurance provides limited information on obtaining an insurance licence. It states that insurance companies are required to get a licence from the MEF and imposes on the MEF a three-month time limit to decide on an application following the deposit of the required application form and supporting documents. In practice, it generally takes longer than this time limit. A sub-decree will provide further details for obtaining a licence. The former sub-decree and related ministerial order remain valid in the meantime.39 Currently, the MEF exercises a two-step approach where, after obtaining an approval in principle from the MEF, an applicant must complete its set-up within six months, including by incorporating the company at the Ministry of Commerce. Otherwise, the licence granted will automatically become null and void.
It is worth noting that brokers, agents and loss adjusters are required to have a licence to operate.
Currently, the MEF is drafting a new ministerial order on the licensing of insurance agents and insurance brokers, which is expected to be adopted soon, including through the bancassurance channel.
Licences issued are not alienable under any circumstances. However, a change of control (greater than 10 per cent) is still possible, although the regulator must be properly notified. Furthermore, the portfolio may be partially or totally transferred, subject to prior approval by the regulator.
Although the duration of the validity of a licence may soon be provided for an unlimited period, it currently varies as follows:
- insurance company: five years for both the initial licence and renewed licences;
- micro-insurance company: one year;
- insurance agent: one year for both the initial licence and renewed licences;
- insurance broker: one year for both the initial licence and renewed licences; and
- loss adjuster: one year for both the initial licence and renewed licences.40
v Compulsory insurance
The former legislation mentioned three compulsory insurances (construction site insurance, motor vehicle third-party liability insurance for vehicles used for commercial purposes, and passenger transportation liability insurance whatever the means of transportation). However, as these requirements were not systematically implemented, the Law on Insurance increased fines for non-compliance to an amount of up to 150 million riels. However, the MEF has not put in place any system in the event of refusal by an insurance company to provide coverage.
In addition to these compulsory insurances, the Law on Insurance requires owners of motor vehicles (on roads or waterways) to obtain motor vehicle liability insurance. A sub-decree will determine the conditions. This compulsory insurance is not likely to be implemented anytime soon for many reasons, including challenges in determining an affordable premium for the poorest owners of vehicles (which will sociologically appear as a tax) and collecting premiums throughout all of Cambodia. This may also leave the illusion of sufficient insurance while the maximum coverage will in fact be very limited. There will also be challenges in organising the insurance industry to ensure proper claim adjustments and payment in a timely and reasonable manner.
With the exception of the Law on Insurance, the Sub-Decree on Insurance dated 22 October 2001 adds one more compulsory insurance: insurance brokers are required to obtain professional liability insurance of US$500,000.41
Like many other countries, because of the economic specificity of insurance, in Cambodia, tax on profit consists of taxation at a rate of 5 per cent on the gross premiums. The fact that the scope of this tax also covered the savings part of the premiums clearly jeopardised the development of life insurance companies' activities and bancassurance activities. The Law on Financial Management 2017 brought a substantial change to the former tax regime by separating types of insurance, as opposed to types of general or life insurance company; risk and property insurance remain subject to the tax of 5 per cent on gross premiums, while savings and other activities (that are not property or risk insurance, or reinsurance) shall be subject to the common tax on profit at the rate of 20 per cent.
Actually, this change is far from an adequate solution. Indeed, life insurers do not necessarily offer endowment policies only; they can also offer term life, bodily injury and healthcare policies that are not substantially savings products. It is unclear whether the latest insurance policies will be deemed as risk and property insurance that will be subject to tax of 5 per cent on gross premiums. We understand that, in practice, life insurers have only one account and therefore file only one set of tax returns. The MEF released a ministerial order on 31 March 2018 implementing this change, but this regulation is far from being detailed enough, which leads to uncertainty. For instance, the ministerial order has not provided an understandable rule on deductibility of technical provisions for life insurers.
Furthermore, practically it appears that part of the premiums is subject to double taxation. Indeed, insurance companies are value added tax (VAT) exempted, but, according to current practice, insurance intermediaries are not, although the legislation is silent on it. Therefore, the insurance company cannot claim a VAT deduction on insurance intermediaries' commissions. This non-deductible VAT will thus be included in the gross premiums amount and therefore also taxed at 5 per cent.
Moreover, the tax administration has not put in place any set-off system when the payment to an insurance intermediary originates from a prepayment subject to other tax (1 per cent minimum tax on profit, VAT, tax on telecommunication). In addition to the 5 per cent tax on premiums, insurance companies must pay a 0.5 per cent contribution to the MEF Insurance Industry Development Fund.
Changes in taxation on insurance intermediaries, which are expected soon, will mitigate the above-mentioned tax implications.
Notably, reinsurance premiums paid abroad were generally not subject to the 14 per cent withholding tax usually due for any payment abroad. This rule was welcomed and was justified by the fact that reinsurance premiums (as a part of the insurance premiums) were subject to 5 per cent taxation. However, for reinsurance premiums not subject to the aforementioned 5 per cent tax (e.g., endowment products), the insurance company must withhold 14 per cent of the reinsurance premiums paid abroad, which is clearly excessive. However, Cambodia does have double tax treaties in force with a number of countries (i.e., Brunei, China, Hong Kong, Indonesia, Malaysia, Singapore, South Korea, Thailand and Vietnam), which might present an obstacle to this internal tax rule.
While there is no restriction on foreigners investing in insurance businesses, there is only one entity form available. An insurance company must be registered in the form of a public limited liability company. Surprisingly, an insurance company must have at least three shareholders, although this minimum is not required for banks or MFIs and is not generally required for a public limited company.42 The Law on Commercial Enterprise only requires a minimum of three directors.43 In practice, some companies have only two shareholders.
For other insurance businesses (i.e., insurance intermediaries and loss adjusters), the form can be a branch of a foreign company, a private limited company or a public limited company.
viii Transfer of portfolio
A Cambodian insurance company may apply to the insurance regulator for approval to transfer all or part of its insurance business to another Cambodian insurance company. The transfer comes into effect following an agreement between the transferor and the transferee once the MEF's approval is given.
As far as we are aware, no portfolio transfer has ever been carried out. A further sub-decree will develop details of the process that are in the best interests of policyholders.
The law on insurance provides a minimum capital of 5 million special drawing rights (SDRs)44 for general, life insurance or reinsurance companies. A further sub-decree will provide rules to determine the amount of capital to be maintained to ensure an insurance company's solvency. According to the current rules, the minimum capital requirements are as follows:
- micro-insurance company (life or non-life): one-quarter of the amount of the underwritten premiums with a minimum of 600 million riels;
- insurance brokers: 200 million riels; and
- insurance agent and loss adjusters: 20 million riels.
x Solvency requirements
There are two kinds of solvency requirement, but these could be modified in light of the Law on Insurance since these requirements originate from a previous regulation.
First, insurance companies and intermediaries must maintain a deposit with the National Treasury (i.e., the MEF's account at the National Bank of Cambodia (this account does not generate interest)) as follows:
- insurance company: 10 per cent of the registered capital;
- insurance broker: US$50,000 (equivalent to the minimum capital); and
- insurance agent and loss adjustor: US$10,000.
Second, insurance companies must maintain a solvency margin as follows. For the first year of operation, the solvency margin is 50 per cent of the registered capital. Thereafter, each case is assessed on the previous year's premiums:
- 13.3 billion riels where net premiums are less than or equal to 66.5 billion riels;
- 20 per cent of the total premiums where net premiums are between 66.5 billion riels and 332.5 billion riels; and
- 66.5 billion riels plus 10 per cent of the insurance surplus from the previous year where the net premiums are greater than 332.5 billion riels.
In addition to the 50 per cent solvency margin, micro-insurance and life insurance companies are required by the MEF to maintain assets (cash or property) equal to their minimum capital to guarantee that they have sufficient capital in accordance with the law. This requirement means that life insurance companies must have an initial minimum capital of US$7 million invested in assets, which cannot be used to pay expenses. This rule has recently been extended to general insurers, insurance intermediaries and loss adjusters.
The long-awaited sub-decree on insurance and additional ministerial orders should be passed soon, which could change both capital and solvency requirements. The MEF started to implement part of the drafted legislation from the second half of 2017.
Prior to enactment of the NBFSA Law in January 2021, control of the insurance sector was exercised entirely by the MEF.
The MEF exercised three kinds of control: financial, legal and economic. Financial control was exerted over, inter alia, licence applications and yearly financial statement requirements (e.g., financial audits, business plan approvals, approvals for distributions of dividends).
Legal control generally consisted of requiring prior MEF approval for many (actually almost all) activities, including changes to memoranda and articles of association (e.g., change of address, change of shareholders' representatives, change of directors, increase of capital) products approval (understanding that each rider is considered to be one product), advertisement campaigns and organisation of the distribution network. From past experience, everything had generally gone well, but with the huge increase in insurers – more than 80 in 2020 – it has been very difficult for the Insurance and Pension Division of the MEF to cope with the huge amount of requests. It was not unusual to wait six months for a simple approval of a change of directors; the MEF had even limited insurance companies to submitting a maximum of two policies at a time. In addition, some of the above actions required authorisations from other ministries, especially the Ministry of Commerce, which extended the length of the process.
Economic control over the industry involved, inter alia, gathering data, issuing and renewing licences, maintaining fair competition and approving any transfer of shares exceeding 10 per cent of the capital. The MEF could organise inspections and had wide powers to do so. Measures undertaken during an insurance inspection could be challenged by bringing a complaint within 45 days to the MEF. The MEF then had two months to decide on the complaint. However, this delay could vary depending on MEF's internal rules.
This situation led insurance institutions to run behind in requiring prior approval, which was sometimes not even practicable when the event was unexpected (e.g., resignation of a director, transfer of a portfolio, requiring the parties to act quickly to maintain the economic interest of the transactions, etc.). The amount of fines drastically increased in past years.
The Law on Insurance considerably reinforced both the MEF's control and procedures in cases where an insurance company was facing a serious financial crisis. In such cases, the MEF could appoint a provisional director for a period of no longer than three months to attempt to recover the insurance company. This mandate could be extended for another three months if necessary. After this period, if the evaluation of the company showed that it could be sufficiently solvent and could comply with the law and all precautionary measures, the provisional director would make a report to the MEF to cancel any precautionary measures taken against the company and the provisional governance would be terminated. However, if the evaluation showed that the company was sufficiently solvent but could not comply with the law and precautionary measures within three months, the company's licence would be temporarily revoked by the MEF and the provisional governance would be changed to a voluntary dissolution of the company. Moreover, if it were shown that the company was insolvent, the company's licence would be revoked by the MEF and the provisional governance would be changed to liquidation through a court proceeding.
Unless the insurance company was in a solvent condition, the company could initiate voluntary liquidation and dissolution processes. An insolvent company could submit a request to the MEF to liquidate voluntarily in cases where the company had reached its due term, or by a resolution of a general or extraordinary assembly of the shareholders in accordance with the memorandum and articles of association. Upon receiving a statement of intent from the company to voluntarily liquidate, the MEF would issue a certificate of authorisation, provided that the company had appropriate grounds to do so. After receiving the certificate of authorisation from the MEF, the company had to cease making new insurance contracts and transfer existing contracts to other insurance companies before the start of the voluntary liquidation and dissolution of the company.
In the case of an insurance company's insolvency, the MEF had to submit a complaint to a court to initiate the liquidation through court proceedings. A liquidator would be selected by the court from the MEF's permitted list of liquidators. A court order could also stipulate a provisional director as a liquidator.
The liquidator was obligated to liquidate all assets and repay all the liabilities of the insurance company under the supervision of the court.
However, following the introduction of the NBFSA Law, it is now legitimate to wonder how these powers of control in the insurance sector will be divided between the MEF and the NBFSA.
The NBFSA Law confers significant powers on the new regulator, stating in particular that the 'Cambodian insurance regulator shall be vested with the powers of the Ministry of Economy and Finance as stipulated in the Law on Insurance (2014) enacted by Royal Decree No. NS/RKM/0814/021 of 4 August 2014 and other relevant provisions in the insurance sector'.45
Moreover, according to the NBFSA Law, the NBFSA, and in particular the NBFSA Council, is also assigned a 'monitoring' power regarding the implementation of strategic plans and action plans, as well as policies and strategies for the development of the non-bank financial sector.46
The NBFSA is also in charge of improving market confidence, supporting investors and preventing non-banking financial crime in the sector by investigating, collecting data from any persons and relevant institutions, and seizing property or cash in the bank accounts of relevant individuals in cases of suspicion of the commission of non-banking financial crimes, pursuant to applicable law.
Finally, by law, the NBFSA Council is expressly vested with the following powers:47
- monitoring and control of the implementation of strategic plans and action plans of the Council;
- monitoring and deciding on legal conditions, legal procedures and regulations for suspension and removal of licences and certifications recognised and registered in the non-banking financial sector;
- monitoring the performance of the duties and responsibilities of regulators under NBFSA supervision;
- monitoring and executing the budget for the functioning of the NBFSA and the regulators and units under NBFSA supervision; and
- monitoring and deciding on the internal policies of the NBFSA.
At present, the powers of control in the insurance sector formerly exercised by the MEF seem likely to come under the competence of the NBFSA. For the time being, the provisions formerly applicable in the insurance sector will continue to apply until substituted by the new legal framework, which will probably provide clarification on the subject. In the interim, the MEF will continue to carry out its duties and responsibilities until the IRC begins its functions.48
Insurance and reinsurance law
i Sources of law
The MEF launched an important reform in 2000 and 2001,49 which consisted of an increase in the minimum capital held by insurance companies to 5 million SDRs as well as a classification of insurance companies into three categories. These categories were general insurance companies, life insurance companies and reinsurance companies. This was followed in 2011 by the introduction of a fourth category: micro-insurance companies.
The National Assembly of Cambodia adopted the new Law on Insurance, which was promulgated on 4 August 2014 and entered into force on 4 February 2015. The Law maintains all former regulations. Three sub-decrees should be adopted in the near future, which will be followed by many ministerial orders. The most important and notable changes will cover the following areas:
- general and life insurance contracts;
- insurance companies' liquidation and dissolution processes;
- the micro-insurance legal framework;
- insurance control; and
- dispute resolution and disciplinary measures.
ii Making the contract
Generally, Cambodian regulations do not differ from other countries' regulations in terms of contract formation. The policy must be written and must indicate:
- both parties' names and addresses;
- the subject matter to be insured;
- the type of covered risks;
- the commencement date and location of risks;
- the insured value;
- the insurance premium and method of payment;
- the method and conditions for declaration of risks;
- the term of contract and period of coverage;
- the terms and conditions of nullification and forfeiture of rights; and
- the conditions for early termination.
For life insurance, it must also indicate the name of the beneficiary and the event and conditions for refund of the insured amount.
Regarding these standard requirements, it is worth pointing out that they are not always economically or practically adapted to some forms of insurance distribution networks. This is especially true for micro-insurance products, which should be easily executed. The draft sub-decree on insurance maintains a writing agreement and signatures; however, during the discussion with private sector, the MEF has accepted paperless insurance policy.
In addition, the Law on Insurance provides specificities that are sometimes difficult to understand. At first, it may appear normal that insurance policies are required to be written in the Khmer language with clear terms and conditions, but the Law does not provide for any exception, especially for major risks and for cross-border risks.
Furthermore, the Law on Insurance seems to indicate that no insurance policy can enter into force prior to the payment of the premium. Put another way, the payment is a condition for the enforceability of the insurance policy. This rule seems to be mandatory.
Surprisingly, the Law on Insurance foresees only three parties to an insurance contract: the insurer (or its representative), the insured and the beneficiary (the latter in the case of life insurance contracts). There is also a definition of a policyholder;50 however, it is not the usual definition of a policyholder as it is commonly understood. In addition, the Law does not mention the possibility of underwriting a group insurance policy even if, in practice, group insurance policies are widely spread out and accepted by the MEF, which even distinguishes between compulsory and facultative group insurance policies.
It should be noted that the Law on Insurance states that an insurance contract is a commercial contract, to which it can be objected that although the insurer may always be a merchant, the policyholder may not be.
Finally, the insurance regulations may conflict with others, leading to a Kafkaesque situation. For instance, a regulation applicable to general insurance companies (but interpreted as applicable to any institution) prohibits chairmen of the board from holding an executive role. However, the Ministry of Labour and Vocational Training, together with the Ministry of Interior, requires them to hold a working permit to get a business visa allowing them to lawfully remain on the Cambodian territory. The working permit requires an employment contract, which could not be arranged with a fake salary, since the General Department of Taxation could reassess it.
iii Interpreting the contract
General rules of interpretation
Currently, there is no rule of interpretation clearly stated in the Law on Insurance and no law on consumer protection. Furthermore, there are very few rules of interpretation in the Civil Code.
However, since every insurance product must be approved by the MEF, this means that the MEF has its own interpretation, which may be used as a benchmark for policyholders and insureds covered under the same insurance policy.
Type of terms in insurance contracts
The MEF is also very cautious regarding the Khmer language terminology that is used.
A sub-decree on insurance contracts should be adopted detailing, inter alia, rules regarding conditions and interpretation.
The Law on Insurance adds two important details regarding the interpretation of a contract.
First, and naturally, it provides for nullification in cases where the insured (policyholder) has concealed the truth or wilfully misrepresented material facts leading to any change of the insured subject of risk. However, negligence does not necessarily lead to nullification.
Second, it provides that for property insurance, the indemnity made by the insurance company must be the same amount as the declared property, unless agreed otherwise. This rule seems contradictory to the indemnification principle, although the reasons behind it are understandable. The Cambodian population is not familiar with insurance policies and may not understand that insurers provide an amount lower than the declared or insured value of the property. This rule obliges insurers either to assess the real value before covering the property or to state clearly that they will not pay the declared amount if it exceeds the actual value.
iv Intermediaries and the role of the broker
In addition to the descriptions in Sections I, II.iii and III.ii regarding the distribution of products, there continue to be very few active insurance brokers and most of these received their licences only recently – with an impressive peak in July 2018 with four new licensed brokers. However, with an insurance penetration rate of 10 per cent among the Cambodian population, the lack of knowledge of many business people (especially local tycoons), the growing interest in insurance and stronger protections for duly licensed insurance companies are all factors that will contribute to an increase in the number of brokers.
Apart from this, brokerage in Cambodia is typically defined as acting on behalf of the policyholder. Although the brokers are organising themselves (there is a draft ethical code in circulation and an informal association exists), the legal relationship between insurance companies and brokers falls broadly under the Civil Code and more specifically under the regulation applicable to agency agreement.51
Brokers are not specifically protected when bringing business to insurance companies, even if insurance companies generally comply with general standards in these situations.
The Law on Insurance provides only a few rules regarding claims and the former legislation, which is still applicable, is useless in this regard. Therefore, claims must follow the common rules provided in the Civil Procedure Code.
The Law only states that the insurer may complain before the court to void its responsibility if a risk occurred because of a fraudulent act of the insured.
The Law also provides a subrogation mechanism to claim reimbursement of a duly paid insurance indemnity from the third party who caused the damage. However, subrogation is not possible against relatives, managers, etc., except in the case of malicious acts caused by any of these. In addition, the Law on Insurance provides the victim with a direct payment mechanism against the insurance company for liability insurance.
The Law provides no payment of life insurance if the insured died by suicide.
Apart from that, all the procedures for dispute resolution will be determined by sub-decree.
The overall net rate claims ratio was 25 per cent in 2019 for non-life activity, 34 per cent for life insurance and 17 per cent for micro-insurance. As at the third quarter of 2020, claims for general insurance, life insurance and micro-insurance totalled US$16.1 million and US$0.75 million respectively.52 The total gross claims paid in 2020 amounted to US$37.98 million, representing a claims ratio of 31 per cent.
i Jurisdiction, choice of law and arbitration clauses
In Cambodia, arbitration clauses are commonly provided in insurance policies in cases of a dispute between the policyholder or insured and the insurer, except notably for micro-insurance policies. However, there is generally no reference to any arbitration forum and no indication of the arbitration procedure to be followed (e.g., designation of arbitrators).
Since compulsory liability insurance does not really exist, there is no set-off53 of mutual debts between insurance companies.
There is no compensation fund or warranty fund in place, except the NSSF.
If a dispute is brought before a court, parties will follow the rules as provided in the Civil Procedure Code. However, when an arbitration clause exists, there is generally no description of the claim procedure and the use of loss adjusters, nor any explanation on how to challenge an insurer's decisions. Until recently, there was no commercial arbitration centre in Cambodia. It was conceived when Cambodia's Commercial Arbitration Law entered into force, which was then amended to accommodate the establishment of the National Commercial Arbitration Centre of the Kingdom of Cambodia until its final approval in July 2014. Currently, the Ministry of Justice is working on the creation of two new tribunals – a Labour Tribunal and a Commercial Tribunal. These two tribunals are expected to be in place and functioning by the end of 2021.
Although a commercial arbitration centre exists, it is unlikely to be used for small claims, and large insurance claims are quite rare. However, the Law on Insurance suggests that the MEF will establish an insurance arbitration centre.
iv Alternative dispute resolution
The Law on Insurance and applicable sub-decrees address mediation. The first mediation case was brought before the MEF at the very beginning of 2019 and involved a micro-insurer. Several other cases were also mediated by the MEF in 2020.
Year in review
The Cambodian insurance market continued to grow in 2020. However, this growth has slowed down compared with the previous years because of the covid-19 pandemic.
As at the third quarter of 2020, the total gross premiums in the insurance sector in Cambodia amounted to US$201.7 million, representing an 8.2 per cent increase compared with 2019. Contributing to this overall increase is the high increase of 18.2 per cent in the general insurance sector and a 2.8 per cent increase in the life insurance sector; however, the micro-insurance sector saw a decrease of 22 per cent, according to the Insurance Association of Cambodia.
Outlook and conclusions
Although there are still a lot of opportunities in the general insurance market, the life insurance market is becoming overloaded and highly competitive. The micro-insurance industry has stalled in anticipation of a sub-decree on micro-insurance.
With regard to human resources and the MEF's availability, dealing with the increase in participants is the main challenge, and has already resulted in the MEF being very delayed in granting authorisations. Since the decision to increase the average salary in the public sector, the administration is very restricted when recruiting civil servants. In addition, owing to a lack of skilled human resources, entities in the public and private sectors tend to poach staff from each other, causing salaries to rise to an unaffordable level for the ministries.
With regard to claims, fraud has become a major issue, especially with a small number of loss adjusters.54 In addition, the tax regime applicable to life insurance activities and the double taxation of brokers and agents may cause frustration.
In terms of investing capital and premiums, the options are incredibly limited. An insurance company must use at least 75 per cent of its reserve funds created from insurance premiums for reinvestment in Cambodia. The new draft regulation pertaining to the use of the minimum capital and solvency margin drastically limit the number of possibilities. It is even worse in practice, as the stock exchange is still in its infancy; investment in real estate is generally forbidden to foreign entities; investment in government bonds is not currently available (although this is in the pipeline); and investment in the private sector is not sufficiently reliable. Therefore, insurance companies try to repatriate their premiums through a reinsurance scheme or make a deposit in a bank that provides a relatively good interest rate.
In addition, in terms of distribution, we do not see any improvements regarding the conditions to be met before becoming an independent insurance agent. As regards bancassurance, although we expect improvements soon, at present insurers are still awaiting a more favourable framework.
Another area of uncertainty is the new national pension scheme, which is to be implemented soon. Although life insurers are not currently offering products of this kind, it remains to be seen whether this new scheme will trigger the issuance of such products from the private sector or whether it will impede their development.
Finally, the creation of the NBFSA – through which all insurance activities and the non-banking financial sector will be streamlined and governed by one regulator – should ensure consistency and accuracy in the implementation of the regulatory regime for the entire sector.
1 Antoine Fontaine is a founding partner at Bun & Associates.
2 First Law on Insurance dated 9 January 1964 (abrogated in 1975 by the Khmer Rouge regime).
3 Cambodian National Insurance Company, Plc (1993); Forte Insurance (Cambodia) Plc (1996); and Asia Insurance (Cambodia) Plc (1996).
4 Law on Insurance, NS/RKM/0814/021, dated 4 August 2014, which entered into force on 4 February 2015.
5 Cambodian Reinsurance Company Plc (Cambodia Re) (2002).
6 The law provided a pre-emption right on 20 per cent of the reinsurance premiums for the benefit of Cambodia Re. This privilege was aborted through the accession of Cambodia to the WTO with effect from 1 January 2009. WTO WT/ACC/KHM/21, 19 August 2003 (03-4316) especially its Addendum Part II – Schedule of Specific Commitments in Services List of Article II MFN Exemptions.
7 Infinity General Insurance.
8 People & Partners Insurance Plc.
9 Campubank Lonpac Insurance Plc (2007) affiliated to Cambodia Public Bank Plc; and Cambodia – Vietnam Insurance Company Plc (2009) affiliated to the Bank for Investment and Development of Vietnam.
10 PhillipCapital Group, which operates PhillipBank, Phillip General Insurance (Cambodia) Plc (2017) and recently established Phillip Life Insurance Plc (2018); Canadia Investment Holding Plc operating the newly set up Dara Insurance Plc (2018), Sovannaphum Life Assurance Plc (2015) and Cambodia Post Bank, affiliated to Canadia Bank Plc; and Maybank's affiliate, Etiqa, has obtained both life and general licences.
12 Mainly the GRET, through its SKY project (Sokopheap Krousar Yeung).
13 Prévoir (Kampuchea) Micro Life Insurance Plc (PKMI) (2011). In 2019, PKMI was acquired by Japanese car leasing company Renet Japan Group Co, Ltd.
14 Milvik (Cambodia) Micro Insurance Plc (Bima) (2014); Cambodian People Micro-Insurance Plc (2014); Mekong Micro Insurance Plc (2015); Meada Rabong Plc (2015) – former Cambodian Health Community (1994); Prosur Micro-insurance Plc. (2016) Forte Micro-Insurance Plc, HI Micro Insurance (2017) Plc.
15 See Section II.iii.
16 Cambodian Life Insurance Company Plc (2012), which was eventually privatised and purchased by the Royal Group of companies then downgraded to a micro-insurer.
17 Manulife (Cambodia) Plc (2012).
18 Prudential (Cambodia) Life Assurance Plc (2013).
19 AIA (Cambodia) Life Insurance Plc (2017).
20 Dai-ichi Life Insurance (Cambodia) Plc (2018).
21 Sovannaphum Life Assurance Plc (2015) affiliated to Canadia group (in Cambodia) and Muong Thai Life insurance (in Thailand); Bangkok Life Assurance (Cambodia) Plc (2016), former partner of the state-owned Cambodian Life Insurance Company Plc, acquired in 2020 by FWD; Forte Life Insurance (2016); and Phillip Life Assurance (Cambodia) Plc (2018).
23 EverCare Insurance Plc (2017) member of Chinese AIBO group; East Insurance Plc (2017) member of Guangzhou Yuetai Group and Ly Hour Insurance Plc (2017).
24 Grand China Life Insurance Plc (2017) member of China's largest financial insurance corporation: China Life Insurance Company.
25 AG Insurance Agent (2006), which became AG Insurance Broker (Cambodia) (2016), and Poema (Cambodia) Co Ltd (2007).
26 MGA Insurance Brokers Co Ltd (2014); Gras Savoye (Cambodia) Insurance Brokers Plc (Willis) (2015); Bassac Insurance Broker Co Ltd (2015); Hong Kong TeamYoun (Cambodia) Insurance Brokers Co Ltd; Branch of Toyota Tsucho Insurance Management Corporation; Insurance Broker Solutions (Cambodia), Ltd (2016); Icon Insurance Brokers Co Ltd (2016); Taiping Insurance (Cambodia) Brokers Co, Ltd (2016); Provita Insurance Broker Co Ltd (2017); LC Insurance Brokers Co, Ltd (2017); Alpha Insurance Broker Co Ltd (2018), Elite Insurance Broker (Cambodia) Plc (2018); Worldbridge Insurance Broker Plc (2018); Tigermar (Cambodia) Insurance Broker Co, Ltd (2018); Global General Insurance Broker Plc (2018); Start Insurance Broker Co, Ltd (21 September 2018), etc.
27 Banks: Cambodian Public Bank Plc (Lonpac-2006 and AIA's agents-2017); ACLEDA Bank Plc (Prudential's-2013 and Forte's-2016 agent); Maybank (Cambodia) Plc (Manulife's agent-2016); ANZ Royal Bank (Cambodia) Ltd (Manulife's agent-2016), CIMB Bank Plc (Manulife's agent-2016), Foreign Trade Bank of Cambodia Plc (Manulife's agent-2016); Advanced Bank of Asia Limited (Manulife's agent-2016); ABA Agent; Canadia Bank Agent; MFIs: Angkor Mikroheranhvatho (Kampuchea) Co Ltd (Forte's agent-2014); Telecom: SMART Axiata Co Ltd (Forte's and Bima's agents-2014); Amret (2018); AMK Plc. Other: Cambodia Investment Management Insurance Agent Co Ltd (2014); Infinity Financial Solutions (Cambodia) Ltd, Samic Plc, Asiaone Insurance Agency (Cambodia) Co Ltd, Cover Link Insurance Agent Co, Ltd (Forte Agent 2018); (Safetynet Insurance Services (Cambodia) Co, Ltd (Forte Agent 2018); iCare Benefits (Cambodia) Co, Ltd (2016); Vattanac Bank (Dai-ichi Life Agent 2019).
28 4.4 per cent for life insurance in 2019.
30 MEF, IAC, Overview of Cambodian Insurance Market 2019, booklet.
32 Overall insurance coverage only amounted to 0.93 per cent of GDP in 2019, an increase from 0.48 per cent in 2015.
33 Article 1, NBFSA Law.
34 Article 4, NBFSA Law.
35 Articles 5, 6 and 7, NBFSA Law.
36 Articles 11, 12, 13 and 15, NBFSA Law.
37 Subject to the unusual exception of banks, MFIs and financial leasing companies.
38 Ministerial Order 009 MEF on the Issuance of a Temporary Licence for Micro-insurance, dated 29 June 2011.
39 Article 113, Law on Insurance.
40 It is worth noting that a ministerial order dated 15 September 2015 provides a duration of five years for the general and life insurance licences, while a former ministerial order dated 17 January 2007 provided a duration of three years. However, for agent and loss adjuster licences, the same 2015 ministerial order provides a duration of one year while, in practice, these licences are granted for three years, in compliance with a former ministerial order dated 23 November 2001, which should be abrogated.
41 Article 86.
42 However, the Ministry of Commerce, legally unfunded, recently requested a minimum of two shareholders for every public limited company.
43 Article 118 Law on Commercial Enterprise dated 19 June 2005.
44 International Monetary Fund SDRs. As at 9 April 2020, 1 SDR equals US$1.362600. In practice, the MEF considers the minimum capital required for life and general insurance companies to be equivalent to US$7 million.
45 Article 15, NBFSA Law.
46 Articles 4 and 8, NBFSA Law.
47 Article 8, NBFSA Law.
48 Articles 23 and 24, NBFSA Law.
49 Law on Insurance No. NS/RKM/0700/02, dated 25 July 2000 and Sub-Decree on Insurance No. 106 ANK.BK, dated 22 October 2001.
50 In accordance with the Law on Insurance, a policyholder refers to a natural person or legal entity that has a legal right over the insurance policy.
51 Article 637 et seq. Civil Code.
52 http://www.iac.org.kh/images/Media%20Release/Statistics/General/2019/Market%20Statistic%20for%20General-Insurance-2019.pdf; http://www.iac.org.kh/images/Media%20Release/Statistics/Life/2019/Market%20Statistic%20for%20Life%20Industry%202019.pdf.
53 However, set-off is legally possible by application of Article 464 et seq. Civil Code.
54 There are only three insurance loss adjusters: Mclarens Cambodia Ltd, MSM International Adjuster (Cambodia) Limited (2011) and Branch of AJAX Adjusters & Surveyors Pte (2017).