The leak of a confidential memorandum between Indochine Insurance and the Ministry

of Economy and Finance has "shocked" the company's managing director and

highlights the uncertain market environment that insurance companies face in Cambodia.

The February 10 edition of the DFDL legal and tax advisors' weekly update published

what Indochine says was factually incorrect details of a licensing agreement for

Indochine, the country's biggest insurer. The item stated:

"The aim of the Memorandum of Understanding is to provide a six-month license

grace period to IICPLC [Indochine] to continue operating its insurance business in

Cambodia, hoping that IICPLC would be able to generate funds to capitalize its business

which it has not been able to meet the requirements since 2003."

The report stated Indochine had been granted a standard one-year license extension

from January 9, 2004 that would be "subject to strict agreements".

Vann Nath, a translator for DFDL who works on the weekly update, said on February

21 that he received documents relating to the memorandum from the Council of Ministers,

but declined to specify who gave them to him or when.

All three private insurance companies operating in Cambodia must renew annual licenses

that depend largely on paying instalments towards a capital investment fee that acts

as a guarantee of their solvency.

The Insurance Act that was implemented in October 2001 originally required each company

to deposit $7 million cash as their capital investment. This was considered by private

companies to be excessive considering the entire industry was estimated to be worth

only $7-to-$8 million and a compromise was reached allowing companies to pay half

the solvency guarantee over five years.

Philippe Lenain, director of Indochine, says his company was late paying the fee

but that negotiations had secured the necessary license. Indochine has been operating

in Cambodia since 1993 and was the first private insurance company to receive an

official license after the law was implemented. Lenain said he was shocked and disappointed

to see details of the confidential agreement in print, but was reluctant to criticize

the government.

"This is more an accident," he said, adding that he had raised the leaked

information with the acting insurance commissioner, Mey Vann.

Vann said he had received many phone calls from international reinsurance companies,

who share the risks with insurance agents, wanting to know more about the DFDL report.

Indochine had been "meeting with difficulty" in paying a $550,000 instalment

of its capital guarantee and was given more time to negotiate an investment by the

Asian French Development Agency, Vann said on February 24.

He played down the DFDL report, saying it was a case of regulators being flexible

in their application of Cambodia's insurance law in order to stabilize and nurture

the fledgling industry.

Valued in 2003 at less than 50 cents per capita, Cambodia's insurance market is currently

tiny but a look to its neighbors indicates the potential of the industry. Last year

Thailand spent nearly $2.8 billion on insurance while Vietnam's industry was worth

$180 million, according to figures compiled by Indochine.

But with a young market come teething problems, say those in the industry.

The concept of insurance is not widely recognized by Cambodians, with local clients

making up just 5 percent of Indochine's customers. The rest, said Lenain, are mostly

foreign investors and NGOs keen to protect their assets in a country where political

and financial instability plus the high incidence of fire make it a risky place to

work.

Another challenge is working with the Insurance Act that was passed into law in 2000

and implemented the following October. It has been described as "quirky"

by one industry leader and by another as "workable but crude". The disproportionately

high capital investment deposit caused headaches for businesses in 2001 who were

yet to see any big returns from the market, but they also had to deal with a system

of compulsory insurance that was poorly enforced.

According to the Insurance Act, all motor vehicles used to transport people or goods

should be covered by third party insurance, right down to "tricycles used for

commercial purposes".

Vong Sandap, director of the state-owned Caminco insurance company, said his research

showed only ten percent of car owners actually had third party cover. The percentage

of cyclos with insurance is unknown, but anecdotal evidence suggests zero.

Similarly, "construction all risks" cover for building projects is compulsory

by law but not always purchased. On January 29, Caminco hosted a seminar for construction

companies to explain the benefits of insuring their on-site operations.

Caminco is the only company to have met the full capital investment requirements,

earning it a five year license from the Ministry of Economy and Finance (MoEF). It

raised the necessary $7 million dollars by buying government bonds with National

Treasury money, said Sandap, but now has around 30 percent of its capital investment

in land and in the Foreign Trade Bank, allowing the money to earn interest and profits.

Private companies can not earn interest on their capital investments guarantees.

Under the terms of the government bonds, Caminco receives a 3 percent interest top-up

twice a year from the National Treasury coffers, with the most recent payment of

$70,500 received last month, Sandap said.

In return, last year's profits of around $200,000 went back to the ministry, although

this year the MoEF will allow any profits made to be reinvested into company development,

asset increases and bonuses. Caminco also has plans for an independent audit of the

company in 2004 to give confidence to its stakeholders.

"We must be more strong and more transparent," said Vong Sandap on February

23. "It is important that Cambodia recognizes the benefit [of insurance]."

The notion of building trust in the concept and the providers of insurance is a mantra

among company directors.

"We sell promises," said Carlo Cheo, managing director of Forte Insurance.

Forte had a turnover last year of $2.8 million and stakes its reputation on the quality

and depth of the international reinsurance agents that back up its ability to pay

on claims.

"The customer can rest assured they will be compensated for their loss,"

Cheo said.

Currently, 20 per cent of all reinsurance business must be done through state-owned

Cambodia Re, but that is set to change as the country works to meet its requirements

for entry into the World Trade Organization (WTO). By 2009, all reinsurance companies

will compete for business on an open market, Mey Vann said.

But regulators must balance the WTO push for trade liberalization with regional concerns

about the regulation of Cambodia's insurance market. Vann said ASEAN members had

advised that Cambodia be "more prudential" than liberal as it developed

the sector.

"We are looking at how to comply with the WTO and at the same time looking at

how to build a sound market for the insurance industry," Vann said.