Problems of asymmetric information management A case study of healthcare line at BaoViet

Key words: pre-existing medical conditions, special diseases, waiting period, insured risks, exclusive risks, insured person, insurance company, insurance intermediaries, outside interm

TRAN THI NHU NGOC

PROBLEMS OF ASYMMETRIC INFORMATION MANAGEMENT: A CASE STUDY OF HEALTHCARE

LINE AT BAOVIET

MASTER PROJECT MASTER IN BUSINESS ADMINISTRATION

(PART-TIME)

SUPERVISOR: DR NGUYEN VAN NGAI

Ho Chi Minh City

(2011)

I, Tran Thi Nhu Ngoc, hereby affirm my honesty for my thesis preparation and that the content was written by myself with information retrieved and obtained from reliable sources The information in this thesis was extracted from published information, internal source and was clearly cited with no plagiarism violation

HoChiMinh City, December 2011

Tran Thi Nhu Ngoc

I would like to express my sincere gratitude to all the Professors of the program for the knowledge and valuable experience that Professors would have divided us in two years I have been consulting and had many valuable discussions supported for case study

I would like to thank Dr Tran Anh Tuan, co-director of Vietnam- Belgium program for organizing and operating this program My deepest gratitude goes to all members of Co-ordinator Board who always stand by us and ensure excellent classes: Mr Serge Bywaski, Ms.Bui Phan Bao Tran, Ms.Le Thi Ngoc Hien, Ms.Le Thi Thu Ha

And last but not least, I also would like to express my gratitude to my beloved parents,

my younger sisters for their warm support during my time of study Thanks my lovely husband for sharing my difficulty and always encouraging me through time of writing this thesis

HoChiMinh City, December 2011

Tran Thi Nhu Ngoc

Evaluating and controlling information about medical treatment of customer are big issues in all Vietnamese insurance companies Most of players now are focusing on low price competition and forgetting the important role of information in insurance industry Uncertainty and unforeseen risks are objectives of insurance business that could be quite special than other industries Exploring the big consequences from problems of asymmetric information management existing in all insurance companies is purpose of this study Information that exchanged between insurance company and customer is not always transparent and fully With the participation of intermediaries, information becomes more complicated and will be hidden to ensure the benefit

Qualitative method is used for analyzing the casual relationship from intention and moral behavior from customer with their medical treatment claims Beside, the disadvantages in analyzing due to limitation of system and information management will

be evident to prove the problems of asymmetric information and its effect to insurance companies

Some solutions are suggested to managers of BaoViet in order to eliminate the consequences of problems Recommendations are also mentioned for further researches after meeting many disadvantages during analyzing data

Key words: pre-existing medical conditions, special diseases, waiting period, insured

risks, exclusive risks, insured person, insurance company, insurance intermediaries, outside intermediaries

This study meets the requirement of the MBA Project I agree for this paper

to be presented for final evaluation

Dr Nguyen Van Ngai

COMMITMENT II ACKNOWLEDGMENT III ABSTRACT IV TABLE OF CONTENTS VI LIST OF TABLES VIII LIST OF FIGURES IX

CHAPTER 1: INTRODUCTION OF THE STUDY 1

1.1 Rationale of the study 1

1.2 Statement of problem 2

1.3 Research objectives 3

1.4 Research questions 3

1.5 Research methods 3

1.6 Scope of this study: 4

1.7 Structure of the study: 5

CHAPTER 2: LITERATURE REVIEW 7

2.1 Asymmetric Information Theory: 7

2.2 Manifestation of Asymmetric Information: 8

2.2.1 Adverse Selection: 8

2.2.2 Moral Hazard 9

2.3 The Principal – Agent framework existing in insurance market 9

2.3.1 The Principal – Agent Framework: 10

2.3.2 Multiple Principal – Agent relationships: 10

2.3.2.1 Insurance market performance: 10

2.3.2.2 Intermediaries and Adverse Selection issue: 11

2.3.2.3 Intermediaries and Moral Hazard issue: 12

2.3.3 Solutions for Principal – Agent conflict: 14

2.3.3.1 Sources of conflict: 14

2.3.3.2 Mechanism to restore Goal Congruence: 16

2.4 Definitions used in Medical Care insurance wording: 18

2.5 Framework of the Study: 18

CHAPTER 3: HEALTHCARE INSURANCE LINE AT BAOVIET 21

3.1 Profile of BaoViet Insurance Corporation and rapidly development of Healthcare Line 21

3.1.1 BaoViet Insurance Corporation in Non-life insurance market 21

3.1.2 Introduction of Healthcare insurance line: 24

3.1.2.1 Coverage 24

3.1.2.1 Difference between Healthcare insurance and Life insurance 25

3.1.3.2 Insurers competition in “hot” growth market 26

3.2 Existing process of information management: 28

3.2.1 Pre contractual: 28

3.2.2 Post contractual 30

3.3 Role of Agent activity 31

3.3.1 Agent as Insurance intermediaries 31

3.3.2 Agent as Hospitals and Clinics 32

CHAPTER 4: PROBLEMS OF ASYMMETRIC INFORMATION MANAGEMENT AND SOLUTIONS 34

4.1 Adverse Selection issue 34

4.1.1 Database analysis 35

4.1.2 Reasons for existing Adverse Selection issue: 38

4.1.3 Consequences of Adverse Selection issue 40

4.2 Moral Hazard problem 40

4.2.1 Database analysis 42

4.2.2 Reasons for existing Moral Hazard issue 44

4.2.3 Consequences of Moral Hazard issue 44

4.3 Solutions for problems in information management: 46

4.3.1 Solutions for Adverse selection issue 47

4.3.2 Solutions for Moral hazard issue 49

4.3.3 Solutions for encouraging the enthusiasm from Insurance Intermediaries (Agency and Broker): 54

4.3.4 Solutions for encouraging the enthusiasm from for Outside Intermediaries (Hospitals and Clinics): 54

CHAPTER 5: CONCLUSIONS AND RECOMMENDATIONS 55

5.1 Conclusions 55

5.2 Recommendations 55

REFERENCES i

APPENDIX 1 - QUESTIONAIRE AND ANSWER SHEET ii

APPENDIX 2 – VERIFICATION AT KINHBAC HOSPITAL xvii

APPENDIX 3 - MEDICAL CARE INSURANCE: PREMIUM AND BENEFIT xviii

APPENDIX 4 - VERIFICATION AT BACHMAI HOSPITAL xx

APPENDIX 5 - VERIFICATION AT TUONGLAI DENTAL CLINIC xxiv

Table 3.1 - Assessment of non-life insurance Vietnam market 23

Table 3.2 – Development of Medical Expenses Insurance Type at BaoViet 25

Table 3.3 – Vietnam Market growth for Healthcare line 27

Table 3.4 - Premium for Healthcare line Vietnam market 27

Table 3.5 - Healthcare Line Loss Ratio in Vietnam Insurance Market 28

Table 4.1 – Medical Care insurance contract – Sale report from 2010 to 2011 by Age of Insured Person 37

Table 4.2 – First date of treatment analysis by Age of Insured Person 38

Table 4.3 - Medical Care insurance contract – Sale report from 2010 to 2011 following each Benefit 42

Table 4.4 - Claims Analysis Following Each Benefit 43

Table 4.5 – Summary solutions for Adverse Selection and Moral Hazard applied to each party 46

Table 4.6 – Comparison between premium paid by Insured person and reimbursement paid by BaoViet 49

Table 4.7 – Examples of “No-claims discount term” 53

Figure 2.1 - Multiple Principal - Agent Relationships 10

Figure 2.2 – Claims Handling process via Medical Facilities 13

Figure 2.3 - Illustrated Framework of the study 19

Figure 3.1 - Organizational Structure 21

Figure 3.2 - Key Performance Indicators 22

Figure 3.3 - Top insurance companies in Vietnam market 24

Figure 3.4 – BaoViet underwriting process 28

Figure 4.1 - Adverse selection expression via first date of treatment 36

Figure 4.2 - Group of normal diseases and Pre-existing Medical Condition 40

Figure 4.3 - Interference between adverse selection and moral hazard 46

Figure 4.4 - Direct Billing card issued by BaoViet and Gras Savoye, 50

Figure 4.5 - Screen shot of client’s information: 51

CHAPTER 1: INTRODUCTION OF THE STUDY

1.1 Rationale of the study

Insurance industry is a business that objective is risks Risks are defined as potential losses with uncertainty and unforeseen Unlike the oversea insurance market, Vietnamese market is lack of the connection between the insurers and between the other industries related to insured objectives, such as medical treatment history of person and Ministry of Health, traffic accident in motor vehicle and Ministry of Transportation, etc Laws have been issued for specific industries that prevented insurance company in verifying and observing insured objectives Consequences of the disconnection will be analysised in this study combined with loss suffered by insurance company, for instance: paying indemnity for pre-existing risks that had been accumulated in previous time Before exploring the consequences, this study is aimed to understand deeper the causes made this issue happening and the reasons why insurance companies still not eliminate it

On important point must be mentioned that supported for above consequences is hot grow factor in Non-life segment from year 2007 up to now Two digits of growing ratio for all insurers contains the unsteady element There have more than forty insurers and brokers in Vietnamese Non-life insurance market but no one has the effective information controlling system Chasing for sale target and forgetting the role of information management are now popular in market, not in any insurance company Most of new players are using the low premium strategy

in order to entice customer As consequence, some insurers are losing the reimbursement affordability because liability in contract is higher thousand times than premium paid, for instance Vietnam Air Insurance (VNI) in year 2011, BaoLong insurance company in year 2010 were losing the affordability in healthcare insurance Customer becomes premium shopping and insurers becomes low premium rivals without awareness about bankruptcy Shortage of information sources management will effect to underwriting and indemnifying Therefore, it affects to profit and growth of insurance company These effects of shortage will be clarified in this study too

1.2 Statement of problem

The objective of insurance industry is risks and information management relating

to these risks The nature of risk and the happened time effect to reimbursement decision directly Nature of risk is including covered risks and exclusive risks The happened time is to define the event appeared in or out of insurance period Existing problem in all insurance company now is still not active in information management to verify both factors for ensuring reimbursement decision Software

or systems used in insurers is assessed at simple level and information only They are not supported for emergency demand in connecting and observing history of insured objective

At present, Vietnam Insurance market is facing with problem of asymmetric information involving insured risks of customers For instance in healthcare insurance line, customers know their health condition better and much more than insurance company Wording of insurance could be complex and difficult to understand but simple explanation is healthcare insurance will deny all pre-existing medical condition of insured person Therefore, customer will not declare them clearly to insurer The issue that described with pre-existing risk from insured person and getting benefit from insurance contract is called adverse selection behavior

Besides, it has moral hazard as symptom of asymmetric information problem It is different with adverse selection because it is defined as customer behavior after time of signing insurance contract Moral hazard could be expressed via less attention in health protection, fraud and cheating during medical treatment, etc In order to defining the moral hazard, insurance company must verify with medical facilities and getting confirmation in writing This work is not fulfilled easily due to lack of law regulations supporting insurance company facing with reluctant from hospital and clinics

Both issues of asymmetric information are not existing in several insurance companies but in all insurance market Asymmetric situation between rapidly

development in increasing quality of life and human awareness; and undeveloped system in controlling information and connecting in insurer association will affect to Vietnam insurance industry Result from analyzing both issues via existing process and current situation in Vietnam market will be the foundation to build another projects repairing existing failures and predictable ones, such as losing affordability, unfair business environment, etc

insured person will hide the history of medical treatment and during first year until second year to get full benefit from treatment for tuberculosis

This study also has a small survey to evaluate the buyer’s behavior when they consider insurer and product before buying, which elements affected them strongly and lead to change existing insurer

Insurance intermediaries, including Agency and Broker, having important role as bridge from customer to insurance company is also interviewed about the quality

of system and service of some leading insurers The interview will be designed to ask the existing situation in Vietnam insurance market about the corporation in providing information of customer from broker

1.6 Scope of this study:

BaoViet is a first and biggest insurance company in Vietnam market, hence, this study choose BaoViet as a case study instead for all insurers BaoViet has a large distribution channel from the North to the South of Vietnam and all provinces in order to adapt the insurance demand from customer everywhere As the first seller

in Vietnam market in launching Healthcare insurance, BaoViet has many products

in this line can cover all demand level, from different income to different territory The highest premium (income) and biggest in volume of market share are the main points to evaluate the result from case study will be representative for overall market

This study uses Medical Care Insurance Product because it is the only product issued for one person per contract and launched at the beginning 2010 The other products are issued one contract for many Insured persons and data analysis would not be independent between Insured because premium data extracted follows its contract number (for instance: the Policy Holder is Procter and Gamble but the Insured persons are their employees, or, Plan Holder is a man and the Insured is his family) All data of this product will be used for this thesis to ensure the transparency and accuracy of result The data record will be analysed as much

as possible, followed its contract

Data grouping:

The claims data record is analysized follow each insurance contract and devided into many categories of contracts: new or renewal, core benefit and endorsements, loss ratio, insured age

Data Analysis

In each category, the data record will be analysed to assess the problem of Adverse Selection and Moral Hazard in health insurance Focused on Research Questions combining with grouping data record, this research intend to explore the causes of loss (subjective and objective) and behavior of Insured person in protecting their health after the purchase

1.7 Structure of the study:

This study is structured into five chapters:

Chapter 1: Introduction of the Study

This chapter introduces reseach problems, reseach objectives and reseach questions

Chapter 2: Literature review

This chapter mentions the theory of asymmetric information and definition of adverse selection and moral hazard Moreover, it also provides the relationship between customer and insurer, between insurance intermediaries to both insurer and customer There also have models multiple relationships of insurance intermediaries and insurer and solutions to solve the conflict but still ensures the goals of insurer

Some major definitions used in insurance market are explained in this chapter The framework of this study is motioned to illustrate the direction and steps relating

Chapter 3: Healthcare Insurance Line at BaoViet

This chapter introduces the main points of BaoViet Holdings and BaoViet Insurance Corporation The difference between life and non-life insurance and result of buyer behavior analysis have also been mentioned

This chapter provides the insurance market fluctuation and competitive situation, especially healthcare line between major players such as BaoViet, BaoMinh, PVI, PTI…

Chapter 4: Problems of Asymmetric information management and Solutions

Adverse selection and moral hazard are analyzed in terms of how they existed and comments from analysis results are provided Claims database is primary and fundamental data used in this thesis

Based on the results of the analysis and shortcomings in the operation of insurance companies, this thesis proposes a number of suggestions related to the healthy competition environment between insurance companies and revises information management in BaoViet insurance

Chapter 5: Conclusions and Recommendations

This chapter is mentioned about conclusions for both issues of Asymmetric information management in BaoViet after observing the treatment from customer: confirmation for existing, the causes and effects from both issues Disadvantages during making this case study will be remarked for further researches in the future

CHAPTER 2: LITERATURE REVIEW

2.1 Asymmetric Information Theory:

Asymmetric information is one of the elements leading to market inefficiency According to Pindyck and Rubinfield, asymmetric information has occurred when some parties know economic variables that are relevant for the choice they face more than the others 1

In medical insurance, most Insurance companies always offer a product providing the age of insured person from 15 days old to 65 years old ( the younger or older person has just be insured in some special agreements mentioned as in policy wording) People over age 65 have difficulty buying medical insurance at almost any price because “Older people do have much higher risk of serious illness, but why does the price of insurance not rise to reflect that higher risk? The reason is asymmetric information”2

Asymmetric information presents on all markets Whatever the product or service sold, the seller almost never knows the buyer’s preferences, nor the maximum price she would be willing to pay to acquire it

People who want to buy medical insurance know much more about their health situation (such as the chronically diseases) than the insurer and they want to be insured When the proportion of unhealthy person increases in the pool of insured people, the risk will be pushed up and lead to the point made unprofitable for insurance company

3

1

Rober S.Pindyck and Daniel L.Rubinfield (1996), Third Edition, Microeconomics, Prentice-Hall,Inc, p.593

2 Rober S.Pindyck and Daniel L.Rubinfield (1996), Third Edition, Microeconomics, Prentice-Hall,Inc,

pp.596-597

3

Pierre-Andre Chiappori (2006), “Asymmetric information in insurance: general testable implications”, RAND

Journal of Economics, volume 37, p.783

Actually, in the pool of insured people with age from 18 to 65, the asymmetric information also happens without hope to know from insurance company, such as congenital defect, dental treatment, pre-existing medical conditions, etc… Some people want to have complete medical insurance contract but it could not be specified when some information that is relevant to this deal is private and some unhealthy conditions

can be observable Insurance companies have been written the wording attached

to insurance contract aimed to clarify the benefits, exclusions and cancellation right to prevent the opportunistic behavior The behavior of consumer in this case, coming from asymmetric information symptom, is called adverse selection and moral hazard

2.2 Manifestation of Asymmetric Information:

2.2.1 Adverse Selection:

Adverse selection is a problem of “pre contractual opportunism” in that the presence of private information provides people with the opportunity to lie prior to contract taking place Private information in this case means customers can lie about how bad a risk they are; and the outcome from the insurance companies’ point of view is that they get an “adverse selection” of customers , i.e they end with the bad risks.4

4

Ian Molho (1997), Lying and Cheating in Markets and Organizations, Blackwell, pp.8-9

Certainty risks behind the adverse selection of customer which be happened under type of illness or diseases is completely different with coverage risks Most of medical care wording define coverage risks as new rising illness or disease and is not being in the group of exclusion diseases (such as Pre-existing medical conditions, congenital disease, chronically disease…) In simple way of explanation, insurance company has just insured for uncertainty events For example, pre-existing medical conditions and special disease are only reimbursed at second year (consecutive period required) provided that no treatment at previous year Unfortunately, the main point is how to assess a certain condition is new rising disease or pre-existing ones, for instance stomach, migraine, throat pain, etc If there is no cooperation from hospital in confirmation and no database of insurer community for treatment record, insurer will not have enough evidence to refuse the claim

In the other hand, adverse selection seems to be consequence of expected wealth-maximizing person and that person would pay an infinite amount to take the gamble (i.e between two players: Insurer and Insured) In purchasing medical care insurance, the bad risks persons are willing to pay higher premium than low risks one for the insurance cover

When having medical insurance, Insured persons are paid less attention in caring their health and start to think seriously about their health condition They visit hospital or clinics much more and will be angry when insurer refuses their claim due to normal health diagnosis in medical report

In outpatient treatment and especially with dental treatment, the moral hazard is performed strongly and could be in bad result The opportunity of getting evidence is low and sometimes, it could make danger for investigator Some dental clinics or private clinics are willing to revise the detail of treatment in avoiding the exclusion diseases for their patient There are circumstances in which insurance company cannot prove anything and

be obliged to reimburse due to exceeding 30 days for investigating (regulated by Vietnam Law) There also have many hospitals willing to cooperate with insurer, however, due to the unprofessional and old technology, they cannot issue the list of treatment record and details to prove the fraud of insured person

2.3 The Principal – Agent framework existing in insurance market

Asymmetric information problem could be assessed from the other sides, not sole from customer, such as insurance intermediaries, hospitals and clinics who have

Consumer Intermediaries Insurance Insurance Company

Outside Intermediaries

Information Quality

Sales Effort

relative benefits from transactions with insurance companies In general, whoever they are, their actions are exploited from maximizing expected utility

2.3.1 The Principal – Agent Framework:

According to Ross 1973, the framework is as follows: One individual (designated the “agent”) acts on behalf of another (designated the

“principal”) in undertaking some activity The agent claims a return for his efforts, e.g a fee or salary The principal may have many such projects or activities on the go and cannot run them all, and hence delegates responsibility for each activity to an agent in this way The principal is likely

to observe the outcome of the agent’s action, which allows him or her at least to make some inference about what the unobserved actions might have been.5

2.3.2 Multiple Principal – Agent relationships:

2.3.2.1 Insurance market performance:

Figure 2.1 - Multiple Principal - Agent Relationships

Source: Martina Eckardt (2007), Insurance Intermediation – An economic analysis of the

Information Services Market, Physica – Verlag A Springer Company, p.113

Author Martina has introduced the role of insurance intermediaries in insurance market as the party bring income for insurer and find out expected insurer for customer In this model, insurance

5

Ian Molho (1997), Lying and Cheating in Markets and Organizations, Blackwell, p.119

intermediaries could be Agency or broker, such as exclusive agents, independent agents, insurance brokers and bancassurance Outside Intermediaries are including Government Departments, medical facilities, Medical Assessment Board, etc…

Main characteristic of insurance industry is risk business All risk assessment is carried out based on how much information providing and nature of insured objective In healthcare insurance, the underwriting work has been done on some basic information of customers, such as age, job, health condition and treatment history There are direct transactions between customer and insurance company unless there are existing insurance intermediaries Pre-contractual steps, including consultant and explanation, are aimed to support customer in understanding healthcare insurance clearer As

a result, customers will choose the insurance plan following their demand to secure the coverage risks, not for searching profit

However, the participation of intermediaries (including insurance intermediaries and outside intermediaries) is affected to quality of information, in concrete is their honesty in providing Therefore, the asymmetric information situation becomes worse in insurer’s side via Adverse selection and Moral hazard issues

2.3.2.2 Intermediaries and Adverse Selection issue:

Adverse selection is the act of deliberately hiding information when having negotiations involved insurance contracts With experience and deeply understanding of processes in insurance companies, the insurance intermediaries cannot provide such information, which reduces benefit of customer On the other hand, these Agents advise customers to hide this information All transactions between the customer and these intermediaries are confidential and insurance companies have no right to interfere in this process Insurance companies are trying their best to emphasize moral behaviors to the

insurance intermediaries and hope to eliminate the consequences of asymmetric information

Insured persons have understood their health condition and relative symptoms Information can easily be exploited and reported to Insurer unless there are existing insurance intermediaries If customer work with insurance intermediaries, these information will

be exploited but how much it provided depending on the honesty and responsibility of the insurance intermediaries

When an insurance contract is issued, insurance intermediaries will initially complete two tasks: task with the insurance company in sales effort and task of finding the appropriate insurer to customers If the claim arises involving in exclusion risks, insurance companies are subject to verify and payment is action when having no result

Loss amount won’t be shared between Insurer and insurance intermediaries as premium sharing Insurance intermediaries is only responsible for sales effort, not for customers and information involving

2.3.2.3 Intermediaries and Moral Hazard issue:

Moral Hazard comes from the ethics of insured person With the participation of intermediaries, Moral hazard is affected by both intermediaries Moral hazard is associated with finding the benefit from actions can not be monitored by the insurer Expected benefits from healthcare insurance could be expressed via subjectivity attitude in health protection and often arrive to medical facilities for checking; and/or patient is not insured person; and/or make fake medical documents

Quality of information depends on the honesty and ethics of intermediaries This source will be the basis for reimbursement or refusing claims request Figure 2.2 describes the process of reimbursement when treated at BaoViet’s partners or in facilities outside BaoViet’s network.

1

Consumer authorised by BaoViet Hospitals/ Clinics Insurance BaoViet

Principal Agent

Other Hospital /Clinics

2

Figure 2.2 – Claims Handling process via Medical Facilities

(1) Consumer go to hospital or clinic for treatment (2) Medical documents are collected and sent to BaoViet for payment request Source: BaoViet Insurance Corporation (2009), “Claims Handling and Direct Billing

procedure”, Claim Handling and Direct Billing Department, Unpublished document

When treating at BaoViet’s partners, medical facilities serve Insured person as an Agent for the Principal These Agents understand clearly and deeply the exclusions and the role of information in assessing which are insured risks and exclusive risks In direct contact with customers combined with medical treatment experience, Agents hide the detrimental information and provide limited information to the insurer However, these actions are not controlled and consequences are not enforced by law When Insured persons arrive to other medical facilities outside BaoViet’s network, information is provided depend on the regulations of each facility and the willingness from the treating doctor

In addition, Government departments also play an important role affecting the counterbalance between the insurer and insured person Law on Medical Examination and Treatment mentions the protection rights for medical information from patient’s treatment Law on Insurance Business allows insurance companies to verify the cheating and clarify the doubt However, there is no regulation connecting two Laws to ensure the rights of Insurer, hence, the problem of asymmetric information still exists

In short, “the game” between the two principals together with the participation of intermediaries (or not) can be concluded in many points, as below:

• Information plays an important role in the relationship between customer and insurance company This relationship is very complicated because of the risks contained accumulate in insured person’s nature and quality of information exchanged between the parties

• Without the participation of insurance intermediaries, direct transactions between the insurers and customers can ensure the transparence of information but cannot avoid the impact of asymmetric information These impact are supported strongly

by appearance of intermediaries Consequently, information is distorted by the supplier and focused on maximizing benefit for customer

• In business view, Insurance intermediaries have supported Insurance companies in decreasing expenses and effort in sales and marketing As long as the presence of both intermediaries in insurance market, information quality will be distorted via intermediary transactions Thus, impact of asymmetric information grows stronger and causes damage direct to the insurance company

2.3.3 Solutions for Principal – Agent conflict:

The interest of principal and agent is completely different as mentioned in theory The Agent also seeks wealth maximization as the principal but in another way

2.3.3.1 Sources of conflict:

Expense preferences

Differential attitudes to expenses lead to conflict between Principal and Agent Beginning with Insurance intermediaries, as usual, the

high quality insurers will offer high rate premium, but the agent would like to select them to secure income and prestige even though it can make customer dissatisfied However, they have been trained negotiation skills to convince customer Their income is defined as agent fee, exploited from premium at a certain rate In contrast, the indemnity amount is only exploited from provisions of insurer, hence, asymmetric information has affected only to insurance companies because they did not insure themselves by using some special conditions in contract

The outcome in each treatment of Insured person that hospital or clinics which credited for BaoViet is always calculated higher at least 10% official price In the other hand, in some hospitals/ clinics, the official price applied for person who has insured by private insurance company is 20% higher than non-insured person

Under asymmetric information, there will have conflict in profit of Principal and Agent For instance, a patient suffered an illness, which can be cured as outpatient treatment and medicine, need to be surgery following the direction of doctor worked for Agent The coverage is always different between outpatient and inpatient treatment, i.e more and higher benefits, hence this decision will be profitable for both insured and Agent If Agents are BaoViet’s employee, they will choose the solution not only well treating but also less expense

Loyalty preferences:

Premium is the income of insurance companies, but the reimbursement is the outcome For keeping loyalty from customer, the insurers always try to serve customer faster and high quality, but they could not accept the cheating even though they understood the price of refusing the claim Another case is when loss ratio being very high, insurer obligate to increase the premium When customer

s walk away, insurers will lose the input (as premium) and affect to ability to reimburse in the future

Agents also want to keep loyalty from customer On top of that, the income or salary they are received being directly from customer premium Therefore, they always try their best to serve customer, even though there could be harmful to insurance company utility

2.3.3.2 Mechanism to restore Goal Congruence:

A number of control mechanisms may be identified The solutions could be from internal control mechanism (the principal) and external control mechanism Due to the difference between characteristic of

“agent” in theory and in this thesis, the mechanisms are limited as follows:

intermediaries

Hospitals/ clinics Internal Control

Mechanism

Monitoring Payment by results

Monitoring Payment by results Monitoring

External Control Mechanism

Common benefits and society awareness

Common benefits and society awareness

Common benefits and society awareness

Internal control mechanism

Monitoring

The principal could choose to improve the information by investing in systems to measure managerial inputs into the performance of agent The cost involved in monitoring will affect to the balance of the firm The principal will use the information to continue the contract with agent or not

However, monitoring may also be problematic if share-ownership (in the principal) is widely dispersed6

6

Ian Molho (1997), Lying and Cheating in Markets and Organizations, Blackwell, p.124

There has conflict between

shareholders to bear the cost However, if one shareholder does it and get efficiency for the firm, all shareholders benefit

Payment by results

The idea is to motivate the agent by making him bear more fully the consequences of his own actions The principal cannot observe the agent’s actions but they can observe the outcome of those actions.7

The history of insurance is beginning from saving money and goods For a long time, insurance had developed via self-insured and transferred to insurance company completely In over view, the purpose of insurance is sharing the loss of community and society for uncertainty and unforeseen risks Therefore, insurance companies need to educate their employee and increase the

This solution could be applied for insurance intermediaries via the efficiency (retain amount after indemnity responsibility and management expenses) compared with premium (income) per contract At present, most of insurance companies have focused on the competition and chasing the competitive premium They have paid attention in loss ratio less than sales target, hence forget to deal with agent about the outcome of cooperation business

Insurance companies now are depended on huge income “brought”

by insurance intermediaries It is just the input and Insurers paid broker fees or commission for agent based on it However, there is still not award mechanism to party having good job in finding customer who has good method in risk control The loss ratio, which

is lower than 60%, could be considered as a good sign, for example

External control mechanism

Common benefits and society awareness

7

Ian Molho (1997), Lying and Cheating in Markets and Organizations, Blackwell, p.122

awareness of their Agent and customer When insurance companies are not existed, the damage and huge lost will be suffered by the customer

2.4 Definitions used in Medical Care insurance wording:

Insured person: An individual who has completed or whose name is included on a

Proposal Form for the Policy and for whom commencement of cover has been confirmed, or who has been issued with a Certificate of Insurance provided always that he/she is not traveling away from their usual resident place for more than ninety (90) consecutive days per period of insurance

Pre-existing Medical Conditions: Any medical conditions of the Insured Person

which have been diagnosed; or for which symptoms existed that would cause an ordinary prudent person to seek diagnosis, care or treatment; or for which medical treatment was recommended by a medical practitioner, irrespective of whether

treatment was actually received or not

Special Diseases: A medical condition that, in the opinion of a Physician who is

licensed as a General Practitioner as well as Specialists or Consultants, is progressive and persistent without real cure This policy refers to cancer and tumor of all types, hypertension, cardio-vascular diseases, stomach ulcers, chronic inflame of bone joints, intestine ulcers, hepatitis, inflammation of membrane inside uterus, hemorrhoids, urolith, biliary calculus, tuberculosis, cataract, sinusitis, diabetes

Waiting Period: The insurance period in which all benefits applied is not paid to

Insured person

2.5 Framework of the Study:

The analysis of current information management at BaoViet in the view of impact from asymmetric information will be analysised in two branches: adverse selection and moral hazard Each issue will be presented in separately but same direction, such as their manifestation in healthcare insurance, data analysis proving, causes

for existing and consequences Recommendations will be proposed based on each issue’s problems on the view of BaoViet manager

The below graph illustrates the framework of this study

Figure 2.3 - Illustrated Framework of the study

Pre-Existing Medical

Conditions

Birth defects, hereditary

Less attention in protecting health and treatment visits

increasing

Fraud based on real

treatment

Fraud by using medical documents of

another person

RECOMMENDATIONS

PROBLEMS OF ASYMMETRIC INFORMATION MANAGEMENT

Conclusion

Under the Multiple Principal – Agent Relationships, in insurance company view, Asymmetric information and its performance become a strictly problem in which insurer is always passive In order to maximize expected benefits, customer and/or agent try to hide as much as possible the information could be involved in exclusions of coverage

3.1 Profile of BaoViet Insurance Corporation and rapidly development of

Healthcare Line

3.1.1 BaoViet Insurance Corporation in Non-life insurance market

As the first insurance company in Vietnam market, BaoViet Insurance Company was established in 1965 and doing business with fire and cargo insurance Beginning with head office in Hanoi capital and a branch in Ho Chi Minh City until now BaoViet Insurance Corporation has 68 branches in Vietnam BaoViet Insurance Corporation is a member of BaoViet Holdings, which is the former state-owned monopoly

Source: BaoViet Holdings (2011), “BaoViet Holdings Annual Report 2010”, website: www.baoviet.com.vn

Supervisory Board

Audit Committee

Strategy and Investment Committee Remuneration and Appointment

Risk Management Committee ALCO Committee

Operations Block

Human Resources Block Information Technology Block Real Estate Management Block Financial Management Block Strategy Development Block Risk Management Block Investment Block

Internal

Audit

Division

BaoViet Life Corporation

BaoViet Fund Management Company

BaoViet Security Company

BaoViet Commercial Joint-Stock Bank

BaoViet Investment Joint-Stock Company BaoViet Investment Joint-Stock Company

BaoViet AuLac Limited Company

Associated Company

to BaoViet Holdings, for instance, it contributed 36% of total revenues in

2010

Source: BaoViet Holdings (2011), “BaoViet Holdings Annual Report 2010”, website: www.baoviet.com.vn

Non-life insurance market

Even though there was low growing rate of GDP from 2007, Vietnam insurance market still has good sign in growth as predicted by Swiss Re (see Table 3.1)

Vietnam is an emerging insurance market where insurance premiums are lower proportion of GDP and many risks are not insured 8

8 Swiss Reinsurance company (2011),”Sigma - World insurance in 2010”, Volume 2, website:

http://www.swissre.com/publications

Bancassurance will be new trend in these countries and the efficiency solution for both insurance companies and banks when risks of business and financial risks are still not adjusted In recent years, the word “bancassurance” becomes widely popular due to many reasons, including the economic crisis when strategy of bank is obligated their customers to buy insurance (car insurance, personal accident insurance, etc.) for insuring fully payment of credit

is always at two digits and high volume in premium There will be challenge for healthcare insurance information management because customer begin to aware and careful in what they are paying for insurance (premium per capita has better growth symbol, even though still at 0.9% per GDP) There could be maternity stage for Vietnam Healthcare insurance

Table 3.1 - Assessment of non-life insurance Vietnam market

Year 2007 2008 2009 2010 2011 2012 2013 2021*

Non-life Insurance Premiums

Premium per

GDP 0.7% 0.7% 0.8% 0.8% 0.9% 0.9% 0.9% 1.3% Premium per

capita,USD 6.0 7.7 8.6 9.3 11.2 13.4 15.3 41.1

Non-life Insurance Premiums by business line

Direct premiums, VND bn

Non-life total 8,258 10,879 13,644 16,786 20,805 25,253 29,877 101,756 Healthcare 1,192 1,597 1,960 2,458 3,004 3,611 4,241 12,172 Motor 2,527 3,138 4,375 5,272 6,504 7,991 9,566 36,082

Average Growth rate

Non-life total 27.9% 31.7% 25.4% 23.0% 23.9% 21.4% 18.3% 15.6% Healthcare 22.0% 34.0% 22.7% 25.4% 22.2% 20.2% 17.4% 13.0% Motor 43.5% 26.0% 37.5% 20.5% 23.4% 22.9% 19.7% 16.9%

* Average growth rate for multi-year period, inflation-adjusted growth rate based on local currencies USD equivalents converted using the average exchange rate for that year Shaded area represents estimates/ forecasts by Swiss Re Economic Research & Consulting Sources: various issues of VietNam insurance, Reinsurance Market Review, VinaRe; MOF; Vietnam Insurance Association; Swiss Re Economic Research & Consulting Historical growth rates are indicative, given that figures are published by different institutions over the years

Source: Swiss Reinsurance Company (2011),”Vietnamese insurance market January 2011”, p12, website: http://www.swissre.com

BaoViet Insurance Corporation and its main competitors

Up to quarter 3 in 2011, Vietnam has approximately 27 players in non-life market including state-owned, joint venture, foreign and local ones From

2008 up to now, BaoViet Insurance Corporation had been facing with strictly competition from Bao Minh and PVI Even though BaoViet is still leader in

2011 but the distance with PVI insurer is a small amount BaoViet is changing their strategy at the beginning 2011 and focused on effective business Hence, facing with PVI focusing on market share, BaoViet meets many difficulties with low premium competition

Figure 3.3 - Top insurance companies in Vietnam market

Source: Association of Vietnamese Insurers (2011), “Vietnam Insurance market

report after 09 months in 2011”, website: http://www.avi.org.vn

3.1.2 Introduction of Healthcare insurance line:

3.1.2.1 Coverage

Healthcare insurance has been existed in Vietnam under several names, but, in general, it was the combination between many types of products, such as personal accident, medical expenses and term life insurance

Coverage of healthcare is risks, which Insured will be suffered Covered risks could be risks due to accident, illness, disease or maternity Because the purpose of insurance is securing unforeseen issue, hence, healthcare insurance is very popular in developing countries at very high premium rate

When insured person suffered an accident or illness, disease, he will spend not only medical expenses for treatment, but also time and income losing The allowance during time of treatment will be indemnity to insured person if this benefit has selected in insurance contract

Healthcare insurance or combined employee benefit is a voluntary insurance, however, there is not much people wiling buy it as

known about illness condition on their own

Moreover, BaoViet also ensures the extra benefit, such as emergency evacuation via SOS international system, for insured person when accident happened at place out of his resident The treatment could be carried outside Vietnam territory but BaoViet can arrange with SOS for guarantee payment within the indemnity limit

3.1.2.1 Difference between Healthcare insurance and Life

insurance

There is still confusing in customer awareness about healthcare insurance This product is a type of Non-life insurance as mentioned in Article 7, Law on Insurance business effective from April 1st 2001

Life insurance is including many products that assured benefits for insured person whether he lives or dead

Non life insurance is including many products that assured indemnity for damage to property, and/or civil liability to third party required by laws and/or others not mentioned in Life insurance

3.1.3 Overview of market trends

3.1.3.1 Healthcare expenditure in Vietnam

There still not has official figure for insured person in Vietnam, but, referred to BaoViet, the number has increased year on year

Table 3.2 – Development of Medical Expenses Insurance Type at BaoViet

Year 2008 Year 2009 Year 2010 Year 2011 (*) Number of Insured

persons

2,121

16,847

54,722

50,544

Premium per year

(VND) 16,289,452,089 136,614,082,533 355,607,516,404 379,046,261,287 Premium/person/year

(VND)

7,680,081.14

8,109,104.44

6,498,437.86

7,499,332.49 (*) up to 20 September 2011

Source: BaoViet Insurance Corporation, “Medical Expense Insurance - Healthcare line

sales report from year 2008 to Quarter 2/2011”,Personal Accident and Healthcare

insurance Department, Unpublished document

was launched in 2008 with Aon Premier Care (with AON broker), with Intercare in 2009 (with Gras Savoye broker), with Medical Care Insurance in 2010 (with HSBC Banassurance) Aon Premier Care and Intercare are products having premium above eight million Vietnam Dong per person (Territory expanding to Worldwide) Medical Care Insurance has lower premium tariff for medium income customer with average premium at above five million Vietnam Dong per person for highest benefit (Territory Vietnam only)

A small survey to existing customer of BaoViet insurance showed that: (see Appendix 1)

• Vietnamese customers are focused on quality of service; different with traditional buying behavior is choosing brand name and reputation because insurance business started with belief

• Customers start to pay much intention in reimbursement Even though they are not totally satisfied with existing condition, but it

is the first reason made customer walked away with existing insurer

• This result also proves us the important of reimbursement: the method and service such as payment, explanation, etc

3.1.3.2 Insurers competition in “hot” growth market

Healthcare insurance line has high growth rate (two digits) year on year The cause of this issue is resident started to caring themselves and using healthcare insurance as best way to facing inflation and medical expenses rising Hence, combined product between personal accident and medical expenses for treatment due to illness, disease and maternity, called healthcare insurance being bought at lower price, has high growth rate and interested all insurers Most of new players and existing ones have tried to quote price as cheaper as possible to potential clients whether there could has indefinite risks As consequence, customers become the beneficiary in cheap premium

too much to Insurer

Table 3.3 – Vietnam Market growth for Healthcare line

Source: Association of Vietnamese Insurers (2011), “Vietnam Insurance

market report in 2009, 2010”, website: http://www.avi.org.vn

Within 4 years from 2008, non-life insurance market also remarked with the entrepreneur of new players, such as ABIC, AAA, PTI, etc The market has been split into many small pieces and become strictly

in competition, but BaoViet has not joined in low pricing competition Moreover, BaoViet has also increased the premium for insured person who has not good effort in controlling risks Therefore, the market share of BaoViet has decreased but still kept on leader position in total premium in 2nd quarter in 2011

Table 3.4 - Premium for Healthcare line Vietnam market

(UNIT '1,000,000,000VND)

INSURER Y2008

% SOM Y2009

% SOM Y 2010

% SOM

Y2011

Q2-% SOM

Source: Association of Vietnamese Insurers (2011), “Vietnam Insurance

market overview in business line in years from 2008 to 2011”, website:

http://www.avi.org.vn

The loss ratio in this line seems to be good from 2008 to 2010: less than 50% for loss ratio in total market Therefore, many insurers were entered to the race chasing potential customer and reducing premium without considering loss amount and loss ratio In 2011, combined with

pushed pressure in Insurers to control effectiveness

Table 3.5 - Healthcare Line Loss Ratio in Vietnam Insurance Market

(Unit : 1 000 000 VND)

YEAR

Total premium

Total claims

Combin

ed loss ratio Direct

premium

Direct insure

Claims

Loss ratio of direct Insuranc

e

Oversea

s reinsure

Assume

d premium

Oversea

s reinsure Assume

d claims

Loss ratio

of reinsure assumed

Source: Association of Vietnamese Insurers (2011), “Vietnam Insurance market – Sales

and Reimbursement Report in business line from 2008 to 2011”, website:

http://www.avi.org.vn

3.2 Existing process of information management:

Source: BaoViet Insurance Corporation (2011), “Underwriting procedure”, Personal

Accident and Healthcare Department, Unpublished document

3.2.1 Pre contractual:

When receiving offer letter from customer, Branch will issue quotation referred to demand and guideline from Head Office of BaoViet Insurance Corporation (about the underwriting) If there is not existing customer of other branch, the procedure will be carried out as regulated Any offer breaching the rules issued by head office (competitive discount, for instance), Branch must submit the quotation including suggestion In this case, the quotation is only effective when it is approved by Head office

Report to Head ffi

Quotation Accepted Insurance

Contract Underwriting

Communicatio

n

regulation of BaoViet Insurance Corporation, especially for Healthcare Insurance line, the renewal quotation is only as the same competitive with previous contract when the current loss ratio is under 80% Higher competitive quotation or any extension related to renewal quotation, even though ensuring current loss ratio being lower 80%, must submit to Head office

This is the difference between BaoViet and other Vietnamese Insurers The Head office is responsible for issuing standard quotation and avoiding to jump into “cheap premium pool” However, the weak point is underwriter still focused on premium and loss ratio too much There are two companies with same loss ratio but different in claims type must be treated differently

Premium in this line will be applied based on premium rate or premium tariff, depend on which product selling When customer has high loss ratio on previous year or working under high risks condition, Insurer would decide to increase premium The important point is all underwriting steps made by searching information via internet sources The underwriter don’t have enough information related to specific elements of that kind of work; previous claims record of customer from last insurer; medical treatment history from hospital network, etc Hence, the underwriting process is still depended on experience and emotion of underwriter

There is another cause lead BaoViet meeting to obstacles in underwriting process: it is claims record database or sharing network In order to get the high premium quotation, Sale executive will offer many competitive conditions for customer, such as extension benefit, high discount rate, etc However, there is no evidence to ensure customer joining this insured coverage would applied better mechanism of risk control in the future The customer will get full of insured benefit within this insurance period, at competitive premium and condition That is the benefit they will have first At the time of renewal, if loss ratio is over 100% and premium is increased, they also has right to choose another insurer “In the market, there are many insurers offering cheap premium” is what they are thinking, hence, Insurers who do not focus on quality and effective will jump into “cheap premium pool”

When insurance contract becomes effective and/or insured person passes the waiting period followed each benefit, they will start to treat and require reimbursement from BaoViet Reimbursement is responsibility that BaoViet committed with Insured at the time of signing contract Unfortunately, claims are recorded followed each insurance policy number, not directly to Insured person Therefore, it will take time to underwrite and consider loss ratio and claims details of each Insured person joining many years When a customer signing contract with BaoViet, he will receive an insurance contract with defining number and code For the next period, he will receive another number This is big problem in controlling claims record from one insured person Companies, Holdings, multinational companies, etc have joined healthcare insurance at BaoViet with number of insured person up to hundreds or thousands When one member of these companies change their work and joining other groups, it is very difficult to underwrite his risk

Healthcare insurance is always applied waiting periods for pre-existing medical conditions and permanent exclusions for hereditary medical condition, birth defects, congenital anomalies However, doctor who was responsible for directly treatment to Insured person must issue the confirmation for above medical conditions Vietnamese Laws, at present, do not allow insurance companies contact doctor for consulting and checking the medical documents without patient’s permit Otherwise, having authorized from insured person to investigate is just the first gate Some hospitals will supply medical reports, but confirmation for pre-existing medical conditions, hereditary medical conditions are impossible In 80% of cases verified, BaoViet receives the confirmation from Hospital as “undefined time or root of disease” This reaction could be understood in moral side or in emotion side Based on Law on Insurance Business of Vietnam, all disputes are obliged to solve in favor of insured person’s benefits if there is unclear or undefined information Based on BaoViet internal procedure, the claims handling executive is responsible for verifying medical treatment and conditions when there has any doubted issue related to exclusions As consequences, Claims Executive must contact to Hospital/ clinics for confirmation and proving the transparency in each claim

focus on minimizing fraud (inside and outside) However, pre-existing medical condition is only known completely by Insured Within insurance period, the one who really suffered outpatient treatment or dental treatment is Insured person himself or not can be controlled by BaoViet

Insurance is a business with object is unforeseen and uncertainty risk There are two kinds of risk: insured risks and exclusive risks Pre-existing medical condition is exclusive risk on first 12 months, provided that during above time, insured person did not have any medical treatment and/or consultant for that disease Because the waiting time applied for this condition is quite strict but the owner of information is Insured Hence, there is not fair in this game for insurers, including BaoViet

3.3 Role of Agent activity

Agents have different roles with both sides: insurance companies (Insurers) and customers In concrete, Insurance broker is responsible for offering competitive quotation to Insurer, not including provide the loss ratio and claims record As the same situation with Agents who introducing customer to insurer and waiting for commission Common point between two insurance intermediaries is getting competitive premium for their customer as soon as possible In some special cases, they are also requested for offering quality and prestige Insurer An Insurer having low premium and high commission will be focused by many Agents The Agent will

be willing to introduce many groups and big companies to Insurers High commission will be refunded for them, but loss will be only suffered by Insurers Hospital and clinics have the same role as Insurance intermediaries For serving customer and keeping loyalty from them, Hospital and clinics will focus on how to maximize benefit for customer The information affected to their potential clients will consider to be hidden

3.3.1 Agent as Insurance intermediaries

As intermediary role, Broker and Agency have directly contact with customer and BaoViet behinds them This role has advantage for BaoViet to save effort

in Sales and Marketing On the other hand, it could be harm for BaoViet to convince customer, because it depends on Agent support