Business risk management of bao minh insurance company

It can be said that insurance industry is a hot sector in modern life when people have high living standard and their high requirements in protecting themselves and their assets. Bao Minh Insurance Company is assessed to be one of leading insurance service providers in insurance market in Vietnam. There are many aspects to mention about issues in insurance field. However, this research only studied on business risk management of Bao Minh Insurance Company. The author used secondary information to make clear about business risk management of the company. Although the company has achieved lots of success in insurance business as well as risk management of insurance, it still exists limitations and challenges that require the company to recover. Thus, this research also recommends methods and solutions for both Bao Minh Insurance company and the State and Regulatory Agencies at aim to make risk management in insurance field better.

VIETNAM NATIONAL UNIVERSITY, HANOI

INTERNATIONAL SCHOOL

***************

NGUYEN HONG HOANG NAM

BUSINESS RISK MANAGEMENT

OF BAO MINH INSURANCE COMPANY

MASTER THESIS

HA NOI - 2020

VIETNAM NATIONAL UNIVERSITY, HANOI

INTERNATIONAL SCHOOL

***************

NGUYEN HONG HOANG NAM

BUSINESS RISK MANAGEMENT

OF BAO MINH INSURANCE COMPANY

QUẢN TRỊ RỦI RO KINH DOANH CỦA CÔNG TY BẢO HIỂM BẢO MINH

Major: Master in Financial Management

Code: 8340202.01QTD

MASTER THESIS

Supervisor: Dr Nguyen Thi Hai Duong

HA NOI - 2020

ABSTRACT Thesis title: BUSINESS RISK MANAGEMENT OF BAO MINH INSURANCE COMPANY

Pages: 75

University: Vietnam National University, Hanoi

Graduate School: International School

Date: December, 2019 Degree: Master

Graduate Student: Nguyen Hong Hoang Nam

Supervisor: Dr Nguyen Thi Hai Duong

Key words: Insurance, Risk management, Bao Minh Insurance company

It can be said that insurance industry is a hot sector in modern life when people have high living standard and their high requirements in protecting themselves and their assets Bao Minh Insurance Company is assessed to be one of leading insurance service providers in insurance market in Vietnam There are many aspects to mention about issues in insurance field However, this research only studied on business risk management of Bao Minh Insurance Company The author used secondary information to make clear about business risk management of the company Although the company has achieved lots of success in insurance business

as well as risk management of insurance, it still exists limitations and challenges that require the company to recover Thus, this research also recommends methods and solutions for both Bao Minh Insurance company and the State and Regulatory

Agencies at aim to make risk management in insurance field better

I would like to sincerely thank the anonymous participants who contributed data to this study Without their outstanding cooperation, this thesis would have never been done

I would like to thank my family, especially my parents for their constant source of love, support and encouragement in times of difficulty and frustration

Finally, I would like to thank my readers for their interests and comments on this thesis

While I am deeply indebted to all these people for their help to the completion of this thesis, I myself remain responsible for any inadequacies that are found in this work

Thank you! Author Nguyen Hong Hoang Nam

TABLE OF CONTENTS ABSTRACT

ACKNOWLEDGEMENT

TABLE OF CONTENTS

LIST OF TABLES i

LIST OF FIGURES/ GRAPHS ii

LIST OF ABBREVIATIONS 1

CHAPTER 1 INTRODUCTION 2

1.1 Study context 2

1.2 Literature review 3

1.3 Research objectives 6

1.4 Subjects and scope of the research 6

1.5 Research methods 6

1.6 Definition of key items 7

1.7 Structure of the research 7

CHAPTER 2 THEORETICAL ISSUES OF BUSINESS RISK MANAGEMENT IN INSURANCE COMPANY 9

2.1 Concepts of Insurance Business 9

2.1.1 Definition 9

2.1.2 Characteristics of Insurance Business 11

2.2 Insurance Business Risk of Insurance Enterprises 13

2.2.1 Definition of Insurance Business Risk 13

2.2.2 Classification of Insurance Business Risk 14

2.3 Risk Management in Insurance Business 18

2.3.1 Identification and Analysis of Risks 19

2.3.2 Risk Measurement 22

2.3.3 Control Risks 23

2.3.4 Finance Risks 25

2.4 Factors affecting Insurance Business Risk Management 26

2.4.1 Subjective factors 26

2.4.2 Objective factors 27

CHAPTER 3 BUSINESS RISK MANAGEMENT OF BAO MINH INSURANCE COMPANY (TIME PERIOD FROM 2016 TO 2018) 29

3.1 Introduction to BMI 29

3.1.1 History of Formation and Development 29

3.1.2 Organizational Structure and Functions 31

3.1.3 Product Lines of Bao Minh Insurance Company 33

3.1.4 Insurance Exploitation Channels 39

3.2 Insurance Business process and Indemnity process of Bao Minh Insurance Company 43

3.2.1 Insurance Underwriting process 43

3.2.2 Insurance Indemnity process 43

3.3 Business Performance of Bao Minh Insurance Company from 2016 to 2018 44

3.4 Real Situation of Business Risk Management of Bao Minh Insurance Company (2016-2018) 46

3.4.1 Insurance Business Situation 46

3.4.2 Risk Management Standards of Bao Minh Insurance Company (ISO 3100) 48 3.4.3 Real situation of business risk management 52

3.5 Evaluation of Insurance Business Risk Management of Bao Minh Insurance Company 58

3.5.1 Achievements 58

3.5.2 Limitations 59

CHAPTER 4: SOLUTIONS TO IMPROVE BUSINESS RISK MANAGEMENT IN BAO MINH INSURANCE COMPANY 63

4.1 Solutions to improve Business Risk Management of Bao Minh Insurance Company 63

4.1.1 Solutions from Bao Minh Insurance Company 63

4.1.2 Recommendations to the State and Regulatory Agencies 68

CHAPTER 5: CONCLUSION AND RECOMMENDATIONS 70

5.1 Summary of the findings 70

5.2 The implication of the research 70

5.3 Limitations of the research 71

5.4 Recommendations for further research 72

REFERENCES 73

LIST OF TABLES

Table 2.1: Matrix of frequency and risk margin 22

Table 3.1: compensation statistics of BMI in the period 2016 to 2018 53

Table 3.2: Claims reserve in the period from 2016 to 2018 54

Table 3.3: claim payment by each operation (period of 2016 to 2018) 54

Table 3.4: Premium income and claim payment of reinsurance operation (2016-2018) 57

Table 3.5: Insurance premium and combined ratio 59

LIST OF FIGURES/ GRAPHS

Figure 2.1 The process of risk management in insurance business 19

Figure 2.2: risk chain in insurance business 24

Figure 3.1: BMI‟s Organizational chart (BMI‟s annual report, 2018) 31

Figure 3.2: Insurance exploitation channel (IEC) 39

Figure 3.3: BMI‟s total revenue (2016- 2018) 45

Figure 3.4: BMI‟s profits before taxes (2016-2018) 46

Figure 3.5: the application process of ISO 3100 on risk management 48

Figure 3.6: List of reinsurers of BMI 56

Figure 3.7: Insurance premium and combined ratio (shown in the chart and table below) 59

LIST OF ABBREVIATIONS

International Organization for Standardization ISO Strength, Weakness, Opportunities, Threats SWOT Politics, Economics, Social, Technology PEST

CHAPTER 1 INTRODUCTION

1.1 Study context

Safety needs for individuals and organizations in society are eternal People always find ways to protect themselves and their property against the misfortune of fate and unexpected events that occur in the production and business process, and life To meet the urgent and legitimate needs of the people, insurance has been born, existed, and developed Insurance is a very importantly financial sector for countries

in general, and for Vietnam in particular Insurance is not only a risk- taking measure, but also has presently become one of effective capital mobilization channels for the economy In fact, insurance business activities in recent years have shown the continuous growth of insurance industry in general and non-life insurance in particular Insurance has the role in promoting and maintaining the sustainable development of the economy and society, and stabilizing the life for the people The non-life insurance market in recent years has been very active, but complicated Since after Vietnam‟s WTO integration, foreign insurance companies poured into Vietnam Domestic insurance companies are racing to establish themselves; this has created competitive pressure for businesses to make the market more complicated The development of economic and social fields leads to the development of all areas and makes risks increase In addition, fraudulent acts have become more and more sophisticated Insurance business aims at profitability Profit is not only due to the investment, but also from the direct insurance product business Therefore, non-life insurance companies must assess the risks that customers want to transfer to them and choose acceptable risks that bring high efficiency to businesses This requires insurance organizations have to set up strategies on the purpose of preventing and limiting risks

Bao Minh insurance (BMI) is one of leading insurance companies in Vietnam It was separated from Vietnam insurance group and established in 1994

In the beginning of operation, BMI has developed mainly in Ho Chi Minh City

However, the company has gradually risen, and become one of the leading enterprises in the industry Its branches have operated in the whole country Along with the development of insurance industry, BMI has had to compete with many existing and emerging insurance companies in Vietnam One of the strategies in the struggle for survival and development of BMI is business risk management strategy

As CEO of BMI, Mr Le Van Thanh said that insurance business is risky business; there is not a steadfast mind, it will be broken (Ha My, 2019)

From the context above, I choose “business risk management of Bao Minh insurance company” for my thesis Through this research, I hope that the research will bring helpful information about risk management in insurance sector

1.2 Literature review

In recent years, many studies have been carried out in the field of insurance They concentrate on risk management strategies The results of these studies have shown the characteristics, the roles and measures of risk management in insurance business

Joseph and Joshua (2013) conducted a study to examine the risk management practices of life-insurance and non-life insurance firms in Ghana The authors used comparative methodology to identify the similarities and differences in risk management practices of life-insurance and non-life insurance companies The results of the findings showed that almost all the life companies have stated their risk appetite levels, which enable them to identify which risks to absorb and which ones

to transfer However, non-life insurance firms have not laid down their risk tolerance levels explicitly Moreover, the research revealed the lack of talented personnel can lead to the risk in insurance management Risk management skills are very important

in preventing and limiting insurance risks In the findings, the aspect of not being proactive in risk management was also stated by Joseph and Joshua (2013)

Another study about risk management in general insurance business in India, Rao and Pandey (2013) emphasized risk factors causing insurance industry The research is quite significant because it has mentioned and deeply analyzed risk

management mechanism, risk identification, risk assessment and risk reduction and control The results of the study stated that insurance players prepared and emphasized more on recognizing risk parameters and pricing products based on risks The players under the immediate response to the pressure of a free market scenario, has dropped the rates even in hitherto non-profitable businesses An efficient risk assessment and management in general insurance industry lays great emphasis due to entry of private players, corresponding policy changes and the present day fact of unprofitable books, erosion of capital resulting from unmanageable claim ratios Practical he findings of the study revealed some differences and similarities in the risk management practices of life and non-life insurance firms Almost all the life companies have stated their risk appetite levels, which enable them to identify which risks to absorb and which ones to transfer But non-life insurance firms have not laid down their risk tolerance levels explicitly The results further revealed that the industry lacks sufficient personnel with the requisite risk management skills and that the sector does not manage risks proactively, rather they do so in a reactive response to regulatory directives

Nguyen Van Thanh and Takao (2005) made a study about supervising solvency of life insurance companies in Vietnam This was considered as one of measures for managing risk of insurance in Vietnamese insurance companies Accordingly, there were two common methods of controlling solvency of life insurance in the world as well as in Vietnam: (1) using fixed ratio model, and (2) using risk based capital model By applying these models in controlling solvency, insurance companies can limit and manage risk effectively

Being into the business of covering risks of other business and social entities, the general insurance players are exposed to financial and operative risks of self as well as of the insured For an effective risk management of the same proper identification of structural functions, their insurability, adequacy, commercial viability holds the key to success The risk may further be minimized by risk distribution through pooling of micro insurance, appropriate quantification and

accurate estimation of results in case of occurrence of underwritten peril In the process of risk management, the importance of information on risk transfer for effective mitigation and adaptation by core business may not be overstated Incorporating innovation, certification will further provide depth to the instruments Encouragement of public private partnership and a strong financial, legal and political framework will provide the much needed support to further increase the general insurance penetration and reducing the ever increasing claim ratio

Lubken et al (2011) has discussed environmental risk, risk management and uncertainty, and the dependence of environmental risk on social, scientific, economic, and cultural processes They propagate that natural catastrophes reportedly derive from past patterns of resilience and vulnerability The role of insurance sector in reducing the impacts of global warming and the challenges insurers and reinsurers face in dealing with the impact of climate change on their risk management strategies has been studied by Kunreuther et.al (2007) The study has examined the issues of attribution and insurability by focusing on natural disaster coverage Phelan et al (2011), have analyzed the adequacy of insurance responses to climate risk and has provided novel critiques of insurance system responses to climate change and of the attendant political economy perspective on the relationship between insurance and climate change Botzen et all (2009) have examined the role of insurances to reduce uncertainty associated with climate change losses for individuals The estimation results have suggested that a profitable flood insurance market could be feasible and the climate change has the potential to increase the profitability of offering flood insurance Rohland & Eleonora (2011) have discussed risk management and quantification of risk in the aftermath of fire in the Swedish and international reinsurance industry The study asserts that characterization of fire as a man-made hazard misrepresents its overall risk as it ignores natural causes of fire and associated risks An another important study by DeMeo et al (2007) talked about the importance of information on Environmental Risk Transfer and insurance options for potentially responsible

parties in case of liability of pollution, cleanup cost cap, and legacy insurance Phelan (2011) argues that unmitigated climate change threatens not just measurable, increased likelihoods of extreme events, but over time, wholly unpredictable frequencies for extreme weather events It also raises concern over the continued provision of insurance in a climate-changed world, for the insurance sector as well

as the societies dependent on insurance as a primary tool to manage financial risks

1.3 Research objectives

The purpose of this research is to analyze, and study factors and reasons influencing the real situation of risk management in insurance business of BMI in three recent years, from year 2016 to year 2018 From that, some solutions and recommendations are given for BMI in the future

1.4 Subjects and scope of the research

The subject of the thesis was business risk management in insurance It could

be said that insurance industry is a profitable filed for both providers and users of insurance in modern time as nowadays Insurance companies could use the amount

of insurance premiums from customers to lend to enterprises or individuals; and customers could prevent damage and losses from insurance premiums

The scope of the research was to review business risk management of BMI BMI was chosen for the research because it was a strongly developed insurance company in Vietnam insurance market The time range was from year 2016 to year

2018

1.5 Research methods

The research used economic research methods, methods of description, explanation, comparison, analysis, etc to analyze the real situation of insurance business risk management in BMI Moreover, the research used the method of dialectical materialism and historical materialism method For data sources, the research used secondary data source for analyzing business risk management of BMI Those were documents, internal information from accounting and financing department, compensation and business risk management department, plan

department of BMI In addition, information about business risk management was extracted from articles, and journals These ones serve for clarification of difficulties and solutions in risk management in BMI insurance Generally speaking, the case study of BMI was analyzed on the purpose of presenting risks in insurance business and identifying challenges in risk management From that, there was suggestions for solving these challenges for BMI in particular, and for insurance industry in general

1.6 Definition of key items

Risk: is defined as the chance of loss or an unfavorable outcome associated with

an action (Laurence Crane, Gene Gantz, Steve Isaacs, Doug Jose, Rod Sharp, 2013)

Business risk: According to Jim (2013), business risk means the various risks a

company copes with while doing business It is a very broad concept It generally includes the entire spectrum of risks which a company encounters

Business risk management: the process whereby organizations methodically address the risks attaching to their activities with the goal of achieving sustained benefit within each activity and across the portfolio of all activities

Insurance: is defined as a contract of reimbursement The reimbursement is

understood in the case of losses from fire, earthquakes and tsunamis, and as well

Bao Minh: a Vietnamese company operates in insurance field It was

established in 1994 and listed on HOSE since 2004

1.7 Structure of the research

Except for abstract, conclusion, appendices and references, this research includes five parts as follows:

Chapter 4: Solutions for business risk management in Bảo Minh Iinsurance Company

Chapter 5: Conclusions and recommendations

CHAPTER 2 THEORETICAL ISSUES OF BUSINESS RISK MANAGEMENT IN INSURANCE COMPANY

2.1 Concepts of Insurance Business

2.1.1 Definition

Insurance means the agreement between the insurer and the policyholder or designated beneficiary The insurer has the responsibility to pay the premium to the policyholder or the designated beneficiary a defined amount called claim payment

or benefit when there is the occurrence of a specific loss (Judy and Robert, 2005) The defined amount of claim payment could be a fixed amount, or could be reimbursed all to policyholder, or be reimbursed a part due to the loss occurred The insurer considers the losses expected for the insurance pool and the potential for variation in order to charge premiums Totally, it is sufficient for the insurer to cover all of the projected claim payments for the insurance pool The premium charged to each participant of the insurance pool is the share of the total premium for the insurance pool

Normally, in insurance business, there are a small percentage of policyholders suffering losses Their losses are paid out of the premiums collected from the pool of the policyholders So, the entire pool compensates the unfortunate few Each policyholder exchanges an unknown loss for the payment of a known premium

Generally speaking, there are some key items needed to remember in insurance definition such as insurer, policyholder, and premium The insurer is also the insurance company who agrees to make the claim payments The policyholder is also understood as the pool participant The payments that the policyholder makes

to the insurer are premiums The insurance contract or insurance agreement is called the policy The risk of any unanticipated losses is transferred from the policyholder

to the insurer who has the right to specify the rules and conditions for participating

in the insurance pool

Insurance is divided into 3 different categories on the basis of the characteristic of each insurance Based on the nature of insurance, insurance is classified into life insurance, fire insurance, marine insurance, social insurance, and miscellaneous insurance In terms of the view of business aspect, there are two types of insurance including life insurance and general insurance The classification

of insurance from risk point of view includes personal insurance, property insurance, liability insurance and fidelity guarantee insurance

Insurance business means an operation of an insurance enterprise for making purposes whereby the insurance enterprise accepts the risks of the assured,

profit-on the basis that the insurance buyer pays insurance premiums to the insurance enterprise and pay insurance benefit to the beneficiary or indemnify the assured when an insurance event occurs

The purpose of insurance business is to make profit Only profits from an insurance enterprise can survive and thrive in a market economy In addition to the main goal of profitability, insurance business must also meet the needs of customers, help customers quickly stabilize their lives and business production when unfortunate losses and losses occur

The essence of insurance business is the transfer of agreement-based risk sharing Insurance enterprises accept the risks that insurance participants transfer to them with them, and fulfill their obligations towards the State It means the insurer agrees to pay insurance or indemnify participants when events occur In return, insurance businesses will collect premiums to create reserve funds, manage and use the fund to fulfill their commitments and profitability

According to the law of insurance business (2000), insurance business activities are often associated with reinsurance business activities, which is "the operation of an insurance enterprise for the purpose of making a profit whereby the insurance enterprise receives a premium from the insurance enterprise insurance

policy to commit indemnity for liabilities received” Both two business activities exist within an insurance enterprise In particular, insurance business is the main business, but reinsurance business is not impossible On the one hand, reinsurance increases revenue, thereby increasing profits for insurance businesses (in case of re-taking On the other hand, reinsurance helps the original insurance business of the insurer be stable, safe, and profitable, especially when the insured risk actually occurs (in case of re-assignment) In addition to the purpose of profitability, reinsurance business also helps insurance companies expand relationships with their customers, capitalize on capital, learn experience, gain more information, and support staff training

2.1.2 Characteristics of Insurance Business

Insurance is an important field for countries in general and for Vietnam in particular Insurance is not only a risk-taking measure, but also has become one of the effective capital mobilization channels for the economy In fact, insurance business activities in recent years have shown the continuous growth of the insurance industry and the potential for future development However, Vietnam's insurance market is being diversified with high speed, market pressure and challenges of integration

Insurance business is a kind of risk- trading, sharing losses with customers; insurance products are services that are particular, unique, abstract but very specific, and more realistic than all products on the market once the terms of the insurance contract are implemented promptly and effectively (Kavita, 2019)

In terms of capital, insurance business requires a large amount of capital at aim to meet high demand of market Actually, many companies need big funds to run business operation These funds can be used for both short term and long term investment In addition, insurance companies support businesses in projects which have high level of risk and are able to get high profits (Ibaohiem, 2019)

Insurance business is considered as one of sectors that face with high risks (Gia Linh, 2019) These risks are shown in many aspects such as the failure of

business companies in loans payment for insurance companies or insurance payment for individuals and organizations as an example As a result, it is extremely necessary for insurance companies always to have insurance reserves Insurance companies always have to maintain solvency during the process of insurance business operation When there is a risk of insolvency, the insurance enterprises must take the initiative in immediately implementing measures to restore solvency and at the same time report to the Ministry of Finance about the financial situation and causes of the risk of loss payment capacity and recovery plan If the solvency cannot be restored, the business will be placed under special control

There is another characteristic of insurance business of both cooperation and competition Normally, companies in same industry compete with each other in business operation This competition is shown in consumption markets, number of customers, quality of products and service, etc Insurance business is different when

it is not only competitive, but also cooperative (Brands Vietnam, 2017) In the development process, insurance businesses need to cooperate to bring about unity and demand for healthy competition Insurance enterprises become familiar with international cooperation integration and create competition for insurance enterprises to improve their competitiveness in order to bring better benefits to insured participants

Insurance products are products "of the reverse business production cycle" Insurance enterprises do not have to invest capital in advance but receive the insurance premiums paid in advance by the insured and fulfill the following obligations to the assured when an insurance incident occurs Therefore, it is impossible to calculate the effectiveness of an insurance product at the time of sale (Social sciences, 2019)

Insurance business is based on the law of large number It means that people will experience from each other to participate in insurance contracts In particular, one person buy insurance; then, he or she recongizes the benefits from the insurance contact and introduce to other persons Also, there are cases that people recognize

benefits insurance contracts bring for and they would like to buy one or some insurance contracts for their relatives

It is certain that insurance business activities must comply with the provisions of the law and relevant international treaties In order for insurance companies to operate effectively in the market economy, it is very necessary to adjust by international laws and treaties related to insurance activities

2.2 Insurance Business Risk of Insurance Enterprises

2.2.1 Definition of Insurance Business Risk

People usually think of risk when mentioning about insurance “Insurance” and “risk” are two words that are always tied together In other words, “insurance” and “risk” are likened to the picture with the shadow Having risk just has insurance So, risk means an unfortunate, unforeseen possibility of occurrence, time and space, as well as its severity and consequences (Rao and Pandey, 2013) In general, the risk is an objective and unforeseen cause in the four aspects shown in the above definition For example, Vietnam often has storms in summers in the North and Central regions but does not anticipate specifically where and when there

is the storm, its intensity and the damage caused by it So, the storm is a risk There are types of risks that cause damage to this property but do not cause damage to other assets such as hail; showers; waterlogging; and droughts with different impacts on different crops Therefore, what people intentionally do to themselves, what anticipation of space and time happens is not a risk In insurance business, insurance companies cannot anticipate accidents occurring to their customers; they also can not anticipate storms destroying customers‟ cargoes on sea Generally speaking, insurance business risks are unexpected events that occur and result in a deviation, contrary to the desired result of making losses in insurance business for insurance companies It always moves and changes in the natural, economic, political, social environment

A risk of loss so closely tied to an insured's way of doing business that it is considered not to be an appropriate subject of insurance coverage; such risks are

typically addressed as overhead (i.e., the cost of the loss is included in the price of the business's products or services) or as a subject for loss control The cost of replacing a defective product or redoing defective work is a classic "business risk" and therefore is excluded from most liability policies (IRMI, 2019)

An insurance company faces business risk when there is the appearance of profiteering insurance, weakness in its management, poor capacity of human resources and business risk stemming from the agent Insurance profiting reduces profits, limits business efficiency and even adversely affects the reputation of insurance enterprises In issuing insurance policy, due to the low transparency, the insured person tends to seek insurance benefits In life insurance, the situation of agents running after sales, not doing the right business processes is increasingly common In fact, this has led to a dispute when settling insurance compensation The situation that the insurance employees accidentally or intentionally recorded the wrong date of participation in the insurance certificate, or the insurance agent colluded with the customer, even, they may trace "the way to move." "For customers to take advantage of loopholes in papers and inspection procedures to make personal profits, etc; phenomenon of false declaration, false declaration of accident of the insured, the insured with acts of colluding with other people officials such as: medicine, doctors, police, witnesses in accidents, etc are quite popular in Vietnam

2.2.2 Classification of Insurance Business Risk

The classification of risks in insurance business is a little bit complicated Based on the value of risk, insurance business risk is classified into types: (1) financial risk and (2) non-financial risk (Sony, 2013) Financial risk in insurance business is the risk that its consequences can be measured in money Damaged property will lead to financial loss, which is the cost of recovering and repairing properties, the cost of replacing the parts of damaged properties, and the cost of buying other similar properties to replace the damaged properties Losses related to human losses can also be assessed by money, which is the cost of treatment,

reduced income due to inability to work, etc Non-financial risks in insurance business are risks that cannot be measured by money For example, in the case of buying a motorbike or order a dish that does not suit buyer‟s taste This can be considered as a risk, but its consequences do not cause financial damage, just make buyer feel dissatisfied This can also happen when buying a home Generally speaking, non-financial risks mainly impact mental and social issues Therefore, the determination of consequences with a financial value is not possible For an insurance enterprise, the non-financial risk may be the image and reputation of the business in the eyes of customers and in the insurance market Competitive ability may be weak when an insurance company is devaluated by its customers As a result, revenue and benefits will reduce

Based on the characteristics of risk, insurance business risk is divided into two kinds: (1) pure risk and (2) risk of speculation (Michael, 2006) The pure risk in insurance business is the risk that can only lead to damage or break even; there is no profit- making factor inside Its consequences can only be unfortunate and be not able to have profitable things This type of risk includes the risk of traffic accidents, house fires, theft of property, labor accidents, etc Speculative risks in insurance business are risks that have an internal profit-taking factor The investment in stocks

is an example This investment may be lost or break even, but its purpose is to make

a profit Trading securities, speculating agricultural products, and speculating on other goods belong to this type of risk For an insurance company, risk happens when the company uses the amount of insurance to speculate in securities or speculate in a project; in the case that the price of stock is high or the project works well, the insurance company‟s speculation is profitable However, in the case that the stock price has trend to go down or the project does not work well; consequently, the insurance company has to face the risk of loss in this speculation

It is clear that people always feel uncomfortable with pure risks and are interested in speculative risks In fact, the usual pure risks are covered; the risk of speculation is not covered The reason is that no one wants to cover all kinds of risks in which the

consequences can be a profit People are willing to buy insurance for speculative risks with a chance to make a profit Their motivation to try to achieve this profit would be very small if they knew the insurance company would pay regardless of whether they tried or not In terms of risk, mental risk is very high

Based on the scope of impact, insurance business risk is divided into (1) basic risks and (2) separate risks (Johnson, 2015) Basic risks are risks that arising from objective events and affecting the whole society such as wars, terrorism, economic crisis, inflation, unemployment, social and political instability, etc So, it

is thought that overcoming this type of risk is the responsibility of the whole society, even the need for the support from Government and International subsidies Insurance companies do not cover these types of risks Separate risks are risks that only causing damage to one or a few people These risks arise from subjective and objective events of each individual or organization who are insurance enterprise‟s customers For example, the warehouse of an organization is burnt and stolen This type of risk is often covered by insurance enterprises and they must make payments

to customers to overcome the losses

Based on the cause of the risk, insurance business risk is classified into (1) disaster risks are phenomena caused by natural disasters such as earthquakes, storms, etc; (2) risks due to unexpected accidents: collision, toppling, etc; (3) risks due to social phenomena such as wars, strikes, social violence, rebellion, etc

Based on the impact of the environment causing risks, insurance business risks are divided into: (1) economic risk, (2) legal risk, (3) risk from competitive environment, and (4) risk relating to business environment (EY, 2012) Economic risks are risks arising from economic issues such as financial crisis, inflation, unemployment, global economic recession, etc Legal risks are risks relating to the completeness, clarity and transparency of the law and the reality of the law If the law is not complete, clear, and transparent; insurance enterprises are easy to meet risks in insurance business operation The risk from competitive environment means that number of insurance companies is more and more increasing Thus, the

competition among these companies is also increasing Risk relating to business environment means that companies cannot receive important information from customers; or, information is lack or incorrect; or, information of customers coming

to insurance enterprises is too late

Based on the situation of impact, the risk is divided into: (1) risks stemming from subjective causes, and (2) risks stemming from objective causes (Felix, 2001) Risks stemming from subjective causes are weaknesses of insurance enterprises in insurance business operation such as shortage of capital, lack of knowledge and experience, weakness in management and as well Risks stemming from objective causes are the impact of macro environment on insurance business operation that insurance enterprises cannot control such as recession of economy, inflation and so on

According to Nguyen Thi Tien (2015), a risk of insurance that can be insured must meet such characteristics as: (1) loss must be random; (2) must be measurable, financially quantifiable; (3) must have a large number; and (4) not contrary to the moral standards of society In terms of random loss, an event that can be insured must be completely random standing on the insured's perspective It is impossible to ensure an event that will surely happen because it is not random; therefore, the transfer of risk will not occur As such, it is not possible to insure what is likely to happen as a result of natural wear and tear Nor can a person insure what the insured intentionally caused Intentional actions of others will be automatically excluded unless it is completely unexpected to the insured There is a point beyond this rule, which is the risk of death; this risk will certainly happen but it is still a risk that can

be insured However, the time of death must be unexpected Referring to measurable, financial and quantifiable characteristics, the meaning of insurance is that it acts as a mechanism of risk transfer and financial compensation for risks Insurance cannot eliminate risk, but it is responsible for financial protection to deal with the consequences of losses If so, the insurance risk must be able to result in a measurable loss with financial instruments That can be easily seen in the case of property losses The value of the lost money of the property is measurable; and as

such under insurance conditions, it must be compensated The exact value of the loss will not be known from the outset when signing the insurance contract, but will

be determined after the loss has occurred In the consideration of a large number of policyholders, if the number of policyholders subjected to the same risk is sufficiently large, the insurer can predict the extent of the loss they may incur If the number of policyholders subjected at risk of the same type is not large enough, the task will be much more difficult and the calculation of the amount of premiums to

be collected will only be a conjecture of information but not an accurate calculation

by math In such cases, the insurer may be cautious or not cautious when calculating insurance premiums, but to ensure safety, the company will certainly try to charge very high premiums to cover the losses in the worst cases Finally, the characteristic

is not contrary to the moral standards of society The general principle recognized

by law is that the contract must not be contrary to what the society considers to be moral and right Such a murder contract is not acceptable It is also not possible to accept contracts that intentionally destroy or steal other people's property Principles that are not contrary to moral standards are applied to insurance policies It is unable

to accept the risk insurance of a failed crime For example, society cannot accept the idea that a thief can sign an insurance contract to be compensated for the property that is not taken by police A person may drive into a restricted road and be fined; that person really has a financial relationship with the fine and argues that this loss

is also unexpected to him However, society cannot accept a person who avoids punishment by signing an insurance contract

2.3 Risk Management in Insurance Business

Risks exist objectively and are parallel with the business process of companies Therefore, risk management is extremely necessary in business operation Risk management is important responsibility of companies There are many different definitions about risk management in business operation Risk management is the entire operation of the administrator through identification, measurement and control of the risk of loss to provide appropriately preventive

measures to ensure the sustainable development of the business In the view of Kartashova, Molchanova and Axana (2018), risk management is the process of accessing to risk scientifically, comprehensively and systematically at aim to identify, control, prevent and reduce losses According to Lodewijk (2015), risk management is financial decisions and should be evaluated in relation to their influences on company‟s value

The process of risk management in insurance business must be implemented through four steps: identify and analyze risk, measure risk, control risk, and finance risk

Figure 2.1 The process of risk management in insurance business

2.3.1 Identification and Analysis of Risks

In order to manage risk, an insurance company has to recognize risks Risks

of the insured are also the risks of insurance companies The identification of risks

is the process of continuously and systematically determining risks and uncertainty

of organizations The purpose of identifying risks is to develop information about risk sources, risky factors, objects of risk and types of losses Jobs of risk identification include monitoring risks; considering risks; studying the specific operating environment of the insured; and all the insured‟s professional activities in order to list all the risks that have been happening At the same time, risk

Identify and analyze risks

Finance risks Control risks Measure risks

identification helps to predict new types of risks From that, it is reasonable and better to give measures in controlling risks

So as to recognize insurance risks well, it is better to plan methods in identifying the risks There are several methods as described below:

- Method of using questionnaires to investigate issues relating to risks This

is a common method that insurance companies would like to use to assess risks The content of questions is about who the insured person is; what he does; what covered subjects are; the place and the scope of operation of subjects; what risks could be; etc

- Insurance companies can use financial statement analysis to analyze risks They will analyze total assets, report of business operating and other information The aim is to determine all risks of customers in terms of property, human resource and legal responsibility By combining these reports with financial forecasts and budget estimates, we can detect future risks

- Flowchart method is one of ways to analyze risks in insurance business This is considered as an important method in analyzing risks In order to implement this method, it is necessary for insurance companies to build a flowchart presenting all of the insured‟s professional activities (Ana, 2012)

- Field inspection method is a compulsory job that insurance companies have to do before and during the insurance process Thanks to this method, insurance companies can analyze, evaluate and recognize potential risks in the future For example, before accepting an explosion insurance for a warehouse, insurance companies have to check fire protection system of the warehouse, how to arrange goods in the warehouse; take photograph of the warehouse and the surrounding, etc In the process of implementing the insurance, insurance employees have duty to trace the situation of the warehouse

- The method of contract analysis means to specifically analyze each contract which has potential risks The aim is to gaps and shortage; from that, to give ways to prevent and reduce risks in the future (Ali, 2016) For example, before

accepting shipping insurance for a shipment, insurance companies should require customers provide sales contract and freight contract at aim to understand packing, shipping method, etc Therefore, they can evaluate risks in the process of transporting goods and offer reasonable insurance plans

- It is good to cooperate with State agencies, superior agencies and legal offices

to find out the causes of risks as well as the agencies‟ judgments about the risks

Generally speaking, in order to identify risks best, insurance companies have

to combine all above methods, especially methods of using questionnaires and field inspection

Before carrying out risk analysis, it is extremely necessary to identify risks and make a table listing all risks The aim of risk analysis is to determine the causes and give preventive measures This is a complicated work because there are many causes for a risk: direct cause, indirect cause, subjective cause, objective cause, near cause, far cause and as well

In order to well analyze risks, insurance companies must analyze risks in steps Firstly, hazard analysis is important Insurance companies analyze conditions that create risks or conditions that increase the level of loss when a risk occurs Insurance companies can base on the process of pre-control, in-control and post-control to detect threats Hazard analysis is not only limited to the factors that have caused the accident, but must also determine factors that may cause accidents according to the experience of other organizations such as insurance companies, units of the State The second is to analyze the cause of risk There are two viewpoints to analyse the cause of risk: (1) most of the risks are related to people; most of the risks are due to technical factors, due to physical and chemical or mechanical properties of the risk objects Moreover, based on the combination of these two viewpoints, the cause of risk partly depends on technical factors, partly depends on human factors The third step in analyzing risks is to analyze loss There are two ways to analyze loss: (1) researching and evaluating loss that already

occurred at aim to predict the losses that will occur; (2) basing on the threats, the cause of the risk, insurance companies predict losses may occur

2.3.2 Risk Measurement

The essence of risk measurement is calculation, determines the frequency of risk and risk margin From that, grouping risks is done Measuring the frequency of losses is a method of estimating loss frequency In details, it is to observe the probability that a hazard will cause loss in a year If an insurance company assumes there is no more than one loss occurring in a year, the probability of loss will be the annual loss rate In terms of measuring the severity of risk frequency, the largest possible loss is the greatest possible damage value, which can be perceived The greatest loss depends on the nature of the hazard causing the loss as well as depending on the object of the loss

Table 2.1: Matrix of frequency and risk margin

The cell number I describes risks with high margin and high frequency It means risk occurs regularly and is serious for each time The Cell number II describes high frequency and low margin The risk usually happens, the serious level is low The Cell number III describes low frequency and high margin It means that risk less happens, but it will be very serious if happening The Cell number IV describes risk with low frequency and low margin It means that risk less happen and if happening, it will be low seriousness

Some measurements of risk are presented as follow:

(a) Quantitative method: insurance company will use: (1) direct method to determine the loss by direct measurement tools such as weighing and measuring; (2) indirect method to evaluate the loss through the prediction of the loss, which is applied for invisible loss such as opportunity cost; reduction in health and spirit, etc; (3) statistical probability method to determine the loss by identifying sampling; and (4) calculating the average loss rate From that, the insurance company will estimate the total loss (Ridha, 2013)

(b) Qualitative method: is the method used by experts to determine the rate

of loss, thereby estimating the total loss

(c) Synthetic method: using a combination of technical tools and human‟s prediction to assess the level of loss

(d) Method of forecasting losses is the method of predicting losses when risks occur (Ridha, 2013) This method bases on measuring the risk probability, average loss level of each incident, thereby predicting the average loss that can occur in the planning period and is calculated by the following formula:

T=n * p * t

In which:

T: possible average loss

n: The number of observations or events that occur in the future

Figure 2.2: risk chain in insurance business

Risk control has very important role in risk management At the first, it increases safety in business Controlling risk helps businesses limit losses to people and assets of enterprises, thereby contributing to reducing the cost of common business operations Secondly, it increases the prestige of businesses in the market Good risk control helps insurance companies have a favorable business environment, improve business efficiency, thereby increasing their position and reputation in the marketplace Thirdly, risk control helps find opportunities and turn these opportunities into reality In the process of risk control, insurance companies must actively approach and handle situations; so, it can reverse the situation, turning the risk into business opportunities

There are several methods in controlling and preventing risks in insurance business They are “avoid risk”, “prevent loss”, “reduce loss”, “transfer risk”, and

“diversify risk”

- Risk avoidance: is the avoidance of activities, people, assets that give rise

to losses that can come from the beginning or eliminate the causes of recognized losses To avoid risk, we can use methods of proactively avoiding before risks occur and eliminating the cause of the risk In insurance business, insurance companies can avoid speculative risks by carefully considering potential effectiveness of a project; or by carefully analyzing ratios of a kind of stock

Consequences: are the long term results of

the incident Result: is the direct result of the impact

Interaction: is the process of danger and risk environment impact each other

Environmental factors: being context that

risk exists Threats: being conditions leading to loss

The risk chain represents

the process of creating

losses including 5 basic

links

- Loss prevention: the aim is to reduce the amount of losses occurring (ie, reducing the frequency of losses) or reduce the level of damage when losses occur

In speculative risk, insurance companies can sell the amount of stock when identifying the sign of down trend of stock price With this solution, the insurance companies can reduce the amount of losses

- Loss reduction: Measures are given to minimize losses at aim to reduce the value of damage when losses occur It means to mitigate the seriousness of losses Activities to minimize losses are measures after the loss has occurred

- Risk transfer: Risk transfer is a risk control tool, creating many different entities instead of a risk-bearing force Risk transfer can be done in two ways: (1) transfer assets and risky activities to another person or group of people, (2) transfer

by covenant contract, only transfer the risk of not transferring assets and its activities related to the recipient

- Risk diversification: Just like risk sharing to minimize losses, diversification also tries to divide the company's total risk into different forms and take advantage of the difference to use the luck of this risk to compensate loss for other risks The theory of diversification can be applied in many different activities

of enterprises such as diversification in securities investment, market diversification, product diversification and diversification of customers Instead of investing in one stock, insurance companies can speculate in a portfolio of stock This is an effective way to reduce losses in stock investment

2.3.4 Finance Risks

The methods of finance risks are divided into two groups as follows:

Group 1- reversion: is the measure that an insurance enterprise can pay for losses by its self The source of risk indemnity is the own capital and the loan that the insurance enterprise must be responsible for self-repayment So, insurance enterprises need to have a financial contingency plan to pay for risks and have a plan to fund highly risky operations

Group 2- reinsurance: For subjects with a high level of risk, enterprises need

to sign automatic reinsurance contracts for those subjects with a number of reinsurance companies or other insurance companies And when a loss occurs, there are claims and compensation from those companies For risks which are of great value or not included in the list of auto reinsurance contracts, insurance enterprises must arrange temporary reinsurance

2.4 Factors affecting Insurance Business Risk Management

2.4.1 Subjective factors

There are four subjective factors impacting the management of insurance business risk, including: development strategy, organizational structure and governance, human resource, and technology application

Development strategy: a development strategy in the right direction will create the success for the insurance company Vice converse, a development strategy in the wrong direction will bring risk for the company As in the case that

an insurance company develop a kind of insurance product for a specific subject; however, when launching the implementation of the product, it does not get positive response from the specific customers So, the risk of failure will happens Therefore, it is important for insurance enterprises to research development strategy carefully

Organizational structure and governance: Unreasonable organization structure, weak management capacity and governance, and lack of capital and ability to adapt to limited changes are causes leading to poor and less effective performance of insurance business operation Business enterprises with these limitations will face many difficulties in competitive capacity They have market share narrowed and their solvency is reduced or completely lost Accordingly, legal responsibility for the State cannot meet

Human resource: It is related to qualifications of employees and management ability of leaders up A good operator or an insurance agent with good qualifications can choose potential insurance objects with low loss Thus, compensation costs can

be reduced Professional qualifications will help supervisors inspect and solve complaints correctly and quickly As a result, they can gain customers‟ trust and reduce inspection costs An insurance company which is successful or failed much depends on the top level of the company They are leaders of branches, of the whole company They are administrators In the case that each branch manages risks well, the whole company will be good Good managers must ensure the skills of awareness, relationship, and knowledge of professional expertise The administrator must analyze and diagnose the cause of the risk to make the right decisions before accepting risks

Technological application: the application of technology in insurance business will save lots of costs and bring effective performance in exploiting insurance products as well as risk management of insurance business Bao viet Insurance has become the first insurance company to sign a cooperation agreement

to sell its products online on the MoMo wallet application, the official distribution channel for Baoviet Insurance's personal insurance products such as insurance of cars, motorcycles, health insurance, cancer, travel insurance, etc Customers can actively select and directly buy Bao Viet's insurance products through the MoMo e-wallet application, and experience the closed online ordering and payment process This application is also extremely fast, convenient with international security standards with just one touch on mobile

risk management activities effectively based on better predictability of changes to business operations

- Legal environment: All businesses operating under the influence of the legal system Legal system being complete and having clear and strict regulations are the basis to help enterprises facilitate in complying and implementing business activities On the contrary, if the legal system is not synchronized; overlapping; unstable; constantly changing, it makes enterprises difficult in complying with and adjusting their business activities in accordance with the provisions of the law Not only the complete and synchronous legal environment helps the State to facilitate the management of enterprises' activities; but also the transparency in management activities and in inspection facilitate enterprises in compliance with the law and comply with the provisions of law

- Social and economic environment: when considering the impact of economic environment on business risk management of enterprises, it is important

to study variables such as market interest rate, inflation, economic situation, competitive level, economic policy, and financial market It is important to consider the impact of economic environment within not only domestic context, but also in the region and the world At present, the process of globalization of the economy is going on strongly Big economic and financial fluctuations in the region and the world quickly affect the economy and business activities of a country

CHAPTER 3 BUSINESS RISK MANAGEMENT OF BAO MINH INSURANCE COMPANY (FROM 2016 TO

2018)

3.1 Introduction to BMI

3.1.1 History of Formation and Development

BMI was established on 28th November, 1994 with charted capital of 1,100 billion VND It is one of leading insurance companies in Vietnam market The headquarter is on 26 Ton That Dam street, District number 1, Ho Chi Minh city, Vietnam The period from 1994 to 2004, BMI was named Stated owned enterprise; since from October of 2004, the company has been equitized into Bao Minh insurance joint stock company After many years, BMI has obtained many achievements such as top 500 largest enterprises in Vietnam, Labor Medal Class I

in 2009, Labor Medal Class II in 2004, Labor Medal Class III in 1999, the most popular Vietnamese brand, and enterprises taking good care of employees' life Presently, the company has over 1700 employees and nearly 4000 agents over three regions of the country BMI has operation network of 23 functional divisions, 1 training center and 59 branches and 550 transaction office throughout the country (BMI, 2019) In terms of products and service, BMI has provided non-life insurance products non-life reinsurance products, service of financial investment and other services as prescribed by law

BMI‟s vision: Always to be one of the leading non-life insurance companies

in Vietnam, operating in the field of financial services and insurance

BMI‟s mission: Bringing safety and stability for the economy and society; contributing to the strong development of Vietnam/s insurance market; bringing benefits to shareholders and creating jobs for people

BMI‟s motto of action: Safety, happiness and success of clients and society are our targets

BMI‟s slogan of action: Bao Minh – Whole – Hearted Service

BMI‟s slogan of advertising: Think Insurance, Think Bao Minh

Based on operation criteria above, BMI has achieved total revenue in 2018 at 4,269 billion VND, market share at 7, 65 percent and stood at the forth position in non-life insurance market in Vietnam (Annual report, 2018)

3.1.2 Organizational Structure and Functions

Figure 3.1: BMI’s Organizational chart (BMI’s annual report, 2018)

Each company has its own organization structure and be suitable for business operation of the company With this organization structure, BMI shows duties and responsibilities of each department and individual BMI‟s organization structure