MID TERM REPORT SUBJECT RISK INSURANCE MANAGEMENT FOREIGN TRADE UNIVERSITY FACULTY OF ECONOMICS INTERNATIONAL BUSINESS =====000===== MID TERM REPORT SUBJECT RISK INSURANCE MANAGEMENT TOPIC Analy.Table of Contents 1. Introduction 4 1.1. Objectives of the report 4 1.2. AIA corporation 4 1.3. Health problems and illness statistics in Vietnam 5 2. Theoretical basis 9 2.1. Life insurance 9 2.2. Roles of life insurance in economy and society 9 2.3. Fundamental legal principles 10 2.4. Requirement of an insurance contract 12 3. Analysis of life insurance contract 12 3.1. Benefits 12 3.2. Coverage and Compensation 14 3.3. Fees and charges 16 4. Conclusion 18 Reference 19 1. Introduction Objectives of the repor
FOREIGN TRADE UNIVERSITY FACULTY OF ECONOMICS & INTERNATIONAL BUSINESS =====000===== MID-TERM REPORT SUBJECT: RISK & INSURANCE MANAGEMENT TOPIC: Analyze health Insurance contract of AIA corporation Class: TMAE 308.1 Group: Lecturer: MSc Hoang Thi Doan Trang Hanoi, September 2022 Table of Contents Introduction 1.1 Objectives of the report 1.2 AIA corporation 1.3 Health problems and illness statistics in Vietnam Theoretical basis 2.1 Life insurance 2.2 Roles of life insurance in economy and society 2.3 Fundamental legal principles 10 2.4 Requirement of an insurance contract 12 Analysis of life insurance contract 12 3.1 Benefits 12 3.2 Coverage and Compensation 14 3.3 Fees and charges 16 Conclusion 18 Reference 19 Introduction 1.1 Objectives of the report “Có sức khỏe có tất cả” is a famous Vietnamese quotation that emphasizes the importance of health in the life of any individual It is undeniable that good health is an essential ingredient for a good life Unfortunately, no one is truly free from health risks due to several factors such as biological factors or social activities No matter how healthy a person is, he is always exposed to a certain degree of risk of having cancer or contact with infectious diseases The consequential losses of health risks are significant to individuals and the people around them as well as to the whole society because illness or injury will reduce one’s productivity and well-being Therefore, it is vital that people take actions to combat the health risks and one common way is to buy life insurance When people buy life insurance policies, they will have to understand the product to decide whether the product is suitable for them In practice, people, however, often not fully understand the policy they buy and make purchasing decisions based on their trust in the insurance salesperson As a result, this may lead to the latter dissatisfaction or complaint as customers realize they have made the wrong decision Hence, the purpose of this report is to help customers understand the insurance contract comprehensively by summarizing and analyzing the key information in the contract and discussing its implications This report will examine a particular life insurance contract provided by the AIA corporation in Vietnam The report’s outline includes: ● Theoretical background ● Statistic of Vietnamese people's health and illness ● Analysis of the basic life insurance contract 1.2 AIA corporation AIA Group Limited, often known as AIA (Chinese: 友 邦 保 險 ; pinyin: Yǒubāng Bǎoxiǎn), is a Hong Kong-based American multinational insurance and finance corporation It is the largest publicly listed life insurance and securities group in Asia-Pacific It offers insurance and financial services, writing life insurance for individuals and businesses, as well as accident and health insurance, and offers retirement planning, wealth management services, variable contracts, investments, and securities AIA is headquartered in Central, Hong Kong, with a presence in 18 markets in Asia-Pacific, with wholly-owned branches and subsidiaries in Hong Kong, mainland China, Taiwan, Macau, South Korea, Singapore, Thailand, Malaysia, the Philippines, Indonesia, Vietnam, Brunei, Cambodia, Myanmar, Australia, New Zealand, Sri Lanka and a 49% joint venture in India Since 2013, AIA has had an exclusive bancassurance agreement with Citibank that encompasses 11 AIA markets in Asia-Pacific AIA health insurance (formerly MyOwn) was established in 2017 as a joint venture between life insurer AIA, health fund GMHBA and financial services provider Discovery In 2020, MyOwn closed to new customers and AIA health insurance was launched They also closed RACQ Health Insurance which was provided by MyOwn Health Fund through a commercial partnership 1.3 Health problems and illness statistics in Vietnam Vietnam is experiencing a significant change in its economic conditions, such a change has been accompanied by significant changes in the pattern of morbidity and mortality The country’s Gross Domestic Product (GDP) is increasing at a fast pace: from $31,176 million in 2000 to $241,272 million in 2018; and the country has experienced remarkable gains in combating poverty and hunger Gross National Income per capita has increased from $110 in 2000 to $2400 in 2018 At the moment the country is ranked among the low-middle income countries by the world population review Parallel with economic growth, the country has experienced a fast and wide process of urbanization Over the past 20 years, more and more Vietnamese have moved from rural areas to urban areas with a rate of 40% by early 2020 Rapid urbanization has been accompanied by environmental deterioration, increased air pollution, deterioration of lifestyle habits (including physical inactivity and diet changes), and a big strain on healthcare services This leads to a significant reduction in communicable diseases that have been substituted in the ranking of major causes of mortality and morbidity by non-communicable diseases (NCDs), as shown in figure The burden of communicable diseases in Vietnam has significantly diminished from representing 38% and 33% of the morbidity and mortality burden in 1996 to a projected 18% and 6%, respectively, in 2026 The projected mortality burden of 6% for communicable diseases is significantly lower than the projected average burden for other countries in SouthEast Asia (SEA) The successful efforts in fighting communicable diseases have been the main reason for the observed increase in life expectancy The average life expectancy in Vietnam in 2017 was 79.2 years for women and 70 years for men, with an increase of 6.5 years for women and years for men between 1990 and 2017 Vietnam is one of the SEA countries with the highest number of elderly individuals (60+): 11 million people, representing 11.95% of the population in 2017 Two million out of these 11 million people are over 80 years old It is estimated that in 2038 the elderly will represent approximately 20% of the population This rapid and significant shift in the age distribution of the population will create a significant increase in the demand of healthcare services for elders Figure Changes in morbidity and mortality patterns in Vietnam from 1996 to 2016 In 2009, cardiovascular disease (CVD) represented the most important cause of death followed by cancer In terms of both death and disability, CVD was the first cause followed by road injuries, diabetes, and lung cancer For CVD, the leading cause of death and disability was stroke followed by ischemic heart disease (IHD), these two causes of death are represented by themselves as the two leading single causes of death in Vietnam Road injuries represented the third leading cause of death and disability Ten years later, in 2019, while CVDs kept their position, road injuries dropped to the sixth major cause of death in Vietnam after diabetes, COPD, and lung cancer ● In Vietnam, strokes cause the most deaths with an estimated 200,000 new cases reported each year 50% of those cases are fatal and 90% of survivors experience post-stroke effects such as cognitive disorders, impaired mobility, and speaking or swallowing problems ● Cardiovascular disease (CVD), which includes strokes and ischemic heart disease, accounts for 31% of causes of death, equivalent to about 170,000 cases ● Lung cancer causes 20,710 deaths with 667 new cases each year Cancers represented the second leading cause of death, with liver cancer being the leading cause of death in men and breast cancer in women In terms of prevalence, liver and lung cancer represented the most prevalent cancers in men while breast and colorectal cancer were the most prevalent cancers in women Figure Top 10 causes of total number of deaths in 2019 and percentage change 2009-2019 in Vietnam (Source: Institute for Health Metrics and Evaluation: Vietnam) Poor health outcomes experienced by the Vietnamese may be attributed to a variety of lifestyle reasons including smoking habits, impaired physician-patient communication, and limited access to healthcare The use of tobacco is particularly high in Vietnam with about 66% of adult men currently smoking In this population, smoking is responsible for 28% of all-cause deaths and 85% of lung cancer deaths The change in Vietnamese diet, which had been proven healthy and balanced, together with physical inactivity contribute to the increase of overweight and obesity, the major causes of diabetes The incidence of diabetes has been increasing at an alarming rate with it doubling in the past 10 years The number of pre-diabetics has also increased by three times as many as there are diabetics It was approximated that in 17 Vietnamese adults (1 in 15 men and in 20 women) had diabetes Moreover, Vietnam represents the third largest beer consumer in Asia and the per capita consumption of liquor has increased 90% between 2010 and 2017 Vietnamese men drink when celebrating an occasion including Lunar New Year, holidays, wedding, housewarmings as well as in regretful circumstances like funeral or death anniversaries In addition, alcohol is used to facilitate business transactions Heavy drinkers comprise 25.1% of Vietnamese males above the age of 15 The effects of this heavy drinking are seen with the high level of liver cirrhosis and road traffic injuries The prevalence of alcohol use disorders and dependence are reported to be around 9.8% and 5.9%, respectively The alcohol-attributable year of life lost score for Vietnam is 4, higher compared with other countries in the region In addition, alcohol consumption is associated with other dangerous behaviours like smoking and unprotected sex Drinking and driving is responsible for 75% of deaths due to road traffic injuries Finally, in addition to individually determined exposure based on lifestyle habits, we need to consider environmental exposures that affect the life and the quality of life of individuals and communities in Vietnam Among these, air pollution represents a significant threat both for the significant impact it has on human health and the significant exposures present in Vietnam, especially in urban areas Air pollution has been linked, among many other diseases, to CVD, lung disease and cancer, and acute lower respiratory infection in children SEA is the part of the world where air pollution and its health sequels are significantly higher than in other parts of the world and, unfortunately, temporal trends indicate that this negative primacy has not been adequately addressed Data from Vietnam indicate that transportation and industrial production represent the major causes of the production of carbon monoxide, nitric oxide, sulfur oxide, and volatile organic compounds, an important target for prevention strategies Theoretical basis 2.1 Life insurance From birth to death, we not know when and where a person will suffer from any disease, injury, or accident They are exposed to a myriad of dangers, such as accidents In particular, when the accident, etc., is related to the life or death of a person If this is the case, it will be very difficult for the family to maintain a stable life It is a preparatory system to compensate for economic losses caused by unexpected accidents, such as death, based on the spirit Therefore, life insurance companies receive premiums from many policyholders and jointly prepare the property Insurance payments are made to the person who has suffered an accident In addition, a person grows up after birth, in marriage, and parenting, As you go through life cycles such as old age, you will need to pay for family living funds, housing acquisition funds, children’s education and marriage funds, Retirement funds, emergency funds, etc are needed These necessary funds are also covered by life insurance Individuals can prepare during the period of economic activity As such, life insurance protects against accidental accidents It has not only a guarantee function but also a saving function to prepare wealth 2.2 Roles of life insurance in economy and society ● In Society: Complementing the social security system Nowadays, Almost all developing & developed countries have rapid urbanization, a prolonged low birth rate, and life expectancy, the aging of the population structure due to life extension, the improvement of the income level, and the increase in expectations And These issues are causing social problems To solve this problem, the government is expanding the social security system, but the level of protection is not enough for citizens Therefore, (1) the country provides Social security that guarantees the minimum standard of living of the people, and (2) companies guarantees to ensure a stable life, and a level of satisfaction for each individual and (3) Individually, Citizens prepare Life Insurance for themselves to avoid unexpectable accidents These three protections could bring a healthy social network ● In Economy: Contribute to national economic development Life insurance companies accumulate premiums paid by policyholders to prepare for future insurance payments In addition, if the accumulated life insurance assets are efficiently managed and profits are generated,shareholders and Dividends are paid out to contractors Not only to the guarantee function, but also in charge of the financial function Most life insurance contracts last for years to decades Because it is a long-term contract, life insurance assets can be managed stably over a long period of time It has a characteristic, and due to these characteristics, it is invested and operated in important industries such as national key industries It has contributed greatly to the economic development of a nation And additionally, Life Insurance provides benefits to society & economy such as Indemnification of loss, Reduction of worry and fear, Loss prevention, Source of investment fund, Enhancement of credit… 2.3 Fundamental legal principles 2.3.1 Principles of indemnity The principle of indemnity states that the insurer agrees to pay no more than the actual amount of the loss To exercise this principle, the insurers must be able to measure and calculate the loss of the insured financially and they commonly use methods such as fair market value or broad evidence rule This essential principle exists to prevent the insured profit from the loss and thus reduce the moral hazard However, life insurance is an exception to this principle as human life can not be measured financially Hence, life insurance is a valued policy that pays a stated amount to the beneficiary at the time of the insured’s death 2.3.2 Principle of insurable interest The principle of insurable interest states that the insured must be in a position to lose financially if a covered loss occurs The insurance contract must be supported by an insurable interest to prevent gambling and reduce moral hazards When the buyer of life and the subject matter is not the same person, the buyer must have an insurable interest in the subject matter’s life For example, in most cases, the principle of insurable interest can be satisfied if there is a close family relationship or a pecuniary interest 2.3.3 Principle of subrogation Subrogation means the substitution of the insurer in place of the insured for the purpose of claiming indemnity from a third party for a loss covered by insurance.8 Stated differently, the insurer is entitled to recover from a negligent third party any loss payments made to the insured The principle of subrogation is important because it prevents the insured from collecting twice for the same loss and holds whoever causes the loss responsible for it In addition, subrogation helps to hold down the insurance rates 2.3.4 Principle of utmost good faith An insurance contract is based on the principle of utmost good faith—that is, a higher degree of honesty is imposed on both parties to an insurance contract than is imposed on parties to other contracts Accurate information is vital for the process of determining the premium rate and for both parties to decide whether to take the contract, therefore both parties must provide all available information accurately to each other In the case where the insured violates this principle, the insurer can legally refuse to indemnify the insured 2.4 Requirement of an insurance contract 2.4.1 Offer and acceptance The first requirement of a binding insurance contract is that there must be an offer and acceptance of its terms In most cases, the applicant for insurance makes the offer, and the company accepts or rejects the offer An agent merely solicits or invites the prospective insured to make an offer 2.4.2 Exchange of consideration The second requirement of a valid insurance contract is the exchange of consideration - the value that each party gives to the other The insured’s consideration is the payment of the premium (or a promise to pay the premium) plus an agreement to abide by the conditions specified in the policy The insurer’s consideration is the promise to certain things as specified in the contract This promise can include paying for a loss from an insured peril, providing certain services, such as loss prevention and safety services, or defending the insured in a liability lawsuit 2.4.3 Legal competency The third requirement of a valid insurance contract is that each party must be legally competent This means the parties must have the legal capacity to enter into a binding contract Most adults are legally competent to enter into insurance contracts The insurer must also be legally competent Insurers generally must be licensed to sell insurance in the state, and the insurance sold must be within the scope of its charter or certificate of incorporation 2.4.4 Legal purpose A final requirement is that the contract must be for a legal purpose An insurance contract that encourages or promotes something illegal or immoral is contrary to the public interest and cannot be enforced Analysis of life insurance contract 3.1 Benefits When participating in AIA life insurance, customers are protected throughout their life since the contract is valid, whether they live to be 100 years old or more Participants are always assured of having solid and complete protection from life insurance against life's risks, which can include illness, accident, and death depending on the benefits of the specific products Therefore, the overall benefits of AIA life insurance include: ● Protect customers against health risks: disability, death, diseases ● Ensure financial support when you lose your ability to work and get injured in old age ● Short fee payment time but long-term benefits 3.1.1 Investment For investment, mostly every insurance company has kinds of interest rate and AIA is not an exception They commit that the minimum guaranteed investment interest rate is fixed and decreases as the year of the contract increases The unsecured investment interest rate is based on the results of the investment of the General Affiliate Fund The accrued interest could be changed to increase or decrease but not lower than the minimum committed interest rate Every customer will be informed monthly of the interest rate in their website In general, the interest rate is not their main purpose to participate in life insurance because the nature of this product is financial provision before the risks 10 3.1.2 Maturity Maturity is one of the guaranteed benefits In this case, the customer will receive all the account value of the insurance contract at the maturity time if the insurance contract is still valid and the insured person is still alive at maturity The maturity is the time to pay or refund the money when it is time 3.1.3 Premium maintenance bonus This one is one of the guaranteed benefits but it has conditions AIA yearly distributes the premium maintenance bonus to basic account value since the 5th contract anniversary with the condition as followed: ● The contract never lapses ● Basic insurance fees are yearly paid before the following contract anniversary day ● No withdrawals from basic account value in the year of the awarded contract The main purpose of all these terms is financial provision to prevent future risks These terms will attract their customers because human’s behavior is always love the bonus This will encourage the customers to extend the contract but less spend and help the company gain more money 3.2 Coverage and Rights 3.2.1 Coverage We can divide cancer into main groups The first is small cancer which is not very harmful to our life such as thyroid cancer… and the second one is normal cancer which cannot be cured and shortens our life very quickly AIA will compensate 250 million VND if their customers have serious cancer Customers who have a partial injury due to a previous accident at the age of 65 or from the date of reaching 65 age until before the next anniversary contract, receive more percentage the face amount and the maximum is billion dong Those who have 11 terminal illness or death or total and permanent disability before reaching 75 years old or from the date of reaching the age of 75 until before the next anniversary contract day, will receive 100% additional closed account value plus the money which is between billion dong and basic account value If the insured not smoke, they will receive an extra 150 million dong at the time of death when they are from 15 years old and be identified as non-smokers Total insurance benefits of all insurance contracts with AIA that the insured is entitled to, including benefits enjoyed by this product are: ● Benefits related to cancer or terminal illness: maximum is 10 billion dong ● Benefits related to accidents: maximum is 10 billion dong 3.2.2 Rights of the insured The insured can request to lower or higher the face amount from the nd contract anniversary and before reaching 65 years old if it fully meets the appraisal conditions and regulations of the company at each time Additionally, they can request to change the basic insurance fee with the same condition as to change the face amount Besides, the insured have rights to change the insurance benefits Since the 2nd contract anniversary, customers can transfer from basic benefits into advance benefits in terms of the age of the insured since the date of entry into force of the contract is under 18 and not yet 35 years old at the time of requesting the conversion And the customer can only change the benefits once during the contract term, risks, expenses and other conditions will be adjusted accordingly To be guaranteed a face amount for important occasions such as weddings, giving birth to a child, adoption… is a right of the insured From the 2nd contract anniversary and before the insured reaches 65 years of age, the customer can request an increase of 25% of the current premium for each marriage or birth or adoption event without proof of health and finances and up to times throughout the contract term In order to have this benefit, the insured must meet all the conditions related to the increase in 12 the face amount for important events (marriage, birth, adoption) which is specified in the Insurance Product Terms and Conditions Besides that, the insured can withdraw money from the face amount With basic face amount, customers can request to withdraw with a maximum 80% since the 2nd contract anniversary For extra face amount, they can request to withdraw maximum up to 100% at any time The withdrawal money each time does not lower than the minimum level that the AIA company specifies accordingly All these rights of the insured are met if the customers follow the regulations and specific terms and conditions of the company Because the compensation is very high, some individuals or groups will try to make profit from this kind of product and we call it insurance fraud In some cases, they fake the documents of their health and they will receive compensation from the insurance company To make sure this thing will not happen, the company will work with the police, authorities, hospitals, testing laboratories… to examine whether there is fraud or not Although humans are at the top of the food chain, we all have problems such as diseases, deaths And to prepare for them, we use “insurance” This term has mostly appeared everywhere on Earth To protect your life when unforeseen risks appear, life insurance can share risks in the community This helps to compensate for the loss of the less fortunate, creating conditions for each individual to be confident in living happily, pursuing big dreams and ambitions in the future In reality, we buy insurance in case we meet some unforeseen thing in life such as death, the compensation will be used for our family, relatives, friends…In general, life insurance is optional but the benefits it brings back are undeniable 3.3 Fees and charges 3.3.1 Cost of Insurance This is the actual cost of holding an insurance policy that allows the insurers to perform their obligations and gain some profit The premium paid by the insured is the result of multiplying a rate determined by actuaries by the number of exposure units 13 and then adjusting the premium by various rating factors such as age, gender, health, and so on The cost of insurance is the main charge for every insurance contract In the studied contract of AIA, the cost of insurance starts at 2,756,000 VND in year and gradually increases to the peak of 13,166,000 VND Afterward, the insurance cost decreases gradually to in year 51, meaning the policy value rises quickest after the subject-matter insured reaches the age of 79 This premium is calculated based on the standard risk exposure, it can be higher depending on several factors, such as health condition or occupation, after the rating process 3.3.2 Premium loads/sales charges These charges compensate for sales expenses and state and local taxes They are deducted from your premium payment before it is applied to the policy In the contract of AIA, the charge is distributed for the first three years, which equals 85%, 80%, and 35% of the annual fee respectively This high initial cost suggests that the insured should hold the policy in the long-term instead of short-term 3.3.3 Administration fee These fees are used to pay the costs of maintaining the policy, including accounting, recordkeeping, providing information, and other activities Administration fees usually are deducted from the policy value once a month In all life insurance policies, AIA charges 30,000 VND every month with a 10,000 VND increment for every 5-year period not exceeding 60,000 VND 3.3.4 Fund management fee Investment of funds obtained from the insured is an essential source of income for every insurance that also benefits the insured as they receive interest from their policy value Hence, these fees compensate the fund managers for their work Fund management fees are usually deducted from the price paid for the shares of underlying fund options, and not directly from your cash value 14 In this contract, the guaranteed return on the insurance account, 2.0% in year for example, is the residual investment profit after the fund management fee is deducted, which does not exceed 2% of the total asset of the fund 3.3.5 Surrender fee & withdrawal fee This charge is deducted from the policy value if the contract is terminated This fee normally exists to discourage the insured from withdrawing money or to compensate the insurer’s loss resulting from such termination In the AIA life insurance, the zero withdrawal and surrender fee turns the insurance policy into a high liquidity asset, meaning that it can be converted to cash easily but unfortunately the withdrawal is subject to a limit of 80% of the policy value 3.4 Other terms and conditions In the last part of the contract, the insured confirms that the representative of AIA has provided information and consulted with her sufficiently and she has understood fully all the terms and conditions of the contract and decided to buy the product of her own will This statement ensures that the contract adheres to the principles of utmost good faith, which requires both parties to be honest in providing information necessary for the process of making the contract Conclusion As a result of the high economic development and fast urbanization process, the living standards of Vietnamese people rise significantly as well as life expectancy Furthermore, communicable diseases (CDs) have been diminished in the last 20 years thanks to medical technological advancements Some non-communicable diseases, however, have been increasing continuously at an alarming rate such as cancers or diabetes This can be attributed to environmental pollution, a high rate of smokers, and the rising amount of alcohol consumption and overeating Additionally, alcohol consumption also causes a number of traffic accidents every year to be high Despite the rising in living standards, the statistics might suggest that Vietnamese people are 15 still subjected to substantial health risk exposure, which can adversely affect their life Therefore, it is crucial that people take actions to combat these risks The AIA corporation, along with many insurance companies in Vietnam, has been improving Vietnamese life by providing life insurance against illness and injury risks When buying an insurance policy, people are advised to consider carefully and choose which suit their circumstance in terms of coverage and payment Our analysis has revealed that the basic life insurance policy of AIA provides protection effectively targeting major risks which are cancers and other popular illnesses, as well as injury and accidents Moreover, the policy also provides reasonable investment returns at affordable fees and charges that are paid to the activities that benefit the insured directly Other terms and conditions in the contract ensure two parties follow the principles of insurance Overall, our analysis detects no flaw in the contract and shows that this policy is fair and beneficial for the insured Reference (2022) accessed 18 September 2022 (2022) accessed 18 September 2022 Michael J McNamara and George E Rejda, Study Guide For Principles Of Risk Management And Insurance, Thirteenth Edition, Rejda, Mcnamara (Exam.insure.or.kr, 2022) accessed 18 September 2022 Thanh-Huong Truong and others, 'Quality Of Life And Health Status Of Hospitalized Adults With Congenital Heart Disease In Vietnam: A Cross-Sectional Study' (2022) 'Vietnam' (Institute for Health Metrics and Evaluation, 2022) accessed 18 September 2022 16 'Topic: Health In Vietnam' (Statista, 2022) accessed 18 September 2022 Tuyet Thi Nguyen and Maurizio Trevisan, 'Vietnam A Country In Transition: Health Challenges' (2022) (Med.stanford.edu, 2022) accessed 18 September 2022 17