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

TRNG I HC M TP.HCM UNIVERSITÉ LIBRE DE BRUXELLES HO CHI MINH CITY OPEN UNIVERSITY SOLVAY BRUSSELS SCHOOL MBAVB4 TRAN THI NHU NGOC PROBLEMS OF ASYMMETRIC INFORMATION MANAGEMENT: A CASE STUDY OF HEALTHCARE LINE AT BAOVIET MASTER PROJECT MASTER IN BUSINESS ADMINISTRATION (PART-TIME) SUPERVISOR: DR. NGUYEN VAN NGAI Ho Chi Minh City (2011) II COMMITMENT I, Tran Thi Nhu Ngoc, hereby affirm my honesty for my thesis preparation and that the content was written by myself with information retrieved and obtained from reliable sources. The information in this thesis was extracted from published information, internal source and was clearly cited with no plagiarism violation. HoChiMinh City, December 2011 Tran Thi Nhu Ngoc III ACKNOWLEDGMENT I would like to express my sincere gratitude to all the Professors of the program for the knowledge and valuable experience that Professors would have divided us in two years. I have been consulting and had many valuable discussions supported for case study. I would like to thank Dr. Tran Anh Tuan, co-director of Vietnam- Belgium program for organizing and operating this program. My deepest gratitude goes to all members of Co-ordinator Board who always stand by us and ensure excellent classes: Mr. Serge Bywaski, Ms.Bui Phan Bao Tran, Ms.Le Thi Ngoc Hien, Ms.Le Thi Thu Ha. I would like to express my sincere thanks to Dr.Nguyen Van Ngai, my advisor, for consulting and instructing me to complete my thesis. My deepest thanks are given to the Board of Director of BaoViet Insurance Corporation for all primary data using in this case study. Thank Marsh and Gras savoye broker and customers who have supported me to fulfill the questionnaire. And last but not least, I also would like to express my gratitude to my beloved parents, my younger sisters for their warm support during my time of study. Thanks my lovely husband for sharing my difficulty and always encouraging me through time of writing this thesis. HoChiMinh City, December 2011 Tran Thi Nhu Ngoc IV ABSTRACT Evaluating and controlling information about medical treatment of customer are big issues in all Vietnamese insurance companies. Most of players now are focusing on low price competition and forgetting the important role of information in insurance industry. Uncertainty and unforeseen risks are objectives of insurance business that could be quite special than other industries. Exploring the big consequences from problems of asymmetric information management existing in all insurance companies is purpose of this study. Information that exchanged between insurance company and customer is not always transparent and fully. With the participation of intermediaries, information becomes more complicated and will be hidden to ensure the benefit. Qualitative method is used for analyzing the casual relationship from intention and moral behavior from customer with their medical treatment claims. Beside, the disadvantages in analyzing due to limitation of system and information management will be evident to prove the problems of asymmetric information and its effect to insurance companies. Some solutions are suggested to managers of BaoViet in order to eliminate the consequences of problems. Recommendations are also mentioned for further researches after meeting many disadvantages during analyzing data. Key words: pre-existing medical conditions, special diseases, waiting period, insured risks, exclusive risks, insured person, insurance company, insurance intermediaries, outside intermediaries. V TUTOR’S COMMENT This study meets the requirement of the MBA Project. I agree for this paper to be presented for final evaluation. Dr Nguyen Van Ngai VI TABLE OF CONTENTS COMMITMENT II ACKNOWLEDGMENT III ABSTRACT IV TABLE OF CONTENTS VI LIST OF TABLES VIII LIST OF FIGURES IX CHAPTER 1: INTRODUCTION OF THE STUDY 1 1.1 Rationale of the study 1 1.2 Statement of problem 2 1.3 Research objectives 3 1.4 Research questions 3 1.5 Research methods 3 1.6 Scope of this study: 4 1.7 Structure of the study: 5 CHAPTER 2: LITERATURE REVIEW 7 2.1 Asymmetric Information Theory: 7 2.2 Manifestation of Asymmetric Information: 8 2.2.1 Adverse Selection: 8 2.2.2 Moral Hazard 9 2.3 The Principal – Agent framework existing in insurance market 9 2.3.1 The Principal – Agent Framework: 10 2.3.2 Multiple Principal – Agent relationships: 10 2.3.2.1 Insurance market performance: 10 2.3.2.2 Intermediaries and Adverse Selection issue: 11 2.3.2.3 Intermediaries and Moral Hazard issue: 12 2.3.3 Solutions for Principal – Agent conflict: 14 2.3.3.1 Sources of conflict: 14 2.3.3.2 Mechanism to restore Goal Congruence: 16 2.4 Definitions used in Medical Care insurance wording: 18 2.5 Framework of the Study: 18 CHAPTER 3: HEALTHCARE INSURANCE LINE AT BAOVIET 21 3.1 Profile of BaoViet Insurance Corporation and rapidly development of Healthcare Line 21 3.1.1 BaoViet Insurance Corporation in Non-life insurance market 21 3.1.2 Introduction of Healthcare insurance line: 24 3.1.2.1 Coverage 24 3.1.2.1 Difference between Healthcare insurance and Life insurance 25 VII 3.1.3 Overview of market trends 25 3.1.3.1 Healthcare expenditure in Vietnam 25 3.1.3.2 Insurers competition in “hot” growth market 26 3.2 Existing process of information management: 28 3.2.1 Pre contractual: 28 3.2.2 Post contractual 30 3.3 Role of Agent activity 31 3.3.1 Agent as Insurance intermediaries 31 3.3.2 Agent as Hospitals and Clinics 32 CHAPTER 4: PROBLEMS OF ASYMMETRIC INFORMATION MANAGEMENT AND SOLUTIONS 34 4.1 Adverse Selection issue 34 4.1.1 Database analysis 35 4.1.2 Reasons for existing Adverse Selection issue: 38 4.1.3 Consequences of Adverse Selection issue 40 4.2 Moral Hazard problem 40 4.2.1 Database analysis 42 4.2.2 Reasons for existing Moral Hazard issue 44 4.2.3 Consequences of Moral Hazard issue 44 4.3 Solutions for problems in information management: 46 4.3.1 Solutions for Adverse selection issue 47 4.3.2 Solutions for Moral hazard issue 49 4.3.3 Solutions for encouraging the enthusiasm from Insurance Intermediaries (Agency and Broker): 54 4.3.4 Solutions for encouraging the enthusiasm from for Outside Intermediaries (Hospitals and Clinics): 54 CHAPTER 5: CONCLUSIONS AND RECOMMENDATIONS 55 5.1 Conclusions 55 5.2 Recommendations 55 REFERENCES i APPENDIX 1 - QUESTIONAIRE AND ANSWER SHEET ii APPENDIX 2 – VERIFICATION AT KINHBAC HOSPITAL xvii APPENDIX 3 - MEDICAL CARE INSURANCE: PREMIUM AND BENEFIT xviii APPENDIX 4 - VERIFICATION AT BACHMAI HOSPITAL xx APPENDIX 5 - VERIFICATION AT TUONGLAI DENTAL CLINIC xxiv VIII LIST OF TABLES Table 3.1 - Assessment of non-life insurance Vietnam market 23 Table 3.2 – Development of Medical Expenses Insurance Type at BaoViet 25 Table 3.3 – Vietnam Market growth for Healthcare line 27 Table 3.4 - Premium for Healthcare line Vietnam market 27 Table 3.5 - Healthcare Line Loss Ratio in Vietnam Insurance Market 28 Table 4.1 – Medical Care insurance contract – Sale report from 2010 to 2011 by Age of Insured Person 37 Table 4.2 – First date of treatment analysis by Age of Insured Person 38 Table 4.3 - Medical Care insurance contract – Sale report from 2010 to 2011 following each Benefit 42 Table 4.4 - Claims Analysis Following Each Benefit 43 Table 4.5 – Summary solutions for Adverse Selection and Moral Hazard applied to each party 46 Table 4.6 – Comparison between premium paid by Insured person and reimbursement paid by BaoViet 49 Table 4.7 – Examples of “No-claims discount term” 53 IX LIST OF FIGURES Figure 2.1 - Multiple Principal - Agent Relationships 10 Figure 2.2 – Claims Handling process via Medical Facilities 13 Figure 2.3 - Illustrated Framework of the study 19 Figure 3.1 - Organizational Structure 21 Figure 3.2 - Key Performance Indicators 22 Figure 3.3 - Top insurance companies in Vietnam market 24 Figure 3.4 – BaoViet underwriting process 28 Figure 4.1 - Adverse selection expression via first date of treatment 36 Figure 4.2 - Group of normal diseases and Pre-existing Medical Condition 40 Figure 4.3 - Interference between adverse selection and moral hazard 46 Figure 4.4 - Direct Billing card issued by BaoViet and Gras Savoye, 50 Figure 4.5 - Screen shot of client’s information: 51 1 CHAPTER 1: INTRODUCTION OF THE STUDY 1.1 Rationale of the study Insurance industry is a business that objective is risks. Risks are defined as potential losses with uncertainty and unforeseen. Unlike the oversea insurance market, Vietnamese market is lack of the connection between the insurers and between the other industries related to insured objectives, such as medical treatment history of person and Ministry of Health, traffic accident in motor vehicle and Ministry of Transportation, etc. Laws have been issued for specific industries that prevented insurance company in verifying and observing insured objectives. Consequences of the disconnection will be analysised in this study combined with loss suffered by insurance company, for instance: paying indemnity for pre- existing risks that had been accumulated in previous time. Before exploring the consequences, this study is aimed to understand deeper the causes made this issue happening and the reasons why insurance companies still not eliminate it. On important point must be mentioned that supported for above consequences is hot grow factor in Non-life segment from year 2007 up to now. Two digits of growing ratio for all insurers contains the unsteady element. There have more than forty insurers and brokers in Vietnamese Non-life insurance market but no one has the effective information controlling system. Chasing for sale target and forgetting the role of information management are now popular in market, not in any insurance company. Most of new players are using the low premium strategy in order to entice customer. As consequence, some insurers are losing the reimbursement affordability because liability in contract is higher thousand times than premium paid, for instance Vietnam Air Insurance (VNI) in year 2011, BaoLong insurance company in year 2010 were losing the affordability in healthcare insurance. Customer becomes premium shopping and insurers becomes low premium rivals without awareness about bankruptcy. Shortage of information sources management will effect to underwriting and indemnifying. Therefore, it affects to profit and growth of insurance company. These effects of shortage will be clarified in this study too. [...]... the framework of this study PROBLEMS OF ASYMMETRIC INFORMATION MANAGEMENT ADVERSE SELECTION Data analysis Manifestation Pre-Existing Medical Conditions Causes and Effects Birth defects, hereditary confusing with new rising MORAL HAZARD Data analysis Manifestation Less attention in protecting health and treatment visits increasing Fraud based on real treatment Causes and Effects Fraud by using medical... The data record will be analysed as much as possible, followed its contract 5 Data grouping: The claims data record is analysized follow each insurance contract and devided into many categories of contracts: new or renewal, core benefit and endorsements, loss ratio, insured age Data Analysis In each category, the data record will be analysed to assess the problem of Adverse Selection and Moral Hazard... the information could be involved in exclusions of coverage 21 CHAPTER 3: HEALTHCARE INSURANCE LINE AT BAOVIET 3.1 Profile of BaoViet Insurance Corporation and rapidly development of Healthcare Line 3.1.1 BaoViet Insurance Corporation in Non-life insurance market As the first insurance company in Vietnam market, BaoViet Insurance Company was established in 1965 and doing business with fire and cargo... behavior analysis have also been mentioned 6 This chapter provides the insurance market fluctuation and competitive situation, especially healthcare line between major players such as BaoViet, BaoMinh, PVI, PTI… Chapter 4: Problems of Asymmetric information management and Solutions Adverse selection and moral hazard are analyzed in terms of how they existed and comments from analysis results are provided... Human Resources Block BaoViet Life Corporation Information Technology Block BaoViet Fund Management Company Real Estate Management Block Internal Audit Division BaoViet Security Company Financial Management Block Strategy Development Block Risk Management Block Investment Block BaoViet Commercial Joint-Stock Bank BaoViet Investment Joint-Stock Company BaoViet Investment Joint-Stock Company BaoViet AuLac... from asymmetric information will be analysised in two branches: adverse selection and moral hazard Each issue will be presented in separately but same direction, such as their manifestation in healthcare insurance, data analysis proving, causes 19 for existing and consequences Recommendations will be proposed based on each issue’s problems on the view of BaoViet manager The below graph illustrates... provided Claims database is primary and fundamental data used in this thesis Based on the results of the analysis and shortcomings in the operation of insurance companies, this thesis proposes a number of suggestions related to the healthy competition environment between insurance companies and revises information management in BaoViet insurance Chapter 5: Conclusions and Recommendations This chapter is... quality of information exchanged between the parties Without the participation of insurance intermediaries, direct transactions between the insurers and customers can ensure the transparence of information but cannot avoid the impact of asymmetric information These impact are supported strongly by appearance of intermediaries Consequently, information is distorted by the supplier and focused on maximizing... Reinsurance company (2011),”Sigma - World insurance in 2010”, Volume 2, website: http://www.swissre.com/publications 23 Premiums growing rate in separate business line shows that Healthcare line is always at two digits and high volume in premium There will be challenge for healthcare insurance information management because customer begin to aware and careful in what they are paying for insurance (premium... insurance Beginning with head office in Hanoi capital and a branch in Ho Chi Minh City until now BaoViet Insurance Corporation has 68 branches in Vietnam BaoViet Insurance Corporation is a member of BaoViet Holdings, which is the former state-owned monopoly Supervisory Board Risk Management Committee Audit Committee Strategy and Investment Committee ALCO Committee Remuneration and Appointment Operations . UNIVERSITY SOLVAY BRUSSELS SCHOOL MBAVB4 TRAN THI NHU NGOC PROBLEMS OF ASYMMETRIC INFORMATION MANAGEMENT: A CASE STUDY OF HEALTHCARE LINE AT BAOVIET MASTER PROJECT MASTER. from problems of asymmetric information management existing in all insurance companies is purpose of this study. Information that exchanged between insurance company and customer is not always. INSURANCE LINE AT BAOVIET 21 3.1 Profile of BaoViet Insurance Corporation and rapidly development of Healthcare Line 21 3.1.1 BaoViet Insurance Corporation in Non-life insurance market 21 3.1.2