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.



2

1.2 Statement of problem
The objective of insurance industry is risks and information management relating
to these risks. The nature of risk and the happened time effect to reimbursement
decision directly. Nature of risk is including covered risks and exclusive risks. The
happened time is to define the event appeared in or out of insurance period.
Existing problem in all insurance company now is still not active in information
management to verify both factors for ensuring reimbursement decision. Software
or systems used in insurers is assessed at simple level and information only. They
are not supported for emergency demand in connecting and observing history of
insured objective.
At present, Vietnam Insurance market is facing with problem of asymmetric
information involving insured risks of customers. For instance in healthcare
insurance line, customers know their health condition better and much more than
insurance company. Wording of insurance could be complex and difficult to

understand but simple explanation is healthcare insurance will deny all pre-
existing medical condition of insured person. Therefore, customer will not declare
them clearly to insurer. The issue that described with pre-existing risk from insured
person and getting benefit from insurance contract is called adverse selection
behavior.
Besides, it has moral hazard as symptom of asymmetric information problem. It is
different with adverse selection because it is defined as customer behavior after
time of signing insurance contract. Moral hazard could be expressed via less
attention in health protection, fraud and cheating during medical treatment, etc. In
order to defining the moral hazard, insurance company must verify with medical
facilities and getting confirmation in writing. This work is not fulfilled easily due to
lack of law regulations supporting insurance company facing with reluctant from
hospital and clinics.
Both issues of asymmetric information are not existing in several insurance
companies but in all insurance market. Asymmetric situation between rapidly



3
development in increasing quality of life and human awareness; and undeveloped
system in controlling information and connecting in insurer association will affect to
Vietnam insurance industry. Result from analyzing both issues via existing process
and current situation in Vietnam market will be the foundation to build another
projects repairing existing failures and predictable ones, such as losing
affordability, unfair business environment, etc.

1.3 Research objectives
This research aims to explore the problem of
1. Adverse selection
2. Moral hazard

in Vietnam, especially in insurance companies. Both issues are proved based on
claims data record compared with the number of contracts issued, and combined
with other elements such as first date of treatment after waiting period, age of
Insured, type of contract, etc. to explore both issues deeper. The difference
between two numbers show the frequency of both issues happened and their ratio
relative to each other.

1.4 Research questions
In order to explore the problem, this thesis is focused on research objectives.
There will be two main research questions:
1. Is there the problem of Adverse Selection appeared from Insured Person’s
behavior?
2. Is there the problem of Moral Hazard appeared from Insured Person?

1.5 Research methods
Qualitative method is the research method used in this study that aimed to explore
the casual relationship between the illness and/or disease of Insured person rising
within insurance period (a) with their awareness and intention about that risk (b).
For example: one insured person being tuberculosis (b) will be refused all claims
related to this disease during first year contract. This disease will be reimbursed in
second year (a) if no treatment has been made within first year. In this case,



4
insured person will hide the history of medical treatment and during first year until
second year to get full benefit from treatment for tuberculosis.
This study also has a small survey to evaluate the buyer’s behavior when they
consider insurer and product before buying, which elements affected them strongly
and lead to change existing insurer.

Insurance intermediaries, including Agency and Broker, having important role as
bridge from customer to insurance company is also interviewed about the quality
of system and service of some leading insurers. The interview will be designed to
ask the existing situation in Vietnam insurance market about the corporation in
providing information of customer from broker.

1.6 Scope of this study:
BaoViet is a first and biggest insurance company in Vietnam market, hence, this
study choose BaoViet as a case study instead for all insurers. BaoViet has a large
distribution channel from the North to the South of Vietnam and all provinces in
order to adapt the insurance demand from customer everywhere. As the first seller
in Vietnam market in launching Healthcare insurance, BaoViet has many products
in this line can cover all demand level, from different income to different territory.
The highest premium (income) and biggest in volume of market share are the
main points to evaluate the result from case study will be representative for overall
market.
This study uses Medical Care Insurance Product because it is the only product
issued for one person per contract and launched at the beginning 2010. The other
products are issued one contract for many Insured persons and data analysis
would not be independent between Insured because premium data extracted
follows its contract number (for instance: the Policy Holder is Procter and Gamble
but the Insured persons are their employees, or, Plan Holder is a man and the
Insured is his family). All data of this product will be used for this thesis to ensure
the transparency and accuracy of result. The data record will be analysed as much
as possible, followed its contract.



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 in health insurance. Focused on Research
Questions combining with grouping data record, this research intend to explore the
causes of loss (subjective and objective) and behavior of Insured person in
protecting their health after the purchase.

1.7 Structure of the study:
This study is structured into five chapters:
Chapter 1: Introduction of the Study
This chapter introduces reseach problems, reseach objectives and reseach
questions.
Chapter 2: Literature review
This chapter mentions the theory of asymmetric information and definition of
adverse selection and moral hazard. Moreover, it also provides the relationship
between customer and insurer, between insurance intermediaries to both insurer
and customer. There also have models multiple relationships of insurance
intermediaries and insurer and solutions to solve the conflict but still ensures the
goals of insurer.
Some major definitions used in insurance market are explained in this chapter.
The framework of this study is motioned to illustrate the direction and steps
relating.
Chapter 3: Healthcare Insurance Line at BaoViet
This chapter introduces the main points of BaoViet Holdings and BaoViet
Insurance Corporation. The difference between life and non-life insurance and
result of buyer behavior analysis have also been mentioned.

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. Claims database is primary and
fundamental data used in this thesis.
Based on the results of the analysis and shortcomings in the operation of
insurance companies, this thesis proposes a number of suggestions related to the
healthy competition environment between insurance companies and revises
information management in BaoViet insurance.
Chapter 5: Conclusions and Recommendations
This chapter is mentioned about conclusions for both issues of Asymmetric
information management in BaoViet after observing the treatment from customer:
confirmation for existing, the causes and effects from both issues. Disadvantages
during making this case study will be remarked for further researches in the future.



7
CHAPTER 2: LITERATURE REVIEW

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

1
In medical insurance, most Insurance companies always offer a product providing
the age of insured person from 15 days old to 65 years old ( the younger or older
person has just be insured in some special agreements mentioned as in policy
wording). People over age 65 have difficulty buying medical insurance at almost
any price because “Older people do have much higher risk of serious illness, but
why does the price of insurance not rise to reflect that higher risk? The reason is
asymmetric information”

2
Asymmetric information presents on all markets. Whatever the product or service
sold, the seller almost never knows the buyer’s preferences, nor the maximum
price she would be willing to pay to acquire it
. People who want to buy medical insurance know much
more about their health situation (such as the chronically diseases) than the
insurer and they want to be insured. When the proportion of unhealthy person
increases in the pool of insured people, the risk will be pushed up and lead to the
point made unprofitable for insurance company.
3




1
Rober S.Pindyck and Daniel L.Rubinfield (1996), Third Edition, Microeconomics, Prentice-Hall,Inc, p.593.
2
Rober S.Pindyck and Daniel L.Rubinfield (1996), Third Edition, Microeconomics, Prentice-Hall,Inc, pp.596-
597.
3
Pierre-Andre Chiappori (2006), “Asymmetric information in insurance: general testable implications”, RAND

Journal of Economics, volume 37, p.783 .
. Actually, in the pool of insured
people with age from 18 to 65, the asymmetric information also happens without
hope to know from insurance company, such as congenital defect, dental
treatment, pre-existing medical conditions, etc… Some people want to have
complete medical insurance contract but it could not be specified when some
information that is relevant to this deal is private and some unhealthy conditions



8
can be observable. Insurance companies have been written the wording attached
to insurance contract aimed to clarify the benefits, exclusions and cancellation
right to prevent the opportunistic behavior. The behavior of consumer in this case,
coming from asymmetric information symptom, is called adverse selection and
moral hazard.

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

4
Ian Molho (1997), Lying and Cheating in Markets and Organizations, Blackwell, pp.8-9

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



9
In the other hand, adverse selection seems to be consequence of expected
wealth-maximizing person and that person would pay an infinite amount to
take the gamble (i.e between two players: Insurer and Insured). In
purchasing medical care insurance, the bad risks persons are willing to pay
higher premium than low risks one for the insurance cover.

2.2.2 Moral Hazard
Moral Hazard is a problem of “post contractual opportunism”, in that the
presence of some unobservable (unverifiable) action provides people with
an opportunity to cheat after the deal is signed. The term “moral hazard”

relates in the insurance industry to the phenomenon that once people take
out an insurance policy, they deliberately take more risks as a result.
When having medical insurance, Insured persons are paid less attention in
caring their health and start to think seriously about their health condition.
They visit hospital or clinics much more and will be angry when insurer
refuses their claim due to normal health diagnosis in medical report.
In outpatient treatment and especially with dental treatment, the moral
hazard is performed strongly and could be in bad result. The opportunity of
getting evidence is low and sometimes, it could make danger for
investigator. Some dental clinics or private clinics are willing to revise the
detail of treatment in avoiding the exclusion diseases for their patient. There
are circumstances in which insurance company cannot prove anything and
be obliged to reimburse due to exceeding 30 days for investigating
(regulated by Vietnam Law). There also have many hospitals willing to
cooperate with insurer, however, due to the unprofessional and old
technology, they cannot issue the list of treatment record and details to
prove the fraud of insured person.

2.3 The Principal – Agent framework existing in insurance market
Asymmetric information problem could be assessed from the other sides, not sole
from customer, such as insurance intermediaries, hospitals and clinics who have



10
Consumer
Insurance
Intermediaries
Insurance
Company

Outside Intermediaries
Information
Quality
Sales
Effort
Principal
Principal
Agent
relative benefits from transactions with insurance companies. In general, whoever
they are, their actions are exploited from maximizing expected utility.

2.3.1 The Principal – Agent Framework:
According to Ross 1973, the framework is as follows: One individual
(designated the “agent”) acts on behalf of another (designated the
“principal”) in undertaking some activity. The agent claims a return for his
efforts, e.g. a fee or salary. The principal may have many such projects or
activities on the go and cannot run them all, and hence delegates
responsibility for each activity to an agent in this way. The principal is likely
to observe the outcome of the agent’s action, which allows him or her at
least to make some inference about what the unobserved actions might
have been.
5
2.3.2 Multiple Principal – Agent relationships:


2.3.2.1 Insurance market performance:

Figure 2.1 - Multiple Principal - Agent Relationships
Source: Martina Eckardt (2007), Insurance Intermediation – An economic analysis of the
Information Services Market, Physica – Verlag A Springer Company, p.113

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




5
Ian Molho (1997), Lying and Cheating in Markets and Organizations, Blackwell, p.119



11
intermediaries could be Agency or broker, such as exclusive agents,
independent agents, insurance brokers and bancassurance. Outside
Intermediaries are including Government Departments, medical
facilities, Medical Assessment Board, etc…
Main characteristic of insurance industry is risk business. All risk
assessment is carried out based on how much information providing
and nature of insured objective. In healthcare insurance, the
underwriting work has been done on some basic information of
customers, such as age, job, health condition and treatment history.
There are direct transactions between customer and insurance
company unless there are existing insurance intermediaries. Pre-

contractual steps, including consultant and explanation, are aimed to
support customer in understanding healthcare insurance clearer. As
a result, customers will choose the insurance plan following their
demand to secure the coverage risks, not for searching profit.
However, the participation of intermediaries (including insurance
intermediaries and outside intermediaries) is affected to quality of
information, in concrete is their honesty in providing. Therefore, the
asymmetric information situation becomes worse in insurer’s side via
Adverse selection and Moral hazard issues.

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



12
insurance intermediaries and hope to eliminate the consequences of
asymmetric information.
Insured persons have understood their health condition and relative
symptoms. Information can easily be exploited and reported to
Insurer unless there are existing insurance intermediaries. If
customer work with insurance intermediaries, these information will

be exploited but how much it provided depending on the honesty and
responsibility of the insurance intermediaries.
When an insurance contract is issued, insurance intermediaries will
initially complete two tasks: task with the insurance company in sales
effort and task of finding the appropriate insurer to customers. If the
claim arises involving in exclusion risks, insurance companies are
subject to verify and payment is action when having no result.
Loss amount won’t be shared between Insurer and insurance
intermediaries as premium sharing. Insurance intermediaries is only
responsible for sales effort, not for customers and information
involving.

2.3.2.3 Intermediaries and Moral Hazard issue:
Moral Hazard comes from the ethics of insured person. With the
participation of intermediaries, Moral hazard is affected by both
intermediaries. Moral hazard is associated with finding the benefit
from actions can not be monitored by the insurer. Expected benefits
from healthcare insurance could be expressed via subjectivity
attitude in health protection and often arrive to medical facilities for
checking; and/or patient is not insured person; and/or make fake
medical documents.
Quality of information depends on the honesty and ethics of
intermediaries. This source will be the basis for reimbursement or
refusing claims request. Figure 2.2 describes the process of
reimbursement when treated at BaoViet’s partners or in facilities
outside BaoViet’s network
.

13
1
1
2
Consumer
Hospitals/ Clinics
authorised by BaoViet
BaoViet
Insurance
Principal
Agent
Other Hospital
/Clinics
2
Consumer
BaoViet
Insurance






Figure 2.2 – Claims Handling process via Medical Facilities
(1) Consumer go to hospital or clinic for treatment
(2) Medical documents are collected and sent to BaoViet for payment request.
Source: BaoViet Insurance Corporation (2009), “Claims Handling and Direct Billing
procedure”, Claim Handling and Direct Billing Department, Unpublished document

When treating at BaoViet’s partners, medical facilities serve Insured

person as an Agent for the Principal. These Agents understand
clearly and deeply the exclusions and the role of information in
assessing which are insured risks and exclusive risks. In direct
contact with customers combined with medical treatment experience,
Agents hide the detrimental information and provide limited
information to the insurer. However, these actions are not controlled
and consequences are not enforced by law. When Insured persons
arrive to other medical facilities outside BaoViet’s network,
information is provided depend on the regulations of each facility and
the willingness from the treating doctor.
In addition, Government departments also play an important role
affecting the counterbalance between the insurer and insured person.
Law on Medical Examination and Treatment mentions the protection
rights for medical information from patient’s treatment. Law on
Insurance Business allows insurance companies to verify the
cheating and clarify the doubt. However, there is no regulation
connecting two Laws to ensure the rights of Insurer, hence, the
problem of asymmetric information still exists.



14
In short, “the game” between the two principals together with the
participation of intermediaries (or not) can be concluded in many
points, as below:
• Information plays an important role in the relationship between
customer and insurance company. This relationship is very
complicated because of the risks contained accumulate in
insured person’s nature and quality of information exchanged
between the parties.

• Without the participation of insurance intermediaries, direct
transactions between the insurers and customers can ensure
the transparence of information but cannot avoid the impact of
asymmetric information. These impact are supported strongly
by appearance of intermediaries. Consequently, information is
distorted by the supplier and focused on maximizing benefit for
customer.
• In business view, Insurance intermediaries have supported
Insurance companies in decreasing expenses and effort in
sales and marketing. As long as the presence of both
intermediaries in insurance market, information quality will be
distorted via intermediary transactions. Thus, impact of
asymmetric information grows stronger and causes damage
direct to the insurance company.

2.3.3 Solutions for Principal – Agent conflict:
The interest of principal and agent is completely different as mentioned in
theory. The Agent also seeks wealth maximization as the principal but in
another way.
2.3.3.1 Sources of conflict:
Expense preferences
Differential attitudes to expenses lead to conflict between Principal
and Agent. Beginning with Insurance intermediaries, as usual, the



15
high quality insurers will offer high rate premium, but the agent would
like to select them to secure income and prestige even though it can
make customer dissatisfied. However, they have been trained

negotiation skills to convince customer. Their income is defined as
agent fee, exploited from premium at a certain rate. In contrast, the
indemnity amount is only exploited from provisions of insurer, hence,
asymmetric information has affected only to insurance companies
because they did not insure themselves by using some special
conditions in contract.
The outcome in each treatment of Insured person that hospital or
clinics which credited for BaoViet is always calculated higher at least
10% official price. In the other hand, in some hospitals/ clinics, the
official price applied for person who has insured by private insurance
company is 20% higher than non-insured person.
Under asymmetric information, there will have conflict in profit of
Principal and Agent. For instance, a patient suffered an illness, which
can be cured as outpatient treatment and medicine, need to be
surgery following the direction of doctor worked for Agent. The
coverage is always different between outpatient and inpatient
treatment, i.e more and higher benefits, hence this decision will be
profitable for both insured and Agent. If Agents are BaoViet’s
employee, they will choose the solution not only well treating but also
less expense.

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

16
s walk away, insurers will lose the input (as premium) and affect to
ability to reimburse in the future.
Agents also want to keep loyalty from customer. On top of that, the
income or salary they are received being directly from customer
premium. Therefore, they always try their best to serve customer,
even though there could be harmful to insurance company utility.

2.3.3.2 Mechanism to restore Goal Congruence:
A number of control mechanisms may be identified. The solutions
could be from internal control mechanism (the principal) and external
control mechanism. Due to the difference between characteristic of
“agent” in theory and in this thesis, the mechanisms are limited as
follows:
Manager
Insurance
intermediaries
Hospitals/
clinics
Internal Control
Mechanism
Monitoring
Payment by results
Monitoring
Payment by results
Monitoring
External Control
Mechanism
Common benefits

and society
awareness
Common benefits
and society
awareness
Common
benefits
and society
awareness
Internal control mechanism
Monitoring
The principal could choose to improve the information by investing in
systems to measure managerial inputs into the performance of
agent. The cost involved in monitoring will affect to the balance of the
firm. The principal will use the information to continue the contract
with agent or not.
However, monitoring may also be problematic if share-ownership (in
the principal) is widely dispersed
6




6
Ian Molho (1997), Lying and Cheating in Markets and Organizations, Blackwell, p.124
. There has conflict between