Comprehensive Study Notes on Insurance Economics and Business Law

Fundamental Concepts of Insurance

Definitions and Nature of Insurance

Insurance is defined through various lenses depending on the scope of the study. In a narrow sense, insurance is specifically understood as a financial service business activity. It functions as a special form of social finance and a policy tool for the State, but its core operational identity is the management of risk for a fee.

Distinguishing Characteristics

The fundamental characteristic that distinguishes insurance from other financial activities (such as banking or investment) is its nature of dispersing risk through a community. While other activities may involve multiple parties or legal frameworks, the mechanism of "spreading the risk" (pooling contributions to pay for the losses of a few) is unique to insurance.

The Nature of Insurable Risk

Not all risks can be covered by insurance. A risk must meet specific criteria to be considered an "insurable risk":

• Randomness and Uncertainty: The loss must be accidental and not subject to the control of the insured. It cannot be something that occurs according to a fixed, predictable cycle.
• Financial Measurability: The loss must be measurable in monetary terms.
• Quantifiable Probability: It must be possible to calculate the probability of the loss occurring to determine appropriate premiums.

Types of Risks

• Pure Risk: These involve only the chance of loss or no loss (e.g., fire, accident). These are the standard targets for insurance.
• Speculative Risk: These involve the chance of gain or loss (e.g., stock market gambling). These are generally NOT insurable.
• Subjective and Inevitable Risks: Risks caused by deliberate illegal acts or events that are certain to happen are not insurable.

Core Principles of Insurance Operations

The Law of Large Numbers (Lấy số đông bù số ít)

This is the foundational principle of insurance. It refers to the redistribution of losses from the few people who actually experience an accident to the entire community of participants. By pooling premiums from a large number of people, the insurer can compensate for the losses of the few.

Principle of Utmost Good Faith (Trung thực tuyệt đối)

This principle requires all parties involved in an insurance contract to declare all material information fully and accurately. In non-life insurance, this obligation to be honest exists throughout the entire effective duration of the contract, not just at the time of signing.

Principle of Insurable Interest (Quyền lợi có thể được bảo hiểm)

To purchase insurance, the insured must have a recognized financial or legal relationship with the object being insured.

• For Property: The insured must have ownership rights, management rights, or legal usage rights. One cannot insure property they have no legal tie to (e.g., disposing of someone else's property without authorization).
• In Life Insurance: An individual can purchase insurance for themselves with an arbitrary sum, provided they have the financial capacity to pay the premiums. For third parties, written consent is usually required, or a legal/blood relationship must exist.
• Timing: In property insurance, the insurable interest must exist at the time the loss occurs.

Principle of Indemnity (Nguyên tắc bồi thường)

This principle states that the compensation provided by the insurer should not exceed the actual financial loss suffered. The goal is to return the insured to their financial state prior to the loss, not to allow them to profit from an accident. This principle does not apply to life insurance because human life and health cannot be accurately quantified in financial terms.

Principle of Proximate Cause (Nguyên nhân gần)

This principle is used to determine which risk is the actual cause of a loss. For example, if fire fighters use water to extinguish a fire and that water damages property, the damage is compensated under the "Fire" policy because fire was the proximate (dominant) cause.

Principle of Subrogation (Thế quyền)

Under subrogation, once an insurance company has compensated the insured for a loss caused by a third party, the insurer gains the right to recover the paid amount from that third party.

Principle of Pre-agreed Sums (Khoán)

Common in life and accident insurance, this principle involves paying a fixed amount agreed upon in the contract regardless of specific financial loss calculations. This is the opposite of the indemnity principle.

Insurance Classification and Techniques

Classification by Nature of Activity

• Social Insurance (BHXH): Mandatory, state-managed, and linked to labor relations. Its goal is to ensure essential income when workers lose their earning capacity.
• Commercial Insurance (BHTM): Business-oriented, implemented by insurance enterprises for profit, covering property, human health, or civil liability.

Classification by Management Technique

• Distribution Technique: Used primarily in non-life insurance for short-term risks.
• Accumulation Technique (Tồn tích): Generally applied in life insurance to manage long-term savings and risk.

Classification by Obligation

• Mandatory Insurance: Usually includes Civil Liability insurance for vehicle owners, Social Insurance, Health Insurance, and Fire and Explosion insurance for facilities with high risk.
• Voluntary Insurance: Based on the free will of the participants.

Classification by Subject Matter

• Property Insurance: Targets tangible assets, commodities in transit, or physical objects.
• Human Insurance: Targets life, longevity, health, and physical integrity.
• Civil Liability Insurance: Targets the legal liability of the insured toward a third party for damages caused.

Financial Mechanisms and Compensation Formulas

Valuation of Losses

Actual Cash Value ($ACV$) can be determined through:

1. Replacement cost minus depreciation.
2. Fair market value.
3. The "Broad Evidence Rule." Note: Original purchase cost is NOT a standard way to determine $ACV$ for modern claims.

Compensation for Under-Insurance

When the sum insured ($STBH$) is lower than the actual value of the property ($GTBH$), the compensation for a loss is calculated using the following ratio:

$\text{Compensation} = \text{Loss} \times \frac{STBH}{GTBH}$

Deductibles (Miễn thường có khấu trừ)

A deductible is a specific amount or percentage that is subtracted from the total loss. The insurer only pays for the portion of the loss that exceeds the deductible amount.

Contribution Principle (Đóng góp bồi thường)

This applies when there are two or more insurance contracts covering the same object, same risk, and same interest. The insurers share the compensation cost proportionally.

Social Security Systems in Vietnam

Social Insurance (Bảo hiểm xã hội - BHXH)

• Primary Goal: Ensure essential income for workers during events like sickness, maternity, labor accidents, or retirement.
• Management: Managed by Social Insurance Vietnam (Bảo hiểm xã hội Việt Nam), under the state management of the Ministry of Labour - Invalids and Social Affairs.
• Funding: Formed by contributions from employees, employers, and State support. It is NOT for paying dividends to participants.
• Maternity Fund Rate: The employer contributes $3\%$ specifically to the maternity fund.

Health Insurance (Bảo hiểm y tế - BHYT)

• Nature: Non-profit, managed by the State (Ministry of Health and Social Insurance Vietnam).
• Contribution Rate: Currently, the employee contribution rate for health insurance is $1.5\%$.
• Payment: Medical costs are paid directly from the Health Insurance Fund.

Unemployment Insurance (Bảo hiểm thất nghiệp - BHTN)

• Target: Workers who have lost their jobs.
• Employer Contribution Rate: Employers currently contribute $1\%$ to this fund.

Legal Framework: Insurance Business Law 2022

Objects of Insurance

• Property Insurance: Legally owned, used, or managed property.
• Human Insurance: Life, longevity, health, and physical/mental condition. It excludes property values.
• Civil Liability: Legal responsibility toward third parties.

Scope of Legal Operations

• Insurers cannot cover illegal risks or risks caused intentionally by the insured.
• Micro-insurance: Targeted specifically at low-income households.
• Deposit Insurance (Bảo hiểm tiền gửi): Protects depositors against the risk of credit institutions (banks) failing.
• Compulsory Fire and Explosion Insurance: Applied specifically to facilities with a high risk of fire as defined by law.

Administrative Responsibilities

• State Management of Social Insurance: Ministry of Labour - Invalids and Social Affairs.
• State Management of Health Insurance: Ministry of Health.
• Direct Implementation of BHXH/BHYT/BHTN: Social Insurance Vietnam (Bảo hiểm xã hội Việt Nam).