KJC Korea
Journal Central

The purpose of this paper is to calculate and analyze value of life annuity which is commonly purchased by pre-retirees in Korea. Instead of using financial value of life annuity such as MW(Money’s Worth) rate, IRR(Internal Rate of Return), and other similar measures, we focus on calculating the value of life annuity which is based on individual’s utility function. To calculate AEW(Annuity Equivalent Wealth) which measures the value of annuity based on the utility function, we use a life-cycle based optimization model, and as a solution procedure, we utilize the DP(Dynamic Programming) techniques. The results indicate that value of life annuity is high regardless of the gender and the degree of risk aversion. Especially, the utility of life annuity increases for a typical male who has higher mortality rate than a typical female when annuity payment is determined under the fair pricing system compared to the case where annuity payment is determined under the uniform pricing system. Further, the value of life annuity decreases as pre-existing annuity level increases and it increases as the annuitization age of an individual increases. Finally, the result shows that if we use a realistic constraint of annual minimum consumption level in the model, then the value of life annuity increases.

In this paper, we investigate the pension risk in defined contribution pension schemes in view of asset allocation strategy and wage growth rate. To measure the downside risk faced by the retiring member of the DC schemes, we adopt the (lump-sum) benefit ratio concept. Benefit ratio is defined as the ratio of the DC to a hypothetical benchmark DB benefit which is equal to final monthly wage multiplied by 30 years. We estimate various risk measures such as shortfall probability, shortfall expectation, VaR, and TVaR and find some conclusions from our analysis. First, the distribution of benefit ratio is very sensitive to the choice of investment strategy. Investment strategy with a low equity weighting gives better results than aggressive investment viewed from downside risk. Second, the member of DC plans can be extremely risky relative to the DB benchmark for the higher rate of wage increase i.e. 8.5%. Third, the trade-off between probability of failing the target benefit ratio and shortfall expectation is important factor when determining the choice of investment strategies for the higher wage growth rate. Fourth, we consider the sensitivity of the equity risk premium. When equity returns are increased by 2 percentage points critical confidence level which accept DC schemes is increased by 19 percentage points. Finally, we adjust the contribution rate for the higher rate of wage increase (8.5%) until we achieve the 95% VaR confidence. The aggressive equity-based asset allocation strategies require substantially higher contribution rates than more conservative bond-based strategies if the same pension benefit is to be achieved.

There has been a great increase in the use of life insurance trust since 1930. As Korean life insurance companies have been recently authorized to carry on trust business as well as insurance business, they became to be interested in producing and selling life insurance trusts. However, it is not clear whether or not such products are permitted under the current Korean law. This article tries to interpret whether they are allowed under the current law, and to suggest legislative reform for solving possible legal problems. The legal issues dealt with by this article are classified as follows. First, the question arises whether or not the trust of a right to insurance claim is legally possible under the Financial Investment Services and Capital Markets Act(FSCMA), which restricts trust properties to limited properties such as pecuniary claims. The answer should be affirmative, as far as the object o·f insurance claim is cash, in that the right to such an insurance claim can be categorized into pecuniary claim. It is suggested that the FSCMA be changed to include all kinds of properties as trust properties, on the basis that the restriction of trust properties has lost its ground nowadays. Secondly, when the trustee insures settlor’s life as a policyholder and an insurer, this act of insuring may amount to the self-dealing which is in principle prohibited so as to prevent the conflict of interests under the FSCMA. The current law is interpreted to bar such a self-dealing even though the settlor or the beneficiary of the trust consents to it, but it may be argued that this regulation is too excessive. Therefore, it is suggested that the law be reformed to allow such a self-dealing when the settlor or the beneficiary of the trust gives explicit permission to it after having been sufficiently notified about its contents. Thirdly, it is questionable whether the declaration of trust applies to a trust where the beneficiary of the life insurance becomes the trustee. The answer may be negative in the life insurance trust, but it seems safe to determine whether the declaration of trust is legal. The dominant opinion negates the validity of the declaration of trust under the current Korean law. It is suggested that the law need to be changed to allow it, on the ground that there is no sound basis justifying such a strict regulation.

This study evaluates the business performance and the relative management efficiency of the online property insurance company using the financial ratio analysis and data envelopment analysis, measuring the changes in the productivity by the Malmquist Production Index. As a result of financial ratio analysis, the companies were maintaining adequate capital level, asset composition, and liquidity and were evaluated as having a healthy financial structure. The loss ratio, which is a representative index for profitability, was below average, and the increase in the operating profit and net profit, which represents the quality of growth, was poor except for B. There were some differences in the return on the operating assets, ROA and ROE among the insurance companies, but the quantitative growth was at a high level overall, and the operating ratios were evaluated as satisfactory. The study selected two injection and yield factors and measured the relative efficiency. The results showed that among four online insurance companies, only one company turned out to be efficient and the other three were inefficient. Also, according to the measurement of the productivity change by the Malmquist index, the productivity of the online insurance companies was decreasing over time. Therefore, the online property insurance companies are in the desperate situation to improve the management efficiency and the productivity instead of focusing on the quantitative growth.

This paper investigates the determinant of the patterns of Korean insurer’s foreign investment using a set of home country characteristics, foreign country characteristics and insurer-specific characteristics. The analysis reveals that important factors in determining whether Korean insurers participate in a given foreign country depend on the type of insurers. Financial services are more likely to attract life insurers, which implies that life insurers tend to expand toward financial markets of developed countries. In the case of non-life insurers, the bilateral trade is more important than other factors. It implies that non-life insurers are more likely to expand to the countries in which their domestic corporate clients choose to invest so as to be able to offer them the services they need. The result also suggests that insurers with a larger scale of per capita assets would tend to more expand abroad.

This paper examines financial, managerial and market factors that insurance companies and regulators use to reach a decision of business continuance, merger/acquisition, or voluntary or involuntary liquidation of the entire business (i.e., a complete exit from the market). For this, we describe exit regulation in the insurance market and the importance of it on insurer operation s. We then use the A.M. Best database of the U.S. property-liability insurance industry for 1999-2004 (for t-1) and a multinomial logit regression approach to empirically estimate the impact of financial (profitability, underwriting performance, liquidity, capital adequacy and capital measurement), managerial and political environments on the market stay/exit decision making process. The results show that asset size is not only positively related to the probability of business continuance but also likely leads insurers to choose voluntary liquidation or merger instead of involuntary liquidation when they have decided to leave the market. Profitability and capital adequacy also affect market exit decisions. Underwriting performance seems to affect the decisions but not necessarily consistently across the market stay/exit choices.

A cash-in-advance model of multiple means of payment is constructed to study the coexistence of multiple means of payment and the effects of opportunity costs and monetary policy. In steady state equilibrium, if the opportunity cost of credit, transactions cost, increases, people hold more cash and use it for a greater variety of goods. Next, if the money growth rate decreases, then the opportunity cost of money, the nominal interest rate, decreases and people use cash for a greater variety of goods. To improve welfare, the government needs to decrease the money stock in order to avoid opportunity costs and the Friedman rule is optimal.