2009, Vol.20, No.2

Journal of Insurance and Finance 2023 KCI Impact Factor : 0.59

pISSN : 2384-3209
https://journal.kci.go.kr/kiri

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.