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The Determinants of Derivatives Usage by Korean Life Insurers

  • Journal of Insurance and Finance
  • 2007, 18(3), pp.69-98
  • Publisher : Korea Insurance Research Institute
  • Research Area : Social Science > Business Management

Lee Kyonghee 1

1보험개발원 보험연구소

Accredited

ABSTRACT

This study provides an empirical analysis of the determinants and extent of derivatives usage in the Korean life insurance industry for the period 2003~2006. The regression results indicate that the determinants of derivatives participation are total asset size, foreign securities investment, and ownership type(domestic or foreign). Average cost(total cost/total asset) is related to the volume of derivatives, which supports the existence of economies of scale in derivatives market. Korean life insurance firms mainly use derivatives to hedge foreign exchange rate risks due to the foreign securities investment focused in asset-liability duration matching. As a result approximately eighty percentage of total derivatives contract is related to foreign exchange rate. Domestic insurance firms with higher foreign currency exposure are more likely to use derivatives than foreign insurance firms. However, leverage, maturity of guaranteed liability, and reinsurance are not related to the use of derivatives.

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