This study theoretically and empirically analyzes key issues to be considered in improving the resolution system for insolvent insurance companies and offers policy implications. The coming adoption of the new International Financial Reporting Standard (IFRS) 17 as well as enforcement of the new capital regulation named Korean-Insurance Capital Stand (K-ICS) will likely expose the latent risk factors in domestic insurance firms and harm their financial soundness. Although a sudden, large rise in bankruptcy filings is improbable, there should be a sound institutional framework that could effectively handle the insolvency resolution in case of a default or bankruptcy of insurance firms considering the importance of the insurance industry in the financial system.

The existing approach for insolvency resolution heavily relies on government support. When an insurance company collapsed in the past, Korea usually responded with the "total portfolio transfer" (or run-off) method. In other words, a reinsurer assumed and accepted the insolvent insurer's contracts without modifications, and in the process, the government provided support like financial bailouts for the losses incurred to the reinsurer. The drawback of this government-dependent process is that it may lead to moral hazards among insurance policyholders and carriers and a fiscal burden to the government. That way, insurance consumers are not sufficiently motivated to care for the financial soundness of their insurers, and thus, the insurers have little incentive to improve their financial health. As a result, the government's fiscal burden increases as the probability and severity of insolvency grow.

The empirical analysis in this study also shows that insurance companies worldwide are highly reliant on their government. Per the analysis, should their countries' sovereign credit rating drop, so will the financial soundness of these insurers due to the accompanying reduction in the government's tacit protection for the insurance carriers. The insurance industry exhibits greater dependence on government in countries like Korea in particular, whose fiscal soundness is projected to deteriorate henceforth, or that do not issue a reserve currency, or whose insurance industry is large relative to the size of the national economy or public finance. The lesson learned is that Korea needs to improve its insolvency resolution system with stronger vigor.

Therefore, this study suggests the adoption of a new insolvency resolution regime in which policyholders are obliged to share some losses in case an insurance company collapses. As insurers' financial condition will become an important factor for consumers to consider before signing an insurance policy, the new regime can induce insurers to race for better financial health.

However, the loss-sharing regime may trigger a phenomenon called "insurance run," in which policyholders terminate their insurance contracts en masse. When a considerable number of policyholders end their contracts and exit the contractual relations altogether, it may negatively affect the business normalization of the insolvent carrier or the financial fitness of the firm acquiring the bankrupt company. The situation may exacerbate when the exit is more prevalent among relatively low-risk policyholders.

This study recommends the following policy responses in an overview of the theoretical and empirical analysis findings. First, caution should be taken not to seriously damage the continuity of original insurance contracts due to the loss-sharing requirement. In essence, insurance contracts are long-term contracts. Insurance premiums are paid at present to prepare for future insurable accidents. Especially for disease risk later in life, people purchase an insurance policy from a young age. The theoretical analysis revealed that it is desirable to set insurance premiums relative to expected risks, higher for younger and lower for older persons, for maximum social well-being. Thus, this premium structure should not be extensively altered under the loss-sharing regime. In this context, loss-sharing measures geared towards contract termination with less-profitable older policyholders in case an insurance firm goes out of business deserve reconsideration. That is to say, rather than terminating original insurance contracts with insolvent insurers, it would be advisable to keep them with minor modifications such as increasing premiums or reducing indemnity payment amounts in order to retain the contract continuity and share the losses.

Second, the loss-sharing ratio should be set at an appropriate level. The theoretical analysis shows that a higher ratio leads to contrary results: insurance firms can bring in more premium income (or pay less insurance money) from consumers retaining original contracts, but some policyholders bring them to an end. Such a trade-off should be taken into account when setting a proper ratio.

Third, a maximum of 10% requirement for loss sharing seems not to cause serious alarm for an insurance run. According to the survey analysis, it is highly probable that many insurance consumers regard the 10% requirement as lower than anticipated. Accordingly, only a few have expressed the intent to terminate their insurance contracts if so required.

Preface
Executive Summary

Chapter 1 Introduction

Chapter 2 Problem Statement
　Section 1 Outlook on the Weakening of Insurance Soundness due to the Introduction of IFRS 17 and K-ICS
　Section 2 Problems with Existing Insolvent Insurance Company Resolution Policies
　Section 3 Analysis Direction of This Study

Chapter 3 Implicit Guarantee: Does Weakened Fiscal Soundness Lead to Weakened Insurance Soundness?
　Section 1 Hypothesis Derivation
　Section 2 Data
　Section 3 Empirical Analysis
　Section 4 Conclusion
　Section 5 Does an Implicit Guarantee for Insurance Companies Imply an Implicit Guarantee for Policyholders?

Chapter 4 Long-Term Insurance Contracts and the Sticking Phenomenon
　Section 1 Model Economy
　Section 2 Short-term Insurance Balance
　Section 3 Long-term Insurance Balance
　Section 4 Long-term Insurance Balance: Considering Policyholder’s Incentive to Leave
　Section 5 Policy Implications for Loss-Sharing Resolution Policies

Chapter 5 Loss-Sharing Resolution Policies and Insurance Run
　Section 1 Basic Model
　Section 2 Derivation Optimal Insurance Contracts for Insurer’s Profit Maximization
　Section 3 Analysis of Policyholder’s Contract Cancellation Behavior and Insurer’s Profitability Considering Insolvency Risks
　Section 4 Impact of Contract Modifications on Insurers' Expected Profit
　Section 5 Policy Implications for Loss-Sharing Resolution Policies

Chapter 6 Consumer Perception of Deposit Insurance Systems and Bailouts
　Section 1 Datas
　Section 2 Awareness of Deposit Insurance Systems
　Section 3 Expectations of Government Support and Intention to Share Losses in Crisis Scenarios
　Section 4 Policy Implications for Loss-Sharing Resolution Policies and Deposit Insurance
　Section 5 Limitations and Additional Considerations

Chapter 7 Conclusion

References
Appendix
ABSTRACT