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Research Monograph A Study on Insurance Resolution December 31, 2021

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Series No. 2021-03

Research Monograph KOR A Study on Insurance Resolution #Financial Supervisory and Policy #Consumer Finance #Banks and Financial Institutions
DOIhttps://doi.org/10.22740/kdi.rm.2021.03 P-ISBN979-11-5932-699-8 E-ISBN979-11-5932-712-4

December 31, 2021

  • 프로필
    HWANG,Sunjoo
  • KDI
    Rhee, Keeyoung
Summary
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.
Contents
발간사
요 약

제1장서 론

제2장 문제제기
 제1절 IFRS 17과 K-ICS의 도입에 따른 보험건전성 약화 전망
 제2절 기존의 부실 보험회사 정리정책의 문제점
 제3절 본 연구의 분석 방향

제3장 암묵적 보증: 재정건전성이 약화되면 보험건전성이 약화되는가?
 제1절 가설 도출
 제2절 자 료
 제3절 실증분석
 제4절 소 결
 제5절 (보론) 보험회사에 대한 암묵적 보증이 보험계약자에 대한 암묵적 보증의미하는가?

제4장 장기보험계약과 고착현상
 제1절 모형경제
 제2절 단기보험 균형
 제3절 장기보험 균형
 제4절 장기보험 균형: 보험계약자의 이탈유인을 고려할 경우
 제5절 손실분담형 정리정책에 대한 정책적 시사점

제5장 손실분담형 정리정책과 인슈어런스런
 제1절 기본모형
 제2절 보험사의 이윤극대화를 위한 최적 보험계약 도출
 제3절 보험회사의 부실우려를 고려한 보험계약자들의 보험계약 취소 행태와보험회사의 수익성 분석
 제4절 보험계약조건의 변경이 보험사의 기대이익에 미치는 영향
 제5절 손실분담형 정리정책에 대한 정책적 시사점

제6장 예금보험제도와 구제금융에 대한 보험소비자 인식조사
 제1절 자 료
 제2절 예금보험제도 인지도
 제3절 유사시 정부지원 예상 및 손실분담 의향
 제4절 손실분담형 정리정책과 예금보험에 대한 정책적 시사점
 제5절 한계 및 추가적인 고려사항

제7장 결 론

참고문헌
부 록
ABSTRACT
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