A study of risk management and capital allocation in Korean Insurance Companies

Abstract

The Korean life insurance industry has rapidly grown over the past decades. The CAGR (Compounded Annual Growth Rate) of asset from 1978 to 2008 is 22.8%. As the asset size increases very fast, risk management plays a vital role in the Korean life insurance industry. Before the financial crisis in 1998, the risk management system was very weak in Korea. It was because the government controlled and protected the life insurance companies. However, the financial crisis brought changes in risk management. 7 of 30 insurance companies were bankrupt in financial crisis. The survivors also suffered from the absence of risk management system. But the financial crisis fostered the ability to propagate in the wild. Korean insurance companies started to realize the risks and built up a risk management system with their experiences. With this effort, they quickly overcame the recent global financial crisis. But there is still room for improvement. Especially, they have not dealt with the risk allocation which is an essential part in risk management. In this paper, I will discuss the current risk management system and capital allocation in the Korean life insurance industry.