Factors Affecting Derivatives Use for Life Insurance Companies

Abstract

The aim of this article is to investigate what factors affect derivatives use for life insurance companies in Korea. For life insurance companies in Korea, there are some problems to solve. First one is to meet IFRS standard which emphasizes solvency. Second one is to overcome problems from macroeconomic including low economic growth and low interest rate, fluctuating foreign currency exchange rate, and problems from population composition change and longer longevity. One of the possible ways to control the risks that life insurance companies face is using derivatives. Traditionally life insurance companies use reinsurance to hedge their inherent risks. However, hedging by using derivatives provides some different merits from those by reinsurance, such as, effects of controlling risks from macroeconomic change, in some cases less costs to control risks, etc. So using derivatives to control risks for life insurance companies is not only for sustainable management but for growth and becoming more competitive. The study results show that asset size, foreign assets and liabilities, proportion of deposit insurance, liquidity, RBC are significant factors affecting derivatives use.