Changki Kim

Securitization of Longevity Risk Using Percentile Tranching

Securitizations that transfer risk to the financial markets are a potential solution to longevity risk in the annuity business. The classical Lee–Carter model is applied to generate the future stochastic survival distribution. A method to design inverse survivor bonds using percentile tranches and to calculate the security prices is presented. The percentile tranche method is a simple and practical way for the issuer to design and price the security. This method can serve to identify the risk–yield relationship, which can provide investors with clear insight regarding the appropriate choice of tranches.

A Way of Managing Weather Risks Considering Apparel Consumer Behaviors

We consider weather risks arising from unexpected variability of weather conditions faced by clothing industry. Weather would influence much on the demand of clothes. Also clothes are purchased according to the taste as well as the necessity of consumers. Hence, consumers’ buying activity exerts greater influence on the sales. In this paper we investigate how consumers react to changes in weather. And then, we see how such reactions translate into different buying behaviors and how such consumers’ behavioral changes are to be quantified in companies’ sales. Finally, in consideration of consumers’ behaviors such as asymmetric consumer behavior, short term memory, and avoidance of regret, we introduce a simple demand prediction model and apply it into a news-boy model to calculate an optimal level of demand that minimizes costs. This paper shows that if apparel companies actively conduct research on consumer behaviors they will be able to minimize costs from weather risks.

Net Contribution, Liquidity, and Optimal Pension Management: NETCONTRIBUTION, LIQUIDITY,ANDOPTIMALPENSIONMANAGEMENT

This paper presents an optimal portfolio balancing strategy for a pension fund manager in the presence of fixed and proportional transaction costs for trading stocks and changes in net contribution. An analytic solution to the one-period problem is presented and a heuristic method for a multi-period problem is developed. For reasonably-calibrated parameters, we find that our numerical results explain the actual asset allocation schemes of some internationally-renowned pension funds well. Furthermore, we also find that net contribution and liquidity have significant impacts on the theoretical optimal asset allocation of a pension fund.

On Consumer Behaviors in Korean Variable Insurance Market

We attempt to analyze the VI consumers’ behavior in Korean insurance market. We pointed out economic factors that affect VI demand, and confirmed VI demand increases with stock market boom, low interest rate, high price level, and stable economic situation. Also consumers who decide to purchase VI usually consider the size, safety and profitability of a target insurance company. The asset and equity size have positive relationship with VI sales. Also reputation in traditional insurance market helps companies to attract new VI customers. The increase in the number of sales organization and sales person positively affects VI sales. In addition, we analyze consumers’ behavior on choosing insurers with distinct characteristics. From the analysis, we notice that more risk averse VI customers would choose domestic companies. Foreign companies have very active marketing strategies using young and highly educated sales persons targeting less risk averse VI customers.

Farmland Backed Annuities: A New Shelter for Aged Farmers

Aging population and the resulting old age income shortage has come to the fore in many countries around the globe. In response, farmland-backed annuities (FBA) that liquidize farmland assets to provide living income to aged farmers have been proposed and instituted by Korean government. We aim to construct a suitable pricing model for FBA and find optimum structure for the product. Suggestions on designing FBA to meet various needs of aged-farmers follow. We also provide risk-profit profile for annuitants, annuity issuers, and reinsurers, respectively.

Motor Insurance Linked Securities: An Area of Financial Innovation

Motor insurance linked securities are developed in modern time to adopt into the contemporary financial market. They create new opportunities for the investors in the financial market and provide great diversification to the traditional assets normally offered. They also benefit the insurers by transferring the motor insurance risks to the financial market. This paper introduces a few types of motor insurance-linked securities and shows the applications, merits or demerits, and possible issues of the securities.

The Impacts of Guaranteed Minimum Death Benefit Options on the Profit Margins of UnitLinked Products

This paper shows a model of the profit testing and the process of assessing the profitability of the unit linked products. The impacts of the imbedded guaranteed minimum death benefit (GMDB) options on the profit margins of the unit linked policies are analysed.