Estimating KDIC Target Guaranty Fund for Non-life Insurers*

Estimating the appropriate level of Target Guaranty Fund for financial institutions has been a challenging mission for the deposit insurance system because the financial safety of insurance policyholders will be at risk. The level of the Target Guaranty Fund should be sufficient to sustain financial distress of financial institutions but testing sustainability of the fund is not always available unless the financial market actually experienced the financial distress. The dramatic changes of market condition nowadays such as the uprising of stock market in 2007 and the collapse of global financial market in 2008 provide us the unique opportunity to test the sustainability. We examine Creditmetrics® and KMV models and the input variables in those models by estimating the Value at Risk (VaR) value of the target guaranty fund system for non-life insurance sector in Korea. We find that the most significant input variable for the models, the volatility of asset values, is not stable to provide sustainable level of Target Guaranty Fund for non-life insurers in Korea and propose that we need to estimate the Target Guaranty Fund level dynamically.