Top priority: risk management

Allianz Korea CEO says financial firms should live by rule of managed risk

By Kim Tae-gyu, Bahk Eun-ji

It’s not expansion but sustainability on the basis of risk management that financial firms have to live by in times of crisis like now.

Allianz Korea CEO Cheong Mun-kuk said during a recent interview that his firm is placing top priority on risk-managed sustainability.

``The view of the Allianz head office is that the ongoing crisis in Europe is not likely to be settled soon,’’ Cheong said. ``At a time when uncertainties linger, we put risk management and the adequate solvency ratio on the front burner.”

He explained that this principle is more important to financial firms than the manufacturing industry.

``If manufacturers collapse, that costs only investors’ money. For financial firms, customers’ money is on the line. Accordingly, guidelines in dealing with clients’ money can’t be overly protected,” Cheong said. “This principle applies to Allianz’s way of business.”

The CEO also thinks the recent savings bank debacle took place because of a failure to adhere to the rules of risk management.

``The lowdown on the savings bank mishap is poor risk management. Because they promised higher interest rates than commercial banks, they tended to invest in high-return assets or products with high risks,’’ the 53-year-old said.

``Yet, they did not care about risk management at all and similar situations are feared to happen in the insurance industry where competition of offering high rates takes place.’’

Since January, 2011, up to 20 of the 106 domestic savings banks have suffered from a suspension of operations because of their woeful financial status.

Sixteen of them were sold to buyers like commercial banks and the remaining four will be disposed of down the road.

Those who deposited less than 50 million won experienced limited problems as payment of up to that amount is guaranteed by the state-run Korea Deposit Insurance Corp. even though interest was slashed to just 2 percent.

Those with bigger accounts run the risk of losing any amount beyond 50 million won at a specific savings bank. Politicians drafted a bill to help out them but it was jettisoned early this year.

Chicken game?

Asia’s fourth-largest economy understands the significance of risk management in finance as demonstrated by its introduction of the so-called risk-based capital (RBC).

The format, which began in April, 2011, is an advanced evaluation system designed to provide a capital adequacy standard related to risks and to raise a safety net for insurers.

Before the RBC was phased in, the regulator simply evaluated insurers’ ability of paying out insurance money. With the adoption of the RBC system, the regulator delves into the level of risk each insurer faces in asset management.

The new rules, geared toward setting capital requirements factoring in the size and degree of risk taken by the insurance firm, brought to light which company paid more attention to their solvency.

In terms of RBC, for example, Allianz Korea’s solvency ratio amounted to 306.8 percent as of the end of this March, more than twice the recommended levels of 150 percent.

However, Cheong points out that the launch of the RBC system does not automatically guarantee a risk-free environment for those who insure and those who are insured.

Worse, he claims that some local insurers still stage a cutthroat competition as they come up with insurance products that pledge annual credit interest rates of higher than 5 percent.

``Currently, the country’s 10-year sovereign bonds offer coupon rates in the neighborhood of 3 percent. But some insurance companies sell products with credit interest rates upside of 5 percent,’’ he said.

``They would lose money with such artificially high rates. The rivalry of trying to increase their market share should be shunned as it might end up causing losses to customers.’’

The life-time financial expert also asked people to change their mindset with regard to insurance, in particular regarding pensions.

``Pensions are not about immediate expenditure but about disposable income for the future with which people can depend on after retirement,’’ he said.

``Hence, they are strongly recommended not to stick overly to the return rates of the first few years. Instead, they have to care about the monthly amount of money they will eventually get.’’

Paradigm shift

In the wake of the Asian financial crisis in the late 1990s, the Seoul administration channeled a lot of funds into both lenders and insurers to keep them afloat, as they teetered on the edge of collapse.

In comparison, Japan funneled taxpayers’ money only into banks during those hard times while slashing assets of insurance companies, which prompted the insurance money customers received to decrease.

Cheong said that the two different approaches caused a diametrically differing mantra of people in the two neighboring countries pertaining to insurance.

``Thereafter, Japanese people pored over the financial health of insurers since they learned that they might face substantial losses if they select unhealthy insurance firms,’’ he said.

``But Korean insurance customers hardly suffered any damages even if they subscribed to problematic insurers. As a result, they still do not mull over the financial status of insurers that much.’’

Yet, Cheong expects that things will change in the not-so-distant future in line with the paradigm shift where risk management and financial health are stressed more.

``Most Koreans select insurance companies for which their relative or friends work irrespective of their financial health,’’ he said.

``As the proportion of pensions rise, however, people will change. It is very important whether an insurance company will be able to properly and stably provide cash as promised in decades after retirement.’’

He said that such a shift is in tandem with the protection of financial customers, which has emerged as a key issue of late.

``The protection of financial customers is a crucial topic not only in Korea but across the world and the issue will be further stressed,’’ he said.

``To achieve that goal, I think fair competition is one of the most crucial things. The hyper-rivalry to crank up market shares with overly high interest rates is simply wrong from all viewpoints.’’

Allianz Korea’s credit interest rates are around 4 percent in lieu with the market, which are relatively low compared to some firms offering 5-plus percent.

But Cheong said that people eventually find out the downside of such inflated credit interest rates as companies might not be able to keep their promises when they have to pay insurance while Allianz consumers do not have to have such a worry.

``Customers will put more importance on solvency and capital capacity,’’ he said.

Listening to employees

Cheong is well known for his unpretentious attitude and behavior. He looks and sounds just like a next-door neighbor _ his trademark, which has led to his popularity inside the Seoul-based insurer.

As a key secret of his low-key leadership, Cheong picked his philosophy of avoiding a high-handed approach and seeking brisk communication with rank-and-file workers on top of high-up executives.

``Executives are professionals who have to prove their performances. So I am a bit strict with them. But ordinary employees are different. They are our crucial stakeholders with whom I must stage communication efforts vehemently,’’ he said.

``I deploy a set of ways to talk with them in both formal and informal fashions.’’

The first Korean CEO of Allianz Korea, which opened in 1999 in the aftermath of the Asian financial crisis, appears in a video clip every month where he lets people know the details of Allianz Korea’s policies.

He has taken advantage of various media like internal magazines and frequently visited regional offices to listen to their voices and deliver the corporate strategies after he took charge of Allianz Korea in 2007.

He is more widely known for his informal ways of communicating.

Cheong meets around 10 employees in the early morning to accept their two cents. As such conventions happened some 30 times, he met around 300 in the morning-coffee chats.

He also holds “happy hour” with employees over beers and sometimes stages a drinking binge _ he is famous as one of the best drinkers among CEOs in the Korean financial industry.

``It is very important for employees to understand what CEO and company are to do. Without understanding them, the results cannot be perfect,’’ he said.