Question

Please provide at least 3 similarities and 3 differences between insurance companies and depository institutions both in terms of their function as well as the make-up of their balance sheet.

Answer 1

Similarities between insurance firms and depository institutions are:

1) A high degree of financial leverage in both.

2) Both institutions receives funds and lent them to finance an asset portfolio to commercial groups.

3) Both are subject to national and state oversight towards quality of their balance sheet.

Differences between insurance firms and depository institutions are:

a) Composition of the liabilities, fixed in depository institutions case and stochastic for insurance companies.

b) Bank deposit’s face value is always fixed whereas the net policy reserves always get defined by future expectations and payouts, where uncertainty exists.

c) The insurance firms are allowed to invest in stock markets but banks and depository institutions are prohibited to do so.