Question

Why do the balance sheets of property/casualty insurers look different than those of life insurers?

Answer 1

Balance Sheet of a life insurer:

Life insurance companies have long-term liabilities because of the life insurance products that they sell.  As a result, the asset side of the balance sheet predominantly includes long-term government and corporate bonds, corporate equities, and a declining amount of mortgage products.

The primary liability category for a life insurance company is policy reserves that reflect the expected payment commitments on existing policy contracts.  Insurance companies also sell short- and medium-term debt instruments called GICs that are used to fund their pension plan business.

Property / Casualty insurer :

The two major lines of property-casualty insurance are:

a)   Property insurance: Insurance compensating the insured, fully or partially, for personal or commercial property damage as a result of accidents and other events; and

b)   Liability insurance:  Insurance compensating a third party, fully or partially, because its personal or commercial property was damaged as a result of the accidental actions of the insured.

In many cases, property and liability insurance is sold together, such as personal or commercial multiple peril and auto insurance. Fire and allied lines usually are sold as property insurance only. Liability insurance is sold separately for coverage such as malpractice or product liability hazards. In addition, reinsurance provides a means for primary insurers to pool their risk by transferring some of the risk and premium to a reinsurer.    

Balance sheet of Property / Casualty Insurer :

Long-term financial assets such as bonds, common equities and preferred stock comprise the majority of the assets, while loss reserves, loss adjustment expenses, and unearned premiums dominate the liabilities. Property / Casualty insurance companies use premium payments to provide assurance against certain types of risk for customers. The premiums to an insurance company represent the actual price for the risk coverage.