Question

Explain why an insurance company has Low risk tolerance and high liquidity requirements’                                                                              

Answer 1

Insurance companies provide insurance against life, health, hosuse and various number of things. During times of crisis, recession or even during normal times there can be high amount of claims by its customers against their insurance policies. The money that insurance companies recieve as premiums from customers must be invested in highly liquid securities so that the insurance company can meet the claims from time to time easily. While at the same time the risk tolerence level is low because they have to invest huge amounts of money. If such money is invested in risky assets and the returns are not in the favor of isnurance companies, the insurance company loose hefty amounts. This will not only be non-profitable for the insurance company, but if the company is not able to pay to a claim, it may lead to the lives of customers being at risk which every agent should avoid. Thus insurance companies have Low risk tolerance and High liquidity requirements.