How does the primary function of an insurance company compare with that of a depository institution?...

How does the primary function of an insurance company compare with that of a depository institution? Are there fundamental differences in the profile of their balance sheet (assets and liabilities)?

Expert Solution

The primary function of an insurance company is to provide protection in case of adverse events or situations. By accepting a premium from customers insurance companies provide the support that a person or company needs in a adverse conditions financially. The assets are the investments of insurance companies in shares, real estate, debt fund etc and liabilities are the potential claims of the customers. There will be many risk offloaded in terms of offloading capital to reduce the risk exposure of the company.

The primary function of Depository institution is to provide financial intermediation for corporates and individuals. They accept deposits and lend the money obtained through deposits to the people in need by charging an interest. The assets of an FI are the loans given to the customers and liabilities are the deposits of the customers.

Depository institutions intermediate, through lending and Insurance companies intermediate through contingent payments among a pool of customers(risk pooling).

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