Stylized balance sheet of bank and insurance company
Differences and similarities of Banks and Insurers
Banks
Insurer
Customers
A, L (Loans, deposits)
L (insurance covers)
Maturity Differential
“max”
“min”
Liquidity
short
rich
Distribution
Branches
Agents and Brokers
A/L relationship
Assets are independent of liabilities
Assets serve payments to liabilites
economic capital
economic asset with an exchange value (=marketable asset)
MUST BE GREATER THAN REGULATED CAPITAL
Serves as a buffer to cover unexp. losses
Provisions are used to cover expected losses
regulated capital
Pre-defined values of economic capital in the bank or insurance company, which must exist for the institution to operate
Bank capital is a function of the asset structure
Insurance capital is a function of assets and liabilities
How to derive regulated capital for insurance
Look at asset structure to determine risk weights and required levels of capital
Look at liability structure and run scenarios over 1 year horizon (hail storms, natural catastrophy, etc.)
CAlculate CaR (sufficient to cover 99.5% of possible outcomes)
Frank Knight
Main finding of Rothschild Stiglitz Model
Any pooling equilibrium will break down if seperation is possible
Solutions to Rothschild Stiglitz problem
mandatory pooling by the state
Allow for information gathering (allow for appropriate seperation)
Specialized pools (Military insurance e.g.)
Money
marketable asset that serves as payment
three functions of money:
store of value
unit of account
means of payment
Last changeda year ago
