CHAPTER 9 Insurance Risk

This chapter addresses the structure and risks of the insurance industry. Many banks offer insurance products alongside banking products, or own insurance companies as subsidiaries. As a result, the risks associated with the insurance industry can be a significant component of a bank's over­all risk profile. This chapter begins by describing the typical business model of insurance companies—which is quite different from the business model of a bank—and then examines the two principal types of insurance: property and casualty (P&C) and life insurance.

Chapter Outline

  • 9.1 Introduction to the Insurance Industry
  • 9.2 Property and Casualty Insurance
  • 9.3 Life Insurance
  • 9.4 Reinsurance
  • 9.5 Other Types of Risk
  • 9.6 Regulation and Supervision—Solvency 2 in the European Union
  • 9.7 The Role of Lloyd's of London
  • 9.8 Summary

Key Learning Points

  • Insurance is a contract between an insurer and a policyholder, whereby the insurer agrees to pay a sum of money to the policyholder if a speci­fied event happens within a specified period of time.
  • Insurance works on the principle of sharing the losses of a few people through small contributions made by a large number of people.
  • There are two main types of insurance: property and casualty (P&C) and life insurance (“life and pensions”).
  • The main inherent risks of property and casualty insurance are under­writing risk, reserving risk, and claims management risk.
  • The main inherent risks of life and pensions are longevity risk, ...

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