The Valuation of Financial Companies: Tools and Techniques to Measure the Value of Banks, Insurance Companies and Other Financial Institutions

6

Insurance Business Models and Financial Statements

Insurance companies provide their clients with economic protection for clearly identified risks that will take place within a certain (predetermined) time period. Unlike in other industries, in the insurance sector costs for the granted service are usually unknown before the actual occurrence (if any) of the insured event, while the stream of premium from policyholders (revenue) is determined or determinable at the set of the contract. We will organize the discussion about insurance business models by pointing out the main business lines and the most relevant distribution strategies for insurance companies. Although insurance companies often offer also services that involve little or no insurance protection (e.g., investment management and other fee-based financial services), our focus will be on the core insurance business of granting economic protection against risks.

6.1 THE BUSINESS MODEL OF INSURANCE COMPANIES

Insurance companies can be seen as facilitators of risk transfer, and especially the largest ones are among the few skilled financial actors able to design and place most risk-related financial instruments. As such, insurers play a prominent role in financial markets by packaging (risk pooling) and diversifying them (risk spreading). Technically, the underlying idea is as simple as it seems: since the correlation among different contracts is not supposed to be perfect, there's some room for portfolio diversification. ...