What Is The Difference Between Banking VS Insurance?

You might be wondering the difference between banks and Insurances and how they work in your life, so we’ve created an article to sort it all out for you! We’ve compiled a list of 11 differences between Banking VS Insurance that will show you everything from who makes up these two industries to the wide range of services each provides.

We hope you find these differences exciting and informative, or at least helpful in helping you understand how these two industries work!

Banking VS Insurance industries operate on different balance sheets.

Banking: The assets side of the balance sheet is called assets and liabilities. Liabilities include interest and principal payments owed to the banks and interest paid out on loans. Assets include cash, UST securities, interbank deposits, federal funds sold, and so forth.

Insurance: The assets side of the balance sheet is called accumulated other comprehensive income (AOCI), while liabilities are prospective claims payable. Disadvantages include interest expense, provision for doubtful accounts, deferred management fees, etc.

Insurance is a financial guarantee.

Banking: Banking is a financial intermediation process, where money from one source is used to fund another source. Money from deposits goes to loans, and interest payments come back from loans, which support more lending and so forth.

Insurance: Insurance is a financial guarantee of a policyholder’s occurrence of loss from an uncertain event that has been incurred but has not been reported or verified as an actual loss that can be measured in terms of substantial cash outlay – e.g., the policyholder is provided with another form of insurance coverages such as life insurance, casualty insurance, marine insurance and so forth.

Banking is a secondary market for insurance policies.

Banking: The creation of money involves the custodian’s creation of a ledger entry. Cash is deposited from one bank account to another, thus making it available for withdrawal in cash or check form.

Insurance: Insurance is a financial guarantee against loss in the primary market, where premiums are transferred from the policyholder to the insurer in exchange for a contract that promises to compensate losses in case of an insured event.

Regulation is essential in banking but not so much in insurance.

Banking: Banking is heavily regulated by the government. They are required to maintain capital levels that are usually higher than those of most other industries. They must also follow specific rules of safety and soundness to protect depositors’ money.

Insurance: On the other hand, insurance companies are not regulated as much as banking institutions. While it is mandatory for an insurer to be licensed in all states, the states themselves have different regulations on maintaining this license.

Banking is a high-risk business, while insurance is more stable and secure than banking.

Banking: The financial crisis of 2008 proved that banking is not as secure as it may seem. Banks are known to lose money when the value of their investments decreases, especially if they have purchased subprime mortgages.

Insurance: Insurance has a more stable investment value than banking does. A car insurance policy will always be paid, even if the car crashes or the person driving is not at fault for any accident or damages.

Banking needs liquidity to function correctly, while insurance needs solvency.

Banking: Many banks are individuals who have pooled their resources to provide loans at low-interest rates to customers with good credit ratings. They then deposit their customers’ savings into a multi-purpose joint account that can be used to pay loans and other bank obligations.

Insurance: On the other hand, insurance companies need solvency. Solvency is a measure of how much money the company has to pay for claims against its policies. In contrast, liquidity is a measure of how easily an asset can be turned into cash.

Banking is a trade-off between interest rate and service level, while insurance is between price and coverage level.

Banking: The price of lending money to customers is determined by the bank’s cost of borrowing. People who want cheaper loans may have to pay more in interest than those who do not.

Insurance: The price of insuring a particular risk is determined by how much it will cost to insure the event never happens. The insurance company has no incentive to lower the coverage level or increase the policyholder’s premium if it would result in lower profits because its credit rating depends on the number of recoveries it makes.

Banking has fixed assets, while insurance has variable assets.

Banking: A bank will maintain a certain amount of liquidity through its investments. In general, this liquidity is spent on paying off liabilities and maintaining the bank’s capital. The net income from investing in these funds will be allocated to shareholders as dividends.

Insurance: On the other hand, insurance companies do not have fixed assets, They payout claims from their reserves for a loss that has not been reported or verified yet. These reserves can decrease because a policyholder does not file a claim or an insurer refuses to pay a share after being notified and confirmed as an actual loss.

Banking is more stable than insurance, which is more volatile.

Banking: A bank is exposed to low-interest rates. In the case of a bank, if a customer doesn’t pay back a loan, or if the value of the security they have invested in has decreased, the bank’s capital will decrease as well.

Insurance: On the other hand, insurance companies are exposed to inflation and high-interest rates. These companies rely on a stream of earnings from premiums, which may not be sustainable due to a shortage of insurance protection or a price increase.

Banking is concerned with finance, and insurance is concerned with risk.

Banking: Banks deal with money that is already set aside for specific purposes. When customers have a checking account, they do not have complete ownership of the bank’s money because it is also backed by the Federal Deposit Insurance Corporation (FDIC). E.g., cash from a checking account can be used to pay off loans, or it can be transferred from one customer to another as a loan.

Insurance: In contrast, insurance is concerned with the possibility that some unforeseen event will occur. For example, if an earthquake or storm destroys someone’s home, that person may apply for homeowners’ insurance to help rebuild their home.

Banking concerns credit risk, and insurance concerns hazard risk.

Banking: Banks deal with credit risk – i.e., risk of default – related to borrowers. To provide loans at a specific interest rate, banks have to consider the chance that a borrower may default on their obligation. The FDIC ensures bank deposits through a resolution process in which the bank is closed, and all customer deposits are transferred into a government account.

Insurance: In contrast, insurance companies deal with hazard risk – i.e., risk of loss – as it relates to insured events like fire or the occurrence of natural disasters like hurricanes or earthquakes.

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