Balance Sheets of Banks and Insurance Companies

Banks and insurance companies have one thing in common that they both fulfil very important social functions and the business they do with customers is reflected at the liability side of their balance sheets. This contrasts with regular business models, which are purely asset driven. This means that customers want to do business with nonfinancial companies because of their abilities and outputs that are reflected at the asset side of their balance sheets. Generally, the balance sheet of a bank is either liability driven or asset driven. An asset-driven balance sheet is less common for retail banks, but more common for investment banks. In addition, when a balance sheet is liability driven, client activity at the liability side drives the structure and size of the balance sheet. There are several different bank business models with either asset-driven or liability-driven balance sheets. Nevertheless, the general balance sheet structure is similar, because banks have sought to diversify themselves at both the asset and liability sides of the balance sheet. However, the balance sheet structure of an insurance company shows similarities with that of a bank. The biggest difference is that the balance sheet of an insurance company is completely liability driven; in other words, client activity of an insurance company does not take place at the asset side of the balance sheet. This chapter also discusses the difference in structure of an insurance company to that of a bank.