The Business of Insurance and Banking: Understanding Two Different Industries

Immediately after the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act, conventional wisdom held that insurers mostly escaped the legislation. Five years later, it is clear that is not the case. The Federal Reserve now plays a significant role in regulating and supervising roughly one-third of the life insurance industry and one-quarter of the property and casualty insurance industry. In addition, the Federal Deposit Insurance Corporation now has resolution authority over many insurance companies, and the U.S. Treasury Department has a new Federal Insurance Office that may soon activate its authority to negotiate international insurance agreements.

The business of insurance is fundamentally different from the business of banking. Each has its own specific models and practices, risk profiles, risk-management strategies, and regulatory regimes. Each has a different balance sheet, revenue stream, and customer value proposition. Insurers and banks run into financial trouble for very different reasons and the regulatory approaches to managing troubled insurers and banks are markedly different.

This paper describes the differences between insurance and banking. It examines and compares key aspects of both industries: size, business models, distribution channels, safety and soundness, consumer protection, reasons for failure, resolution, and systemic risk.

Among the Financial Regulatory Reform Initiative’s core observations are:

• The differences between banks and insurance companies are greater than their similarities;
• Policymakers and regulators need to fully recognize and understand these differences and act accordingly; and
• As federal regulators take on roles in overseeing a significant part of the insurance industry, they should be careful to tailor their regulation and supervision of insurance companies to the ways these companies differ from banks.

If these three propositions sound simple, that’s the point.

View individual sections of the primer:

• Size of the industry
• Business models
• Distribution channels
• Regulatory oversight
• Reasons for failure
• Resolution
• Systemic risk