Insurance companies use equity to fund their business – providing a ‘cushion’ to absorb any losses that might be incurred on contracts. Regulatory focus is therefore around solvency rather than liquidity. Insurance companies further manage their exposure to risk by taking out reinsurance contracts. Credit rating agencies provide an independent assessment of the strength of individual companies.
Key learning objectives:
How are insurance companies funded?
What is the role of the regulators?
Does an insurance company face liquidity risks?