Balanced Sheet for Life Insurance Companies

The balance sheet for a life insurance company is similar to the balance sheet of a property and casualty insurance company. The discussion on that follows focuses on the major diffences.

Assets; Like the property and casualty insurance companies discussed earlier, the assets of a life insurance company are primarily financial assets. However, there are three major differences between the assets of a property and casualty insurance company and the assets of a life insurance company. The first major differences between the assets of a property and casualty insurance company. The first major difference is the average duration of the investments. The matching principles states than an organization should match the maturities of its sources and uses of funds. Most property and casualty insurance company. The first major difference is the average duration of the investments. The matching principles states that an organization should match the maturities of it’s sources and uses of funds.

Most property and casualty insurance insurance contracts are relatively short-term, often for one year or six months. Permanent life insurance contracts, however maybe in force for 40 to 50 years, or even longer. As the matching principle suggests, life insurance company investments on average should be longer duration than property and casualty insurance company investments. Note that life insurance companies invest more heavily in bonds, and real estate than do property and casualty insurance companies place greater emphasis on liquidity, holding larger relative positions in cash and marketable securities.

The second major difference is created by savings element in cash-value insurance. Permanent life insurance policies develop a savings element over by the policyholder. When life insurance premiums are calculated, it is assumed that the life insurer will have funds available to earn investment income. If a policyholder borrows the cash value, the life insurer must forgot the investment income that could have been earned on this money. Life insurance companies charge interest on life insurance policy loans, and this interest bearing asset is called ‘contract loans’ on a life insurer’s balance sheet. It can be thought of as as interest-earning account receivable from the policyholder.

The third major difference in assets between a property and casualty insurer and a life insurance company is that a life insurance company is that a life insurance company may have separate account assets. To protect policyholders, state laws place limitations on a life insurance company’s general investments. Separate account investments are not subject to these restrictions. Life insurers use separate accounts for assets backing interest-sensitive products, such as variable annuities, variable life insurance, and universal-variable annuities, variable life insurance, and universal-variable life insurance.

Liabilities; Policy reserves are the major liability items of life Insurers. Under these level premium method of funding cash-value life insurance, premiums paid during early years are higher than necessary to pay death claims, while those paid in later years are insufficient to pay death claims. The excess premiums paid during early years result in creation of a policy reserve. Policy reserves are a liability item on the balance sheet that must be offset by assets equal to that amount. The policy reserves held by an insurer plus future premiums and future interest earnings will enable the insurer to pay all future policy benefits if the company’s experience conforms to the actuarial assumptions used in calculating the reserve. Policy reserves are often called legal reserves because state insurance laws specify the minimum basis for calculating them. Two other life insurance company reserves merit discussion-the reserve for amounts held on deposit and the asset valuation reserve. The reserve for amounts held on deposit is a liability that represents funds owed to policyholder and to beneficiaries. Given the nature of the life insurance business, it is common for life insurers to hold funds on deposit for later payment to a policyholder’s and beneficiaries. For example, a beneficiary may select a fixed-period or fixed amount settlement option under a life insurance policy, or a policyholder may select the accumulate at-interest dividend option.

As noted earlier, statutory accounting rules emphasize the solvency of insurers.

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