Banks vs Insurance Companies: The One Who Has It All

Introduction

Both insurance firms and banks are financial institutions.

However they don’t share many similarities.

While they are related, they operate based on different models.

These models lead to some significant differences between them.

So who has it all?

Let’s go through the following detailed sections to discover more about banks and insurance companies so that you can make an informed decision in terms of where to purchase insurance coverage and store your hard-earned money.

Insurance Companies

As you already know, insurance firms are intermediaries.

An insurance firm insures its customers against risks like:

Car accident
Slip and fall accident
House on fire
Natural disasters
Death and more.

When any of these risks occur, insurance companies require their customers to file claims in order to receive their compensation.

For instance, if customers have claims for damaged homes, their insurers require them to file reports that’ll determine the amount of compensation they’ll receive.

Insurance companies aren’t always ready to pay a reasonable compensation amount.

And that is where a reputable public adjuster in Florida comes in.

A reputable public adjuster can help with getting most of the money from insurance companies.

In return for these protections, insurance company customers pay regular insurance premiums to them.

Insurers manage these insurance premiums by making profitable investments.

And that is how they function as financial intermediaries between customers and channels that receive their funds.

Insurance firms may channel the cash into investments like bonds and real estate.

Insurers manage and invest the money from their customers for their benefit.

Their enterprise doesn’t create funds in the monetary system.

Banks

Banks operate differently.

They take deposits and pay interest for their use.

Banks turn around and lend out the funds to borrowers who pay for them at higher interest rates.

Thus, banks make money on the differences between the interest rates they pay and the interest rates they charge customers who borrow money from them.

Banks use the money their customers deposit to create a huge base of loans that generate profits for them.

Since bank customers who deposit their money only withdraw a percentage of their deposits each day, banks only keep these deposit percentages in reserve and lend out the remaining portions to borrowers.

Key Differences Between Banks and Insurance Companies

Banks support short-term deposits while, at the same time, making long-term loans. That means there’s a mismatch between their assets and liabilities. In case a massive number of their customers want their cash back, banks may need to gather money quickly.

When it comes to insurance companies, their liabilities depend on certain protected events occurring. Their consumers can get payouts if the events they’re protected against, like hurricanes, don’t take place. They don’t have claims on the insurance service providers otherwise.

While customers can cash in certain coverage policies in advance, this is usually done based on a person’s needs and requirements. Just like bank withdrawals, it’s unlikely that a huge number of customers will want their funds back simultaneously. That means insurance service providers are in an excellent position to control their risks.

The nature of systemic ties is another massive difference between insurance companies and banks. Banks run as a section of the vast banking system and have access to clearing organizations, as well as a centralized payment that connects them.

That means systemic contagion can spread from one bank to another due to this interconnection. On top of that, banks in the U.S. can access the central bank system via the Federal Reserve, meaning they can access much-needed support.

Insurers aren’t part of the centralized payment and clearing system; therefore, they aren’t as vulnerable to systemic contagion as banks are. But they do not have any last resort lender. Insurance firms aren’t subject to federal financial regulatory authority.

They’re categorized as the purview of different state guaranty associations. If an insurance provider fails to operate, the state guaranty company has the responsibility to collect funds from other insurers in the state to pay the affected company’s policyholders.

Productive Uses

Both banks and insurance service providers put money from their customers to use.

Instead of people storing money in their homes, under mattresses, they can give them to intermediaries as savings who might allow someone to purchase a home or invest in next-level technology.

If you’re planning to save your cash, banks are the perfect option; but if you want to protect your life, family, or property against risks, insurance companies are ideal for you.

And remember, to get reasonable compensation from an insurer, you need to work with a reputable public adjuster.

Also Read: Personal Finance