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  • Print publication year: 2012
  • Online publication date: August 2012

Chapter 11 - European Insurers and Financial Conglomerates

from Part III - Financial Institutions

Summary

Overview

The function of insurance is to protect individuals and firms from adverse events through the pooling of risks. Life insurance protects against premature death, disability, and retirement. Non-life insurance protects against risks such as accidents, illness, theft, and fire. Insurance is a risky business, as insurance companies collect premiums and provide cover for adverse events that may or may not arise somewhere in the future. The pattern of small claims, such as fire or car accidents, is fairly predictable. However, larger accidents or catastrophes (like hurricanes) involve high claims with low probability.

The insurance business is plagued by asymmetric information problems. There is a moral hazard problem when the behaviour of the insured, which can be only partly observed by the insurer, may increase the likelihood that the insurer has to pay. After signing the contract, the insured may behave less cautiously because of the insurance. Another problem is adverse selection. High-risk individuals (for instance, ill people) may seek out more (health) insurance than low-risk persons. The insurer may therefore end up with a pool of relatively high risks. Mechanisms to separate high from low risks are explained in this chapter.

Insurance companies tend to centralise risk management, using internal risk-management models at their headquarters. But there is still a role for local business units to capture factors that are location-specific. The same is true for asset management. As insurance companies are large asset managers, they can profit from economies of scale through the pooling of assets.

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Suggested Reading
Dionne, G. 2000 Handbook of InsuranceKluwerDordrecht
Drzik, J. 2005 At the Crossroads of Change: Risk and Capital Management in the Insurance IndustryThe Geneva Papers on Risk and Insurance – Issues and Practice 30 72
Mikosch, T. 2004 Non-Life Insurance Mathematics: An Introduction with Stochastic ProcessesSpringer-VerlagBerlin
Rees, R. 2008 Freixas, X.Hartmann, P.Mayer, C.Handbook of European Financial Markets and InstitutionsOxford University Press
Van Lelyveld, I.Knot, K. 2009 Do Financial Conglomerates Create or Destroy Value? Evidence for the EUJournal of Banking and Finance 33 2312
References
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Comité Européen des Assurances 2007
Comité Européen des Assurances 2010
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