P&C vs. Life Insurance Questions Flashcards
How are P&C and Life Insurance companies similar and different?
Both types of companies collect Premiums upfront, recognize them as revenue over time, recognize Claims as expenses and pay them out in Cash over time, and make money from both Underwriting and Investing. Beyond that, they’re quite different: - Policy Length: Life Insurance policies last for much longer: 20-30+ years vs. 1-3 years for P&C. - Business Model: P&C is more of a flow business, dependent on winning and servicing new customers and profiting from underwriting activities, while Life is more of a spread business, more dependent on investments and interest rates. - Financial Statements: Life Insurance firms have more complex Balance Sheets with additional items, such as Separate Accounts. - Valuation: You can use the Dividend Discount Model and P / E, P / BV, and P / TBV multiples to value both types of firms, but with Life Insurance, there’s also Embedded Value and related metrics and multiples, such as P / EV and ROEV.
How do the financial statements of P&C and Life Insurance firms differ?
Items on the financial statements are similar, but the proportions are different. For example, Life Insurance companies earn a higher percentage of revenue from Interest and Investment Income. Also, Life Insurance firms have “Separate Accounts” line items on their Balance Sheets to distinguish between money that they manage directly and the funds that policyholders manage. They also tend to have more investment categories on the Assets side since investments are more important for Life Insurance firms.
Would a P&C or Life business have a bigger “loss triangle” in its supporting schedules?
The Life Insurance firm would almost always have a bigger “loss triangle” because its policies last for decades rather than years, and it pays out Cash Claims over a far longer period. If a customer purchases a 2-year auto insurance policy, the customer could easily get in a car accident and file a claim a few months after the policy begins. But if the same customer purchases a 30-year life insurance policy, he/she is not likely to die within the next few months.
How do you value P&C and Life businesses differently?
You can still use multiples such as P / E, P / BV, and P / TBV for both types of firms, along with the Dividend Discount Model. But for Life Insurance, Embedded Value (see the Valuation section), which equals a firm’s Net Asset Value + Present Value of Future Cash Profits from Current Policies, is a new, important methodology. You could create many metrics and multiples based on Embedded Value as well, such as Return on Embedded Value (ROEV) and P / EV.
How do a P&C firm’s growth and profitability change over the industry life cycle?
As Premium Growth increases, Underwriting Margins normally decline, and vice versa:
