Insurance Companies v/s Banks – What’s the Difference?
Banking and financial insurance are two very important processes in the world of finance. Even though they are closely related, there is little to no similarities between them. Banking is constant, doesn’t change and is a dependable source to fall back to for specific segments, insurance, on the other hand, is subject to various subjective variables. This makes it a different experience for whoever uses insurance.
Principles of Banking
Before we get down to the differences, let us talk about banking first. It is made up of two important components, which are landing and borrowing. When it comes to their own capital, banks don’t rely much on then especially when compared to the total volume of the money transactions that are performed. Banks, to some extent, maintain a reserve, but they usually use the funds that they get from the deposits made by the customers. The reserves are saved and maintain as a safety reserve for when losses strike such as failed loans.
Principles of Insurance
Since we talked about banking, it is now time to discuss about insurance. Insurance is operated by four main principles. The first is its unshakable faith on the system, the second is insurable interest, the third is assurance and guarantee, for both contribution and subrogation, and the fourth and the final, there is a proper cause for action. Insurance companies provide outward and material information and knowledge on the risks one might face, and the rates of insurance premiums. If the insured company suffers from a loss, the principle of indemnity will see to it that the insured is placed in the same position as he was earlier in, before the loss or the damage had started.
Banking has many advantages and one of them is that it allows a customer to take back liquidity. What it is means is that the money that is there in the bank account of a person can be removed at from there at any point and at any time depending on the account type? Whereas in insurance, the money that has been invested for a certain amount of time, is only available to the person after the term period is finished.
Insurance is a huge business that deals with many people on a daily basis. Now, if a disaster was to occur, then large numbers of repayments have to be concurred. In that case, there is a chance that the funds might come up short. Because banks use a huge amount of leverage money, they are open to liquidity risks, interest rate risks and credit risks.
Meeting of Banking and Insurance
Insurance and banking organisations work closely because of the marketization and the recent globalisation of finance. There was a time when banks and insurances couldn’t be more different, now, though, a lot of banks offer insurances as a form of investment opportunity. The institution of finance has a major role in bringing the two industries to work together.