Uppsala universitet

4.3 Insurance Companies
The three traditional functions of the financial markets in any country are to facilitate
reallocation of saving and consumption or investments, contribute to the reduction and
allocation of risks of and between participants, and to develop and maintain well functioning,
efficient, and rational payment systems. Insurance companies have in a natural way inherited
the role of contributing to the reduction and spread of risks. (Bergendahl, Hartman &
Lindblom, 1990)

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Hence insurance companies constitute important actors in the financial markets along
with other players, including banks, investment companies, building societies, custodians, and
securities brokers. The task of the insurance companies is to manage and level out risks;
something they do by aggregating a large number of policyholders into the same group. This
group consists of both high and low risk customers. From the evaluated risk of the aggregated
group as a whole, the premium of each member of the group is calculated in order to be able to
offer the service of coverage by the insurance in question. The policyholder thus pays the
insurance firm to bear his or her risk (Jaensson, 1997).
Banks, insurance companies, and most of the other financial companies and institutions
have many things in common. Their products and production methods are similar, and they
receive payments, keep and bear interest capital, and repay the received means according to
contracts established. However, there are still substantial differences among different lines of
business. The financial markets are experiencing a major transformation. Deregulation and
internationalisation have increased the level of competition, as banks and insurance companies
have entered each others’ domains and multinational companies have started their own
financial companies, serving their own needs (Bergendahl, Hartman & Lindblom, 1990).
A pertinent question these days is how to define a financial institution. Are there any
longer banks that only provide traditional bank services or insurance companies that offer only
traditional insurance services? A term encompassing both insurance firms and banks is
Financial Services Organisations (FSOs) (Ennew, Wright & Thwaites, 1993), which might be
more appropriate to use when the financial business offers a mix of services. However, for
reasons of simplicity, this report conceptually maintains the division between insurance firms
and banks.
The insurance business can be said to be divided into two completely separate lines of
operation: property/casualty and life insurance. Reinsurance is a subgroup of property
insurance, denoting the sharing of risks among two or more insurance companies, where each
actor takes responsibility for a fixed part of any loss and receives premiums accordingly
(Pillsbury, 1994). Insurance companies in the life insurance business must legally be reciprocal
companies, which is to say that they are owned by the insurance subscribers. A
property/casualty insurance company can, on the other hand, either be a reciprocal or a public
limited company. In Sweden there is a principle of separation which says that an insurance
company managing both property/casualty and life insurance must keep the two areas entirely
separate. (Bergendahl, Hartman & Lindblom, 1990)

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The majority of the insurance companies’ service products are found within the
property/casualty business. The most important lines of insurance in this field are primarily
commercial/industrial and property insurance, marine and transport insurance, professional
driver and aviation insurance. During the last decade, there has been a development towards an
expansion of mainly large-scale enterprises or corporate groups to form captives. These are
insurance companies owned by a firm in order to, as far as possible, be able to level out and
eliminate incurring risks on its own and thus lower its insurance costs. The captive firm is run
like a subsidiary, and it insures either directly or indirectly via reinsurance companies, parts of
the company’s risks. The main difference between private and commercial insurance is that the
latter is less standardised and much more complex in its nature. Corporate customers often
want individually adapted solutions, countered by “insurance packages” by the insurers,
including combinations of individual insurance. (Bergendahl, Hartman & Lindblom, 1990)