Banks Vs. Insurance Companies: What are the differences?

This past April 8th, the latest bank to fail in our local area was Western Springs National Bank and Trust.  Western Springs had assets totaling $186 million with total deposits at $181 million.  Although the FDIC arranged a purchase and assumption agreement with Heartland Ban and Trust in Bloomington to protect the deposits, this closure tweaked my curiosity and prompted me to dig a bit deeper and evaluate the risk between banks and insurance companies.

Last year, the number of bank failures rose to 157, breaking the record of 140 bank failures in 2009, with 860 institutions flagged by the FDIC as being ‘problem banks’ as of September 30, 2010.  The total assets of all failed banks last year totaled $96,5 billion.  In the first quarter of this year, we’re looking at 34 banks who have failed, with assets totaling $14,851,700,000. 

The failure of insurance companies are much different.  The main difference is that while banks keep a small percentage of their deposits as reserves, an insurance company is required, by federal law, to keep at least 100% of their deposits as a minimum reserve with an industry average around 115%.  To further protect your money, an insurance company is forbidden from buying investments on borrowed money.  One example that showcases the difference in risk is what happens to the corporate credit rating when an insurance company acquires a bank and when the opposite happens.  An insurance company’s rating will usually experience a down-grade of its financial rating following the acquisition of a bank, but never when a bank acquires an insurance company.

Because of these regulations enforced by the fed, the failure rate of insurance companies are substantially lower than that of banks.  In a 27 year study conducted by A.M. Best in 2005, insurer (life/health) impairments ranged from 1 in 250 companies in a stable economy and 1 in 35 in more unstable economies, with an average of 1 in 109 companies over the 27 year study period.  The estimated failure rate for insurance companies is 1 in 111 to 1 in 500.
With the difficulty of deciding where to best invest your dollars, don’t underestimate the ‘silent giants’ of the insurance industry.  Just because they (the insurance companies) aren’t advertising on your favorite show on NBC every 15 minutes doesn’t mean that they are an investment vehicle you should ignore.  Insurance is widely regarded as a means to establish an estate to transfer wealth to your heirs.  Understand that insurance can be a viable (and in most cases, a preferred) alternative of cash accumulation that can be much, much safer than your run-of-the-mill savings account at your local bank.
If you’d like to talk more about how these differences can be an advantage to you, give me a call at (312) 493-2054 or email me at
You can also browse through more topics regarding personal finance by my mentor, Matthew Sapaula, at:


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