FRM Exam Part I · Insurance Companies and Pension Plans

Types of Insurance Companies and Their Structure

Updated 11 October 2026 · Fact-checked

Insurers pool risk by collecting premiums and paying claims. Life insurers cover long-term mortality and savings risk. Property-casualty insurers cover short-term damage and liability. Health insurers cover medical costs. Premiums are invested, so assets are mostly bonds, and liabilities are reserves for future claims. To solve questions, match the product to its liability horizon and risks.

Understand Insurance Company Types and Structure

An insurance company takes on risk from many policyholders in return for premiums. Because losses across a large pool are fairly predictable, the insurer can promise payment on a claim. It earns money from underwriting (premiums minus claims and expenses) and from investing the premiums before claims are paid. The money held before claims are paid is called float.

The main types differ in what they cover and how long the promise lasts. Life insurers pay on death or survival. Contracts run for decades, and the main risks are mortality, longevity, interest rates and lapses. Products include term life (pure protection for a set period), whole life (lifelong cover with a savings element) and annuities (regular payments, often for life). Property-casualty (P&C) insurers cover damage to property (fire, storm, theft) and liability (accidents, lawsuits). Contracts are short, usually one year and renewed, but claims can take years to settle, especially in liability lines. The main risks are catastrophes and uncertain claim size. Health insurers cover medical costs. Contracts are short, but costs rise over time, so medical inflation and utilisation are key risks. Some countries classify health with life, others with P&C, so read the question's wording.

The balance sheet shows the difference. On the asset side, insurers hold mostly bonds, with smaller amounts of equities, real estate and loans. Life insurers hold long-dated bonds to match long liabilities. P&C insurers hold shorter, more liquid assets because claims can be large and sudden. On the liability side, the biggest item is reserves: for life insurers, the present value of future benefits less future premiums; for P&C insurers, unearned premium reserves (cover not yet provided) and loss reserves (claims reported or incurred but not yet paid). The remainder is capital (equity), which absorbs losses.

Companies are also organised as stock companies, owned by shareholders, or mutual companies, owned by policyholders. Mutuals have less pressure for profit but find it harder to raise outside capital. Insurers also buy reinsurance, which transfers part of their risk to another insurer, to cut volatility and free up capital.

For the exam, think in terms of mismatch. Life insurers fear falling interest rates, because long liabilities rise in value more than assets. P&C insurers fear underwriting cycles and large catastrophes. Health insurers fear rising costs. Link each product to its main risk and the answer usually follows.

Key formulas to remember

Balance sheet identity: Assets = Reserves (liabilities) + Capital (equity); Capital is the buffer. A fall in asset value or a rise in reserves reduces capital one for one.
Underwriting result: Underwriting profit = Premiums earned − Claims incurred − Expenses; A negative result can still be offset by investment income.
Overall profit: Total profit = Underwriting profit + Investment income; Explains why insurers can write at an underwriting loss when float is invested.
Reserve for a life policy: Reserve = PV(future benefits) − PV(future premiums); Discount rate matters. A lower discount rate raises reserves.
Net retained risk with proportional reinsurance: Retained loss = (1 − cession share) × Gross loss; Applies to quota-share reinsurance only.

How to solve Insurance Company Types and Structure questions

Use this method for any question on insurer types, business models or balance sheets.

1Identify the insurer type from the product: death or annuity means life; property damage or liability means P&C; medical costs means health.
2Note the contract horizon: decades for life, usually one year for P&C and health.
3List the main risks for that type: mortality, longevity, interest rate and lapse for life; catastrophe and reserve uncertainty for P&C; cost inflation for health.
4Place items on the balance sheet: bonds and investments as assets; reserves as liabilities; the balancing figure as capital.
5If numbers are given, apply Assets = Reserves + Capital, or Underwriting profit = Premiums − Claims − Expenses, and compute carefully.
6Check for reinsurance, mutual versus stock structure, or investment income that changes the answer.
7Eliminate options that attach the wrong risk or the wrong horizon to the insurer type.

Quickest way: Match product, horizon and risk

When to use it: For conceptual multiple-choice questions comparing insurer types or describing their balance sheets.

Underline the product or liability in the question.
Decide long (life) or short (P&C, health) horizon.
Pick the matching asset profile: long bonds for life, shorter liquid assets for P&C.
Drop any option that reverses these links.
For numbers, write Assets = Reserves + Capital and solve for the unknown.

Common mistakes in Insurance Company Types and Structure

Saying P&C insurers have long-term liabilities like life insurers.
Students confuse long claim settlement with long contract length.
Fix: P&C contracts are usually annual. Some liability claims settle slowly, but the contract itself is short.
Treating reserves as assets.
The word reserve sounds like cash set aside.
Fix: Reserves are liabilities, the amount owed to policyholders. Assets are the investments backing them.
Forgetting investment income when judging profitability.
Focus stays on premiums minus claims.
Fix: Add investment income on float. An underwriting loss can still give an overall profit.
Assuming rising interest rates hurt life insurers most.
Students mix up the bank and insurer mismatch.
Fix: Life insurers hold long liabilities, so falling rates raise liability value faster than assets. Falling rates are the stress case.
Mixing up unearned premium reserves and loss reserves.
Both are P&C reserves.
Fix: Unearned premium reserve is for cover still to be provided. Loss reserve is for claims that have already happened.

Worked examples

Example 1

An insurer has assets of $850 million and reserves of $720 million. It then raises its loss reserves by $40 million with no change in assets. What is its capital afterwards?

Show the solution

Initial capital = Assets − Reserves = 850 − 720 = $130 million.
New reserves = 720 + 40 = $760 million.
New capital = 850 − 760 = $90 million.

Answer: $90 million

Example 2

A P&C insurer earns premiums of $500 million, incurs claims of $380 million and expenses of $140 million. Investment income is $45 million. What are the underwriting result and total profit?

Show the solution

Underwriting result = 500 − 380 − 140 = −$20 million, a loss.
Total profit = Underwriting result + Investment income = −20 + 45.
Total profit = $25 million.

Answer: Underwriting loss of $20 million; total profit of $25 million

Exam tips

Expect conceptual questions linking insurer type to risks, asset mix and contract horizon. Learn the comparison cold.
For balance sheet numbers, always compute capital as assets minus reserves, and watch for changes to only one side.
Read for hidden details such as reinsurance, mutual structure or investment income before choosing an answer.
Be careful with classification of health insurance. Use the product description in the question, not assumptions.

Practice questions from Insurance Companies and Pension Plans

Insurance Company Types and Structure in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Insurance Company Types and Structure: frequently asked questions

What is the main difference between life and property-casualty insurers?

Life insurers cover death and longevity over decades, so they hold long-dated assets and face interest rate and mortality risk. P&C insurers cover damage and liability on mostly one-year contracts, so they hold shorter assets and face catastrophe and reserve risk.

What are the main items on an insurer's balance sheet?

Assets are mainly bonds plus some equities, real estate and loans. Liabilities are mostly reserves for future benefits or claims. The difference is capital, which absorbs losses.

What is float?

Float is the money an insurer holds between collecting premiums and paying claims. It is invested, so it generates income that can offset underwriting losses.

What is the difference between a stock and a mutual insurer?

A stock insurer is owned by shareholders and can raise capital in the market. A mutual insurer is owned by its policyholders, which aligns interests but limits access to outside capital.