An insurer’s balance sheet · RiskAtoms Academy

By the end you will be able to

1Identify investments, technical provisions and own funds on an insurer's balance sheet.
2Explain why an insurer's biggest liability is an estimate of future claims and benefits.
3Contrast an insurer's balance sheet with a bank's.
4Explain in outline how IFRS equity becomes Solvency II own funds.

Why it matters

A bank borrows first and lends later. An insurer is paid first and pays later, sometimes decades later. Example Insurance SE holds €70,000m of assets, and most of it is already promised to policyholders.

Core explanation

Paid first, pays later

When you buy car insurance, you pay the premium today. If you crash, the insurer pays months later. If you buy a pension annuity at 65, you hand over a lump sum and the insurer pays you every month for the rest of your life. In between, the insurer holds the money. That pool of money waiting to be paid out is often called float, and the insurer invests it.

So an insurer's balance sheet has three main blocks. Here they are for Example Insurance SE, a made-up European insurer that sells both life and non-life cover.

Block	Side	Example Insurance SE	Share of assets
Investments	Asset	€63,000m	90%
Technical provisions	Liability	€54,000m	77%
Equity (IFRS)	Equity	€7,000m	10%

Investments. The asset side is mostly an investment portfolio. Bonds dominate (€54,000m here), because their fixed payments can be lined up with future claims. Shares and property add return and risk. Alongside sit cash and reinsurance assets: the share of claims that reinsurers will pay back.

Technical provisions. The biggest liability is the money set aside to pay policyholders: technical provisions. They come in two kinds:

Life (€44,000m): the value today of annuities, pensions and life cover still to be paid. These run for decades and depend on how long people live and on interest rates.
Non-life (€10,000m): claims reported but not yet paid, claims incurred but not reported, and cover still to run on policies already sold.

Nobody knows the final cost of these promises. Actuaries estimate it, and the estimate is the single biggest judgement in an insurer's accounts. If it proves too low, the shortfall comes out of equity.

Equity and own funds. Equity is, as always, assets minus liabilities. Insurance supervisors in the EU look instead at own funds: the same idea, but measured on the Solvency II rules, which value some assets and liabilities differently. The worked example shows the bridge.

Bank versus insurer

	Example Bank plc	Example Insurance SE
Main assets	Loans	Investments (mostly bonds)
Main liabilities	Deposits, payable on demand	Technical provisions, paid as claims arise
Equity ÷ assets	6%	10%
Main danger	A run on deposits, bad loans	Claims and lifetimes beyond estimates, falling assets

Names differ by standard. Under IFRS 17, in force since 2023, technical provisions appear as “insurance contract liabilities”, and they include the CSM, profit not yet earned. “Technical provisions” is the Solvency II term. US insurers report under US GAAP, which did not adopt IFRS 17, and also file statutory accounts with their state regulators.

Sort itWhere does it go?

0 / 7 right

Place each item on Example Insurance SE's balance sheet.

Bonds issued by a carmaker that the insurer has bought.
Monthly pensions promised to 200,000 retired annuity customers.
A car crash claim reported last month but not yet paid.
Damage from last week's storm that customers have not yet reported.
Subordinated bonds the insurer itself has issued.
The share of a hurricane claim that a reinsurer has agreed to pay back.
Profits from past years kept in the business.

The formal version

Solvency II gives precise definitions. Technical provisions are the cost of the promises plus a buffer:

\text{Technical provisions} = \text{Best estimate} + \text{Risk margin}

The best estimate is the expected value of all future claim and expense payments, discounted to today. The risk margin is extra, so that another insurer would accept the obligations. Own funds then follow from the accounting equation, with one adjustment:

\text{Own funds} = \underbrace{\text{Assets} - \text{Liabilities}}_{\text{on Solvency II values}} + \text{Qualifying subordinated debt} - \text{Foreseeable dividends}

Subordinated debt sits in liabilities, but it is repaid only after policyholders, so Solvency II lets it count as loss-absorbing capital, within limits. This is a simplified version; the full rules set tiers and limits.

Try it

Click through Example Insurance SE's balance sheet. Then try two different shocks. First, let corporate bonds fall 10%. Reset, then raise non-life claims by 10%. Which hurts more, and why? Finally, find the rise in life provisions that uses up all the own funds above the SCR.

Reveal the answer

About 9.8%: own funds above the SCR are €4,300m, and €4,300m ÷ €44,000m = 9.8%. A couple of years of extra life expectancy across a whole annuity book can do that, which is why longevity is a core life insurance risk.

Interactive balance sheetExample Insurance SE

€ million, year end

Assets · €70,000m

Liabilities and equity · €70,000m

assets liabilities equityDashed outline: size before any shock.

Assets: what it owns

Investments€63,000m

Total assets€70,000m

Liabilities and equity: how it is funded

Liabilities
Technical provisions€54,000m
Equity

Total liabilities and equity€70,000m

Government bondsasset · 40.0% of total assets

Bonds issued by governments, held to match long-dated promises to policyholders.

Risk to watch: Interest rate risk, and the credit risk of the issuing governments.

Apply a shock

Corporate bond prices fall0.0%

Corporate bonds lose value, for example as credit spreads widen in a recession.

Equity and property prices fall0%

Shares, funds and investment property lose value together.

Non-life claims cost more0.0%

Non-life technical provisions rise because claims turn out bigger than expected.

People live longer0.0%

Life technical provisions rise because annuities must be paid for longer.

Loss charged to equity

€0m

Equity

€7,000m → €7,000m

Share of equity lost

0.0%

Equity ÷ assets

10.0%

How much of the balance sheet the owners fund.

Solvency ratio

186.0%

Own funds ÷ SCR, with the SCR held fixed.

Simplified: losses are charged before tax, own funds move one for one with IFRS equity, and the SCR is held at €5,000m. In reality the SCR also moves when the balance sheet does, and a rate move changes both bonds and provisions together.

Worked example

From IFRS equity to own funds

Example Insurance SE reports IFRS equity of €7,000m. Its supervisor wants own funds. Work through the bridge one adjustment at a time.

The own funds bridge

Step 1 of 6

1
Start from IFRS equity
€7,000m, from the IFRS balance sheet.

Regulatory lens

In the European Union, insurers are supervised under Solvency II, in force since 2016. It sets out the market-consistent balance sheet above, the SCR, and what counts as own funds. The UK has its own version, now called Solvency UK. In the United States, state regulators use risk-based capital rules developed through the NAIC. For large international groups, the IAIS has developed a global Insurance Capital Standard. Later levels cover each of these. For now, remember the three blocks: investments, technical provisions and own funds.

Sparks

SparkClaims that arrive decades later

In the 1980s and 1990s, claims for asbestos-related illness reached insurers for policies written decades before. Nobody had set enough aside, because nobody had known. The losses helped push the Lloyd's of London market into crisis in the 1990s. It is the textbook case of why IBNR matters.

SparkFloat as a business model

Warren Buffett has long explained Berkshire Hathaway's use of insurance float in his letters to shareholders: money collected as premiums and held until claims are paid can be invested meanwhile. If the insurer also makes an underwriting profit, the float costs it less than nothing.

Key takeaways

An insurer is paid first and pays later; the money in between is invested.
Assets are mostly investments, with bonds the largest part.
The largest liability is technical provisions: an actuarial estimate of future claims and benefits.
If provisions prove too low, or investments fall, the loss comes out of equity.
Solvency II measures own funds: assets minus liabilities on its own values, plus qualifying subordinated debt, less foreseeable dividends.
Insurers usually fund more of their balance sheet with equity than banks do (10% here against 6% at Example Bank plc).

Reaction

Check what stuck

Glossary

Float: Premiums an insurer has collected but not yet paid out in claims. It invests this money meanwhile.
Investments: The bonds, shares, property and loans an insurer holds to meet its future claims.
Technical provisions: The amount an insurer sets aside today to meet its future obligations to policyholders. Under IFRS 17 they are called insurance contract liabilities.
IBNR: Incurred but not reported: claims for events that have already happened but that nobody has told the insurer about yet.
Reinsurance: Insurance bought by an insurer from another insurer, a reinsurer, to pass on part of its risks.
Best estimate: The probability-weighted average of future claim and expense cash flows, discounted to today.
Risk margin: An extra amount on top of the best estimate, so that another insurer would agree to take the obligations over.
CSM: Contractual service margin: under IFRS 17, the profit an insurer expects to earn on its contracts but has not yet earned.
Own funds: Under Solvency II, the capital an insurer has to absorb losses: assets minus liabilities on the Solvency II basis, plus qualifying subordinated debt.
SCR: Solvency Capital Requirement: the capital an EU insurer must hold under Solvency II, calibrated to survive a 1-in-200-year loss over one year.

Deep Dives & Origins

Deep Dives

Hull, Risk Management and Financial Institutions (Wiley), the chapter on insurance companies and pension plans. Beginner.
Saunders and Cornett, Financial Institutions Management: A Risk Management Approach (McGraw-Hill), the chapter on insurance companies. Intermediate.

Origins

Directive 2009/138/EC of the European Parliament and of the Council (Solvency II), article 75 (valuation), article 77 (technical provisions) and articles 87 and 88 (own funds).
IASB, IFRS 17 Insurance Contracts (2017, amended 2020).
NAIC, Risk-Based Capital overview (naic.org).
Berkshire Hathaway, annual letters to shareholders.

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