Banking and insurance are sometimes lumped together as financial services but, in fact, the two industries take entirely separate approaches to risk management. The distinction helps us to understand the financial crisis and offers important guidance for financial reform efforts.
Risk managers have two key tools for mitigating the odds of negative consequences: direct knowledge of individual cases and diversification. For banks, direct knowledge is primary, diversification secondary; for insurance companies, diversification is primary and direct knowledge is secondary.
Bankers . . .
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