Financial Markets and Institutions (2-downloads)

www.quicken.com/investments/

mutualfunds/finder

. Perform the EasyStep Search

according to your own preferences for investment.

Can you find funds that provide the return you want

with the expense ratio you are willing to pay?

2. The mutual fund industry publishes a fact book con-

taining exhaustive data on the historic and current

state of mutual funds. Go to 

www.ici.org

, click on

Research and Statistics, then on Fact Books.

a. Section 1 provides an overview of the mutual fund

industry. Select and report on one statistic not

reported in this textbook.

b. Section 2 reports on trends in the mutual fund

industry. Discuss the relationship between the

return on equity and flows to equity mutual funds.

c. According to Chapter 4, what percentage of mutual

funds assets are currently owned by households?

d. According to Chapter 4, what is the average annual

income of an investor in mutual funds?

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Insurance Companies and

Pension Funds

Preview

In this chapter we continue our discussion of financial institutions by looking at

two nonbank institutions: insurance companies and pension funds. Insurance is

an important industry in the United States. Most people hold one or more types

of insurance policies (health, life, homeowners, automobile, disability, and so on),

and the annual revenues of insurance companies exceed $600 billion. Insurance

companies are also a major employer, especially of business majors. Figure 21.1

shows the number of persons employed by the insurance industry between 1960

and 2009. The numbers rose rapidly during the 1960s, 1970s, and early 1980s.

(Currently, well over 2 million Americans are employed in the insurance industry.)

In recent years, the rate of growth has slowed, however. There are a couple of

possible explanations for this. First, technology has streamlined claims process-

ing so that fewer back-office workers are needed. Second, competition by other

financial institutions such as commercial banks and brokerage houses may be

cutting into some of the business traditionally reserved for insurance companies.

One major competitor to insurance has been the private, company-sponsored

pension plan. Better-educated and longer-lived workers are putting more money

into pension funds than ever before. Over 65 million individuals are now invested

in a private pension fund. These plans are also reviewed in this chapter.

Insurance companies and pension funds are considered financial intermedi-

aries for several reasons. First, they receive investment funds from their customers.

For example, when a person buys a whole life insurance policy, the person

receives a life insurance benefit and accumulates a cash balance. Many people

use insurance companies as their primary investment avenue. Similarly, private

pension funds also take in investment dollars from their customers. Second, both

of these institutions place their money in a variety of money-earning investments.

Insurance companies and pension funds make large commercial mortgage loans,

invest in stocks, and buy bonds. Thus, these institutions are financial intermedi-

aries in that they take in funds from one sector and invest it in another.