in this chapter we continue our discussion of financial institutions by looking at t 638325

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