Chapter 8 - Mutual Funds, Insurance, and Pension Funds

Abstract

Mutual funds, insurance, and pensions funds are major financial intermediaries. Mutual funds represent the second-largest pool of private capital in the world after the banking industry. Mutual funds are classified into open-ended, closed-end, and unit investment trusts. The main categories of funds are stock or equity funds, bonds or fixed-income funds, money market funds, and hybrid funds. The insurance industry is basically classified as life and property insurance. The two main types of life insurance are term and permanent life insurance. There are also other life insurance products such as group life insurance, credit life insurance, annuity and pension plans. Property/casualty insurance is insurance on homes, cars, and businesses. The three fundamental risks faced by insurance companies are underwriting, market, and regulatory risks. Value at risk and expected shortfall are two major metrics used to measure and manage financial risks in insurance. Pension funds are classified into different types: public and private pension plans, occupational and personal pension plans, DC and DB plans, protected and unprotected pension plans, funded versus unfunded pension plans, single- and multiple-employer pension funds. Private pension funds consist of 401(k), 403(b), and individual retirement accounts (IRAs).