Financial Intermediaries

To begin with, the aim of this project is to present different financial intermediaries like insurance companies, divided in mutual life insurance company and stock life insurance company and open-ended funds, closed-ended funds and pension funds which are types of mutual funds. They are very important in the macroeconomic functioning of the economy because is an institution that acts as the middleman between investors and firms raising funds. I have also presented here some examples of insurance companies and mutual funds not only from Romania but also from other countries.

1. Defining financial intermediaries

”The term financial intermediary may refer to an institution, firm or individual who performs intermediation between two or more parties in a financial context”. As a institution, it facilitates and intermediates the channelling of funds and financial transaction between at least two parties, provider of a product or service and consumer or customer, indirectly. “This may be in the form of loans or mortgages. Alternatively, they may lend the money directly via the financial markets. Most people do not enter financial markets directly but use intermediaries or middlemen. Commercial banks are the financial intermediary we meet most often in macroeconomics, but mutual funds, pension funds, credit unions, savings and loan associations, and to some extent insurance companies are also important financial intermediaries.

The financial intermediaries are used by many people because they provide two important adventages to savers. First, lending through an intermediary is usually less risky than lending directly. The major reason for reduced risk is that a financial intermediary can diversify. It makes a great many loans, and even though some of those loans will be mistakes, the losses will be largely offset by loans that are sound. In contrast, an average saver could directly make only a few loans, and any bad loans would substantially affect his wealth. Because an intermediary can put its "eggs" in many "baskets," it insures its depositors from substantial losses. A second advantage financial intermediaries give savers is liquidity. Liquidity is the ability to convert assets into a spendable form-money-quickly.”

Financial intermediaries help many people to use, though indirectly, financial markets but the macroeconomic theory does not pay much attention to them.

2. Insurance companies

“Insurance, in law and economics, is a form of risk management primarily used to hedge against the risk of catastrophic financial loss. Insurance is defined as the equitable transfer of the risk of a potential loss, from one entity to another, in exchange for a premium and duty of care.

Insurance companies may be classified as:

- Life insurance companies, who sell life insurance, annuities and pension products

- Non- life or general insurance companies, who sell other types of insurance.

In most countries, life and non-life insurers are subject to different regulations, tax and accounting rules. The main reason for the distinction between the two types of company is that life business is very long term in nature — coverage for life assurance or a pension can cover risks over many decades. By contrast, non-life insurance cover usually covers a shorter period, such as one year. ”

Insurance companies gain money from people witch decide to deposit various amounts of money in for insure their car, health, life, pets, etc, but they also have to return an amount of money if something happens with the thing insured.

“Insurend make money in two ways:

- Through underwriting, the process through which insurers select what risks to insure and decide how much premium to charge for accepting those risks and by investing the premiums they have collected from insureds.