Nondepository institutions are playing an increasingly important role in the financial system. Five types of financial intermediary may be classified as nondepository institutions.

a. Insurance companies.

i. Life insurance companies insure policyholders against death through term life insurance and provide a vehicle for saving through whole life insurance.

ii. Property and casualty companies insure individuals and businesses against losses arising from specific events, like accidents and fires.

iii. The two primary functions of insurance companies are to

• allow policyholders to transfer risk.

• screen and monitor policyholders to reduce adverse selection and moral hazard.

b. Pension funds perform two basic services.

i. They allow employees and employers to make payments today so that employees will receive an income after retirement.

ii. They spread risk by ensuring that those employees who live longer than others will continue to receive an income. For this reason, pension funds may be thought of as the opposite of life insurance.

c. Securities firms include three basic types of financial intermediary: brokers, mutual fund companies, and investment banks.

i. Brokers give customers access to the financial markets, allowing them to buy and sell securities.

ii. Mutual fund companies provide savers with small-denomination shares in large, diversified investment pools.

iii. Investment banks screen and monitor firms before issuing their securities.

d. Finance companies specialize in making loans to consumers and businesses for the purchase or lease of specific products, such as cars and business equipment.

e. Government-sponsored enterprises supply direct financing and provide loan guarantees for low-interest mortgages, student loans, and agricultural loans.