Contractual Savings Institutions
The contractual savings institutions obtain funds under long-term contractual arrangements and invest the funds in the capital markets such as the
Firms in this category are insurance companies and pension funds. These institutions are characterized by a relatively steady inflow of funds from contractual commitments with their insurance policyholders and pension fund participants.
An example of a contractual savings institution is a life insurance company. Life insurance companies obtain funds by selling insurance policies that protect against loss of income from premature death or
In addition to his protection many life insurance policies provide some savings. Because life insurance companies have a predictable and flow of funds and their outflows are actuarially predictable, they are able to invest primarily in higher yielding, long-term assets, such as corporate bonds and stocks.
Life insurance companies are regulated by the states in which they operate and compared to deposit type institutions bear regulations are less strict.
Another type of contractual savings institution is the casualty insurance company. Casualty insurance companies sell protection against loss of property from fire, theft, accident, negligence and other causes that can be actuarially predicted. Their major source of funds is premiums charged on insurance policies.
Casualty insurance policies are purer risk protection policies. As a result they have no cash surrender value and thus provide no of liquidity to the policyholders. As might be expected, the cash outflows from claims on policies are not as predictable as those of life insurance companies.
In either case depending on your needs a contractual savings institution can satisfy them and that is why they are an important financial institutions for our economy.