Contractual Savings Institutions

Contractual Savings Institutions are

financial intermediaries that acquire funds
periodically under contractual agreements. Because payouts such as insurance benefits
and pensions are predictable, they can invest mainly in long‑term assets such as corporate
bonds and equities

Types of Contractual Saving Institutions

Life insurance Companies

Property- Casualty Insurance Companies 

Pension Funds 

Life insurance Companies provide 

insurance against mortality, illness, and retirement
risks. They collect premiums and invest heavily in long‑term securities

Ordinary life Insurance, Team life, Whole lie, endowmentLife

Team Life: Pure insurance, expires if insured beyond the term 

Whole life- Lifetime coverage with cash savings component 

EndowmentLife- Pays upon death or id insured reaches maturity date 

Newer products, Variable life. universal life 

Variable life- Policy invested in mutual funds, payout varies with performance 

Universal life- flexible premiums and maturity terms 

Other activities of life insurance

Sale of annuities for retirement savings

Accident and health insurance 

Managing private pension funds 

Major Liability 

Policy reserves- expected future payout obligation based on actuarial assumptions

Regulation

State-regulated under McCarran Ferguson Act

NAIC coordinates examinations 

State guarantee funds provide limited backup 

Property Casualty Insurance companies

Cover property damage and legal liability (auto, homeowners)

Property casualty Insurance companies Risk exposure

Greater uncertainly in losses, rely on reinsurance to manage catastrophic exposure

Property casualty Insurance companies: balance sheet

Invest mostly bonds and stocks

Loss reserves- expected payouts on filed claims 

Unearned premiums- prepaid but not yet earned premiums 

Property casualty Insurance companies: Regulation

State Level

Rate ceilings on lines like auto insurance 

Pension funds

Tax-deferred retirement savings plans, withdraws taxed at retirement

Defined Benefit vs Defined contribution

DB: employer guarantees benefit, employer bears invest and longevity risk 

DC: Employer/employee contribute, employee bears investment risk

Types of Pension funds

Private- 401(K), 403(b), IRAs

Public- state/local system, social security 

Pension regulation ERISA

Funding requirements

Vesting limits (<10 years)

Fiduciary duty: prudent person rule 

PBGC insures DB plans 

Why are contractual savings institution less concerned about liquidity than banks

Their payouts are predictable