1. Insurance providers, which are regulated by the states, acquire funds by selling policies that pay out benefits if catastrophic events occur. Property and casualty insurance companies hold more liquid assets than life insurance companies because of greater uncertainty regarding the benefits they will have to pay out. All insurers face moral hazard and adverse selection problems that explain the use of insurance management tools, such as information collection and screening of potential policyholders, risk-based premiums, restrictive provisions, prevention of fraud, cancellation of insurance, deductibles, coinsurance, and limits on the amount of insurance.
2. Pension plans provide income payments to people when they retire after contributing to the plans for many years. Pension funds have experienced very rapid growth as a result of encouragement by federal tax policy and now play an important role in the stock market. Many pension plans are underfunded, which means that in future years they will have to pay out higher benefits than the value of their contributions and earnings. The problem of underfunding is especially acute for public pension plans such as Social Security. To prevent abuses, Congress enacted the Employee Retirement Income Security Act (ERISA), which established minimum standards for reporting, vesting, and degree of underfunding of private pension plans. This act also created the Pension Benefit Guarantee Corporation, which insures pension benefits.
3. Finance companies raise funds by issuing commercial paper and stocks and bonds and use the proceeds to make loans that are particularly suited to consumer and business needs. Virtually unregulated in comparison to commercial banks and thrift institutions, finance companies have been able to tailor their loans to customer needs very quickly and have grown rapidly.
4. Mutual funds sell shares and use the proceeds to buy securities. Open-end funds issue shares that can be redeemed at any time at a price tied to the asset value of the firm. Closed-end funds issue nonredeemable shares, which are traded like common stock. They are less popular than open-end funds because their shares are not as liquid. Money market mutual funds hold only short-term, high-quality securities, allowing shares to be redeemed at a fixed value using checks. Shares in these funds effectively function as checkable deposits that earn market interest rates. All mutual funds are regulated by the Securities and Exchange Commission (SEC).
5. Investment bankers assist in the initial sale of securities in primary markets, whereas securities brokers and dealers assist in the trading of securities in the secondary markets, some of which are organized into exchanges. The SEC regulates the financial institutions in the securities markets and ensures that adequate information reaches prospective investors.