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IAI Actuarial Core Principles · Business Economics · Role, structure and stability of the financial system

Which statement about the role of institutional investors such as life insurers and pension funds in the financial system is most accurate?

Institutional investors such as life insurers and pension funds hold long-term assets against long-term liabilities and are major buyers of bonds and equities. Because their liabilities are not payable on demand, they are less exposed to sudden runs than banks, so they tend to support stability.

  1. AThey hold long-term assets matched to long-term liabilities, supply capital to the bond and equity markets, and can be a stabilising force because they are not subject to sudden runs in the way demand deposits areCorrect
  2. BThey accept only demand deposits and so are the main source of liquidity risk in the economy
  3. CThey fix the price of all securities by regulation, which removes market volatility
  4. DThey operate only in the primary market and never trade existing securities
  5. They are regulated by no one, since they do not deal with the public

Explanation

Life insurers and pension funds collect long-term savings and invest in bonds and equities, supplying long-term capital. Their liabilities are long-dated and contractually constrained, so they are less vulnerable to runs than demand deposits. They do not set prices by regulation, they trade in both markets, and they are regulated.

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