A central function of the financial system is to facilitate an efficient allocation of resources in the economy... Discuss.
liability insurance, life insurance and health insurance. The premiums pooled together from the policyholders are then invested until the proceeds are needed to pay off claims from policyholders.
In most cases, insurance companies employ portfolio managers who look to invest the capital raised from the policy holders. In a big insurance company, there maybe more than one bond portfolio manager employed to decide which bonds to acquire, as well as more than one stock/shares portfolio manager in order to determine which stocks/shares to buy. One of the main goals of this manager is to earn comparatively high returns on the portfolios given a certain level of risk. By doing this, income on the investments should not only cover future insurance payouts but also make profit to give back to the owners of the firm. A key factor dependent on this is the performance of bonds and share portfolios which the company owns. The type of investment the company will look into will vary more with the type of policy the insurance company offers, for example; household and car insurance policies are liabilities that are going to fall much sooner and will therefore require a portfolio with much more liquid assets. On the other hand, life insurance plans are much more of a long term plan and thus are long term liabilities which can be covered by longer term assets.
With insurance companies, the allocation of resources are apparent, customers pay for a service whereby they shift the risk of something bad happening to them on to another party. The insurance company and those who invest in it benefits through profits (as long as wise investment decisions have been made), and the money invested by the insurance company will help new and existing business to start up and expand, thus developing and aiding good economic growth.
Another feature dominant within the financial sector is the small area of interest rates. The rate of interest set by the Bank of England reflects the position and state of the economy at that moment in time. When the economy is going through a boom period, interest rates are likely to rise in order to help reduce spending, while at the same time, if a period of recession is experienced, the bank of England will lower rates in order to boost consumer spending. This type of monetary policy helps to allocate resources efficiently through restricting rising inflation rates while at the same time keep the economy going though times of economic slow down.
When reflecting upon the functions of the financial system, we can highlight the major services it offers. Firstly, it provides mechanisms for the disposal of savings and the financing of investment and matches the needs of investors (borrowers) and savers. By doing this and efficiently allocating resources, it enables efficient production and exchange of goods and services within the economy. It transfers funds between investors and savers in order to fund expenditure and maintain the provision of investible goods. Finally, it permits changes to be made in [next page]