4.1 Insurance companies

Box 4.1

Measuring nancial activity

UK ofcial statistics on nancial activity use the following terms, which must be carefully

distinguished:

Holdings at year end: refers to the stock of assets (or liabilities) at a particular moment.

It is the data that is used to compile a balance sheet of assets and liabilities.

Net acquisitions: refers to the quantity of assets (or liabilities) acquired during a period.

This is ow data and for nancial institutions it must match the inow of funds from

savers during the period in question.

Turnover: The total value of transactions (the sum of purchases andsales) during a

period of time. This is also ow data, but the gures will normally be much larger than

those showing net acquisitions.

In addition to data showing assets accumulated and assets recently acquired, there

is a third set of data whose examination we postpone until Chapter 6, where we look

at the functioning of capital markets. This is data for turnover. Turnover refers to the

total purchases and sales of assets (or liabilities) and will usually be much greater than

any gures for net acquisitions. This is easily understood if one imagines a unit trust

manager with an inow of funds of £100m which he has to allocate between additional

assets. £100m will be the gure for net acquisitions, but in order to achieve precisely

the portfolio which he thinks best, he may very well sell £200m of his existing hold-

ings and buy £300m of assets in total. The fund’s turnover in this case is £500m.

In order that we do not have to repeat ourselves for every type of NDTI, let us

just remember that howsoever they differ from deposit-taking institutions, NDTIs all

engage in the principal features of nancial intermediaries:

l	They create assets for lenders and liabilities for borrowers which are more attractivethan would be the case if the parties had to deal directly.

l	They do this in part by ‘maturity transformation’.
l	This in turn depends upon large size which enables them to pool and diversify risk.

What distinguishes the institutions is the manner and scale in which this is done.

In Chapter 1 we discussed the advantages to both lenders and borrowers of using

nancial intermediaries and paying for their services. The NDTIs we are about to look

at are differentiated partly by the very specic services which they offer. The one thing

which they all offer to lenders, however, is the risk-reducing effect of diversication.