Traditionally, the core functions of banking were to (1) accept money from, and collect checks for, customers; (2) honor checks for orders drawn on them by customers; (3) keep current accounts, or something of that kind, in which customers’ debits and credits are entered; and, of course, (4) lend. Banks derived their income largely from the margin between the interest rates they paid on money deposited with them and the interest rates they charged on money lent by them.
Insurers are important financial intermediaries. They play a significant role in the financial system as vehicles for savings (policy premiums are not used immediately to meet claims; they are instead invested, earning policyholders a return when they either collect on claims or have their premiums reduced) and risk pooling (insurers pool the risks of different policyholders, so that those whose insured risk eventuates are compensated in part out of premiums paid by those who do not file claims). The insurance office itself provides an intermediary service. It underwrites some of the residual risk of the risk pooling and may assume some of the savings risk. An example of the latter is a traditional, nonparticipating annuity where the insurer guarantees the annuity payment irrespective of the investment performance of the fund from which the annuity is financed.