a small service plaza on the road between Mecca and Madinah,
in Saudi Arabia, I came across a man selling brand
name watches from a tray-box. He knew what he was
selling and buyers knew also, because pricing equates with
I often tell people who are comparison-shopping for financial
products that one cannot get a Mercedes, for the price of
There are no bargains! You get what you pay for! The majority
of insurance products are priced according to the same rules,
using mortality tables as well as morbidity data common
for the region, and using claims experiences that are also
common for the region.
The expression claims experience refers to the
amount and type of claims that the insurance company and
its re-insurers have received from people who have suffered
a loss, and filed a claim for compensation.
The re-insurer is typically a larger international organisation
that is called upon by the local insurance company, to help
share the risk when the risk is deemed to be large. When
there are too many large claims, for example after massive
flooding or earthquake, the re-insurers may recalculate
benchmarks, and reset the pricing.
Pricing of financial products is standardised by the fact
that numbers within the population are ranked by virtue
of age, occupation, location, etc. These factors relate
to the amount of risk exposure that face all individuals
in the grouping.
For example, all males between age 30 and 35, in general,
who work in a clerical position, are exposed on a daily
basis to the same degree of risk of accident, and illness.
Compare them with males age 30-35, who work with contagious
disease patients, or who are policemen or firemen.
Although they may be the same age, and same health status,
the job-related risk is different.
But there is another more critical area in pricing of financial
products: I call it packaging. Very often the core product
is mixed with other added value products that
are bundled as a bargain when the two are packaged together.
Unlike the buyer from the tray-box vendor on the road, you
may find yourself in a situation where you cannot differentiate
how the packaging accounts for the difference in pricing.
For example, you can easily buy cheaper insurance if you
choose term insurance, as opposed to cash value insurance.
In cash value insurance you get back money if there is no
claim. In term insurance, you get back nothing if there
is no claim.
In addition the hidden fee structure in investments is seldom
explained in full. You can be shown a glossy projection
that completely ignores the fees that will be charged.
There is even an incredible new ploy where certain institutions
are refusing to accept guaranteed cash value instruments
as collateral. They urge investors to close off accounts
in one institution, to place in theirs.
Hence the need for central banks to be extra vigilant and
fair is legislating for financial institutions across the
In the end it is the small man who suffers the most from
the draconian charges and schemes of large institutions.