Thursday, September 30, 2010

Economics of Insurance

Lately, an insurance agent whom I knew through a friend of mine approached me with some ‘awesome’ savings plan offered by his company. Honestly, I couldn’t recall much of the conversation and financial planning tips thrown to me. It is more of his bragging about the potential return and how many people have actually hooked up the product that seized my attention. I was ‘enticed’ while going through the figures he computed.

It wasn’t any medical card or life insurance policy, but an alternative to the conventional savings like fixed deposits in the banks. It offers 4% return for the first 5 years, 5% the next few years and 6% on the following years. The maximum it offers is 6%. My friend, who sat next to me at that time was so eager to sign up considering the 4%-6% offered. I quietly told him to reconsider.

Source: theStar

In Malaysia, CPI (price level) increases on the average of 3% every year. That has been the trend for the last three decades. It is even more important to note that rise in general price level does not reflect the actual situation face by average Malaysians as some will be more affected than the others. For instance middle-income households with large families or those parents who need to travel extensively everyday will be more affected than small families or those who stay within the vicinity say, 20km from their workplace. The CPI is just a weighted average!! It is fair if I say that personal expenses inflation is a better barometer

In that case, I believe that rise in expenditure on food, fuel and transport is definitely surpassing 3% every year. This is because subsidies on fuel, flour, sugar, rice and other necessities have been cut. Let’s not forget that we do not just consume flour, sugar, prawn, fish etc in its raw form but also in value-added items. Food that we consume in fine restaurants or even coffee shops are levied at market price but is not captured by CPI. Transport which carries the weight of 15.9% does not consider the ‘actual price’ of the cars when they are hire-purchased. Prices of construction materials such as cements and clinkers are price controlled, but the prices of house and rental is subjected to market force which is not regulated. Also, surprisingly mobile downloads and phone bills are not included in the communication category although they are integral part of our life

In a nutshell, price level will continue to increase and having a fixed return for a predetermined period is a BIG NO NO from me. If I were given an option, I would rather engage in investment like unit trusts that carry very little risks and yet potentially yield much better return. Let’s invest to beat the inflation

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