How Market Size Affects the Costs of Financial Services

When the principle is applied to just about any market sector really, it can go both ways in that the size of the market can affect the costs of the product or service negatively or positively. In the financial sector however the latter seems to be true as opposed to the former. Market size affects the costs of financial services positively in that the bigger the market and the more people there are to charge money for the services, the less each of those consumers has to pay.

You can apply this principle to any isolated sector of the financial services industry, from banking to insurance. If we take a look at the banking sector for example, banks make quite a bit of their money through charging bank fees on their services and a lot of their profits come through charging interest on the money they loan out to their debtors. They love it when they have millions of clients because this means they can lower the fees charged to each client while they themselves still manage to make insane amounts of profits.

The same can be said about the insurance industry, which is why some of the biggest insurance companies which operate across international borders as multinationals are seemingly rich enough to be able to go all the way and sponsor some of the biggest football clubs in the world, for example. I mean it’s no secret that insurance companies use what is essentially capital in the form of the premiums all of their clients pay to invest and grow that money, while they facilitate the payouts as required by those of their clients who file claims. Whether they invest in the stock markets or if they invest in other financial instruments, the bottom line is that the profits they make are directly dependent on the number of clients they have and the subsequent capital they have access to with which to invest.

This is a great indicator for picking out an insurer, which is perhaps something consumers in bigger markets like Western Canada enjoy over the likes of us over here in little old Aberdeen. In particular, renters insurance would perhaps make for a small market over here, but in the western region of the likes of Canada it’s a huge market, which means the renters seeking insurance in that part of the world would enjoy paying a lot less than what we’d pay over here in premiums.

So if you are indeed on the market for an insurer from whom you want to get good coverage at the most competitive prices, a good place to look is at the size of their market share. An insurer with more clients is one which simply makes more money and so is more likely to pay out more in claims, while at the same time they’re able to keep their premiums low because of the size of their client pool.

So size definitely matters in the financial industry and it certainly matters in the insurance sector of the financial industry.

Got something to say? Go for it!