Insurance is the transfer of risk from one party to another in exchange for the payment of a premium. The premium, in turn, is invested and used to pay out future claims and to operate the insurance company. In short, insurance companies are engaged in two primary revenue streams:
1. the assumption of other people's risk in exchange for money/premiums.
2. the management of such premiums (asset management).
What should investors look for when investing in insurance companies?
As with traditional metrics of investing stocks, there are some things that investors should look at while investing in insurance companies.
The first and foremost thing would be look at is its business model. As mentioned above it all depends on how well the company is selling its premiums and how well it manages such premiums.A critical piece of an insurance company's operations is to ensure that it always has enough capital to manage all the risk it has assumed.
Premium growth - Premium is the life-line of any insuring company’s growth. Premium growth is so important that commissions paid are generally the largest expense after premiums paid.
Credit rating. All insurance companies have a credit rating which reflects a third parties assessment of their ability to pay policies as they become due. The higher the credit rating the better.
Investment income. Money is made mostly through investment income. Investors have to watch out for, how well the insurance companies manage the investment income and what they are investing in and whether they are engaging in any hedging strategies.
Hence, insurance companies satisfying the above criteria and with good fundamentals can be considered for investing. Investors should look at the business side of the insurance companies and good distribution network. For those looking to invest in such insurance companies, you should keep an eye on Lloyds of London , where there is a lot of information on movements within the insurance industry.