Investing in insurance companies is not for the faint of heart. Because the very nature of insurance involves transferring risk from one party to another, investing in these businesses requires a careful eye and well thought out approach. In addition to the type of investigating that an investor would do in any type of company, they must also take a look at a few of the aspects that make these companies unique in the business world. Insurance companies can run into trouble when the payout that they are giving exceeds the premiums that they are taking in. During natural disasters, such companies can take a real beating.
Some of the things that investors should look at before handing over their hard-earned money include premium growth. Basically, selling new premiums is the lifeblood of an insurance company. If they are no longer selling premiums, the company will no longer grow and may actually shrink if the premiums that it is paying out exceed revenue. A company that is experiencing good premium growth should be put on the short list of possible investments. An investor should also consider the company’s losses versus its revenue. This ratio will give a good indication as to the overall health of the company.
Some such companies make most of their money from investments while the premiums they sell are basically loss leaders. If a company’s investment income is exceedingly high then it is likely that they are not selling many premiums. This is a red flag for possible investors. It is also worthwhile to take a look at what kind of investments the company is making. If the company is not willing to disclose where their place in their investments, it may be best to move along and consider a different company.
A prudent investor should also investigate an insurance company’s capital adequacy. Insurance companies are required to set aside a minimum amount of money in order to cover future claims payouts. If the amount of money being set aside is exceedingly high, it is likely that the company is expecting to have to pay out a lot in the near future or they are putting money into reserves rather than focusing on expansion. An insurance company’s credit rating should also be examined because this is a good indication of their ability to cover policies in the future. As with any investment, insurance companies should be carefully looked at before an investor takes the plunge.