Strategies for Capitalizing on the Thriving Insurance Sector
The insurance sector, a cornerstone of the global economy, plays a crucial yet often overlooked role in our contemporary world. From everyday necessities like food and communication to advanced technologies such as offshore oil rigs and satellite launches, insurance touches nearly every aspect of economic activity.
Most individuals are familiar with basic insurance forms, such as car or home insurance, which are legal requirements in countries like the UK. Many banks, for instance, demand home insurance before lending money on properties. These examples highlight insurance's role in facilitating economic transactions. By offloading significant financial risks onto insurance companies in exchange for premiums, policyholders can mitigate potentially catastrophic financial losses.
Calculating insurance premiums requires extensive data analysis, encompassing factors ranging from local crime rates to historical weather trends. In addition to these considerations, premium calculation takes into account operational costs, broker commissions, reinsurance fees, and potential investment returns.
One of the insurance industry's key principles is accurately pricing the risks borne by insurers. For instance, insurers like Admiral (LSE: ADM) write countless policies annually, knowing that certain policies will yield large claims or losses. However, by pooling risks across numerous customers, the probability of substantial losses is distributively managed, enabling insurers to meet claims and maintain profitability when they arise.
The oil and gas sector exemplifies this risk management strategy. Giant oil rigs in the North Sea, cargo ships transporting goods from China, rockets carrying satellites into space, and cranes constructing infrastructure all benefit from offloading their risks to third-party insurers. Without this insurance, these industries would struggle to maintain adequate cash reserves to cover potential liabilities resulting from disasters.
BP learned this lesson the hard way in the aftermath of the Deepwater Horizon oil spill. In an attempt to reduce costs, the company self-insured its drilling activities in the Gulf of Mexico. Following the disaster, the ultimate cost of clean-up efforts and compensation to victims amounted to approximately $65 billion. Proper insurance policies could have helped BP mitigate some of this risk.
Such an enormous sum would have been a heavy burden even for the largest insurers. This is where reinsurance and retrocession insurance step in, spreading risk across the insurance industry. For instance, an insurer might reinsure $80 million of the $100 million in annual premiums for a policy, with the remaining risk shared among multiple insurance companies.
A significant metric in the insurance industry is the combined ratio, which provides valuable insights into a company's performance. Essentially, this ratio demonstrates whether premium income exceeds claim payouts and operating costs. If premiums surpass expenses, the combined ratio falls below 100%, signifying profitability for the insurer. Conversely, if claim payouts and operational costs exceed premiums, the combined ratio extends beyond 100%, indicating that the insurer may be facing financial difficulties. Despite this, many insurance companies routinely report combined ratios above 100%, especially during periods of volatility and unpredictability.
Besides the four main sectors—life insurance, property and casualty (P&C) insurance, health insurance, and reinsurance—the P&C market is the one most consumers encounter in their daily lives. P&C encompasses car, home, business, and specialized risks such as marine, aviation, energy, and political risk insurance, requiring expert underwriting. Of the estimated $7.7 trillion in gross written premiums the industry is projected to write in 2025, roughly 40% will come from life insurance, around 10% from reinsurance, 20% from health insurance (with two-thirds stemming from the US), and the remainder from P&C.
In terms of global market size, the US leads the way, accounting for roughly 43.7% of global premiums, followed by China (10.3%), the UK (5.4%), and Japan (5.0%). The top 20 markets together represented 91% of global premiums in 2022.
Starting in 2017, the insurance industry underwent a significant shift in profitability due to a confluence of factors. The shift began with a record $144 billion in global insured losses from catastrophic events in 2017. Major hurricanes in the US and the Caribbean were mainly responsible for these losses, which occurred after a period of relative stability in the industry. The catastrophes exposed mistakes in risk pricing, leading to substantial underwriting losses.
Most P&C and reinsurance contracts are short-tail contracts, requiring annual renegotiation. In response, insurers swiftly repriced risk starting in 2018. However, the pandemic in 2020 brought about new challenges as the world went into lockdown. Insurers then faced a triple threat: surging accidents, inflation, and low interest rates, which affected investment returns.
Rates have since increased, with U.S. P&C premium growth reaching 9.4% in 2021, 9.8% in 2022, and 10.5% in 2023. The current market, often referred to as a hard market, has seen insurers raise prices substantially to compensate for increasing claims costs from economic and social inflation and losses from catastrophes. These increases have been observed through 2024 and 2025, with regions at higher risk experiencing premium growth of 20% or more.
Reinsurance rates have also adapted to the changing environment, reflecting the new normal of higher catastrophe losses. Prior to the pandemic, annual insured losses from catastrophes seldom surpassed $10 billion. In 2023, according to Gallagher Re's 2025 Natural Catastrophe and Climate Report, losses reached $154 billion, and the average annual loss from natural catastrophes from 2017 to 2023 exceeded $146 billion. The ten-year average is $12 billion.
Chubb (NYSE: CB), a leading U.S. P&C insurer, has capitalized on these trends. The company's core operating profit has grown each year since 2022, driven by strong pricing and growth in commercial and consumer lines around the world. Global net written premiums increased by 10% in 2023 and 9.6% in 2024. Chubb stands out for its industry-leading P&C combined ratio, which reported a five-year average of 89.2%, in contrast to the U.S. P&C industry's average of 99.7%.
It's essential to emphasize the insurance sector's significant influence on the global economy, offering risk management solutions crucial for industries that face high financial vulnerabilities. The industry's resilience and adaptability in the face of numerous challenges—including natural disasters, economic downturns, and regulatory changes—underscore its indispensable role in maintaining economic stability.
References:[1] Aite Group. (2019). Synthesizing AI and Data Science for Insurers.[2] Deloitte. (2018). Global Artificial Intelligence (AI) Market Report 2018.[3] Reuters. (2020). Deepwater Horizon disaster: Gulf of Mexico oil spill timeline.[4] McKinsey & Company. (2020). How sophisticated insurers are outperforming their peers.[5] Swiss Re. (2021). Sigma Series: P&C Insurance.
- By investing their premium income in assets such as bonds or property, insurance companies can generate interest to supplement their claim payouts and meet operational costs.
- For individuals looking to grow their savings, investing in dividend-paying stocks of insurance companies can provide a steady income stream due to the companies' stable financial position and strong investment practices.
- Businesses that face significant financial risks, like those in the oil and gas sector, often turn to insurance to protect their cash reserves and maintain profitability, especially in the face of catastrophic events.
- In the finance sector, insurance companies play a vital role in risk management, calibrating their pricing strategies to account for various factors, including volatility and unpredictability in the market.
