How to Analyse Insurance Companies: Key Metrics and Business Model!

Insurance companies play a critical role in financial markets by managing risk and providing protection against uncertainty. Unlike typical businesses that sell goods or services, insurers sell policies, collect premiums, and pay claims when required. Their earnings come not only from underwriting but also from investing the premiums they hold. To analyse such companies, it’s essential to understand how their business model works, and which financial metrics matter most.

The Business Model of Insurance Companies

At the core, insurers collect premiums from policyholders in exchange for risk coverage. The pool of premiums collected is used to pay out claims, cover expenses, and invest in financial markets. The business model revolves around three key components:

1. Underwriting – Assessing and pricing risk appropriately when issuing policies.
2. Claims Management – Ensuring timely and fair claim settlements without excessive losses.
3. Investment Income – Since premiums are received upfront, insurers invest this “float” in bonds, equities, and other assets to generate returns.

The balance between underwriting profitability and investment returns determines long-term success.

Key Metrics to Analyse Insurance Companies

Combined Ratio

This is the most important measure of underwriting performance. It is the sum of the loss ratio (claims paid vs. premiums earned) and expense ratio (operating costs vs. premiums). A combined ratio below 100% means the company is profitable from underwriting alone.

Loss Ratio

Shows how much of the premiums collected are paid out as claims. A consistently high loss ratio signals poor risk management, while a very low one may suggest overpriced policies that could reduce competitiveness.

Expense Ratio

Measures efficiency in managing administrative and operating costs. Lower expense ratios indicate better cost control.

Embedded Value (EV) and Value of New Business (VNB)

For life insurers, EV reflects the present value of future profits plus net assets. VNB measures profitability of new policies sold in a year. Higher EV growth and strong VNB margins are positive indicators.

Investment Income

A major earnings driver, especially for life insurers. An insurer’s ability to generate stable returns from its portfolio is crucial during periods of high claims.

Solvency Ratio

Indicates financial strength and the ability to meet policyholder obligations. Regulators mandate minimum solvency ratios to ensure safety.

Conclusion

Analysing insurance companies requires a different lens compared to traditional businesses. Investors must look at underwriting discipline, claims experience, investment performance, and solvency. A well-run insurer balances profitability with prudence, ensuring long-term growth and trust. Understanding these metrics helps investors evaluate which companies are better positioned to weather risks and deliver sustainable returns.