How to analyse general insurance companies?

A general insurer safeguards the insured from any uncertainties that arise due to unforeseen events, such as health problems, accidents and natural calamities. ICICI Lombard and New India Assurance are the only listed general insurers right now, that is until Star Health joins the list whose IPO opened on November 30, 2021. Maybe this is a right time to know some key metrics that will help you analyse and assess general insurance companies.

The business model
Unlike life insurers, general insurers do not make money from the net difference between the premiums received and claims paid, as in most cases claims are higher than what they receive as premiums. They are highly dependent on investment income generated in the form of dividends, interest, etc.

Key metrics

Key metrics used in the general insurance industry are as follows:

Gross written premium: The total amount received as the premium for the insurance policies issued. The higher the total premium, the better it is.

Net premium: This is the total premium less the premium 'ceded' to a reinsurer or another insurer plus the premium accepted from another insurer. A general insurer has to buy reinsurance from companies, like GIC Re, for at least 5 per cent of its policies, as mandated by the insurance regulator, IRDA. This helps in lowering the general insurer's risk. The premium paid for this has to be deducted from the total premium. Also, insurers transfer some of their risk to other insurers and pay a premium for it or they can take on some risk from other insurers and get paid.

Net premium earned: This is the net premium less safety reserves. A higher net premium earned means higher earnings for the insurer.

Net incurred claims: These are claims incurred in a specific period after adjusting for those paid by the reinsurer. High incurred claims could lead to underwriting losses.

Combined ratio: This tells how much a general insurer is paying in claims and expenses as compared to the premiums earned. A ratio above 100 per cent means underwriting losses, i.e., the company is paying more in claims and expenses than the premiums it is collecting.

Solvency ratio: This is a measure used to test the solvency of the insurer in the worst-case scenario, i.e., all the insurance claims materialise at once. The regulator has mandated it to be at least 150 per cent.

Expense of management to gross direct premium: The ratio of expenses incurred by the management to the gross premium received. This expense includes direct commissions paid and operating expenses related to business.

Expense of management to net direct premium: The ratio of expenses incurred by the management to the net premium received. This expense includes direct commissions paid and operating expenses related to business.

Incurred-claims ratio: The ratio of claims incurred to the net premium earned. Incurred claims are a sum of the claims paid and the claims due during the year. A low incurred-claims ratio is desirable.

Where can you get this data? In the NL (non-life) forms of these respective companies. All general insurance companies are legally obligated to disclose these data to the public on a quarterly basis.

You can also read this article to know how to analyse life insurance companies