By Admin 
The insurance sector has long been considered a stable and reliable investment option in the stock market. When the premium collection or policy sales figures of an insurance company increase rapidly, the attention of investors also goes towards it. But just increasing the premium does not mean that the company is earning good profits. Insurance business is a little different from other businesses. Here the company first takes premium from the customers and later pays the claims. In such a situation, to understand the real strength of an insurance company, it is important to look not only at the premium but also at many other figures.
Do not take decision just by looking at premium growth
Insurance companies often present the increase in their premium collections as a major achievement. In life insurance companies, new business premium and renewal premium are monitored, while in general insurance companies, gross written premium is monitored. However, sometimes companies sell policies at lower prices or pay higher commissions to attract more customers. This may make the initial figures look good, but if the burden of claims increases in the future, profits may be affected.
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Embedded value shows real power
Embedded value is considered an important parameter while evaluating life insurance companies. It tells how much future benefit is expected from the company’s existing policies. Since life insurance policies last for many years, a policy sold today can become a source of income in the years to come. Embedded value helps investors understand how strong a foundation the company has for the future.
Keep an eye on VNB and VNB margin also
VNB i.e. Value of New Business is considered an important indicator in the insurance sector. It tells how much future benefit the company can get from newly sold policies. If a company has a good VNB margin, it means that it is not only selling more policies, but is also selling profitable policies. This signal is very important for investors.
Are customers staying with the company or not?
Customer retention is very important in the insurance business. This is measured by persistence ratio. This figure tells how many customers keep paying the premium on time after purchasing the policy. If this ratio is high then it means that customers are trusting the company. A low ratio may be a sign of mis-selling or poor customer service.
Combined ratio required for general insurance companies
If you want to invest in a general insurance company then definitely check the combined ratio. It combines claims and expenses to tell whether the company is making profits from underwriting or not. A combined ratio less than 100 percent is considered good. This means that the company is earning more from premiums and reducing expenses.
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Solvency ratio is also very important
Insurance business runs on trust. Customers pay the premium in the hope that the company will pay their claim if needed. Solvency ratio tells whether the company has enough capital to meet future responsibilities or not. Companies with strong solvency are generally considered safer.
See also Products and distribution network
Not all insurance products are equally beneficial. In some policies the margin is higher, while in others it is lower. Apart from this, how the company is reaching out to the customers is also important. Strong agent network, bank partnerships and digital platforms help in the long-term growth of the company.
Follow this checklist before investing
While investing in insurance companies, do not take the decision just by looking at the premium growth. Also analyze indicators like embedded value, VNB, VNB margin, persistence ratio, combined ratio, solvency ratio and product portfolio.