General Insurance Cycles and Catastrophes.

Understanding the ups and downs of general insurance business

2 min readPublished
A traditional wooden boat secured on a dry Indian riverbank under a sky transitioning from sunny to stormy monsoon clouds.
Quiet Years & Sudden Storms

Just like a boat tied on a dry riverbed waiting for the monsoon, general insurance companies operate in cycles of calm and catastrophe.

The story

Imagine running a tea stall in a town prone to floods. Most days, business is steady, but when the river overflows, you're hit with unexpected expenses. General insurance works similarly, covering risks like floods, accidents, and theft.

General insurance covers pure risks like fire, theft, and accidents. Unlike life insurance or investments, it doesn't offer returns.

Motor Third-Party insurance is mandatory, and its pricing cycle significantly affects the industry's profitability. When premiums are low, insurers struggle to make a profit.

Health insurance is another challenge due to medical inflation, which pushes claims higher every year. Insurers must balance premiums with the rising costs of medical care.

Catastrophic events like floods or earthquakes cause sudden spikes in claims, disrupting insurers' profitability. These events can lead to heavy losses, forcing insurers to reprice their policies.

Analogy

Unpredictable neighbour

Just like a neighbour who offers different prices for your old gold jewellery daily, general insurance profitability can swing wildly due to catastrophe events and pricing cycles. Sometimes the neighbour is generous; other times, they're stingy. You must understand these moods to make informed decisions.

Why this matters

Understanding general insurance cycles and catastrophe risks can help you make informed decisions about your investments in insurance companies. It's crucial to assess how these factors impact their profitability and long-term sustainability.

Lock it in

Where people go wrong

  1. Confusing general insurance with investmentsGeneral insurance is purely for risk coverage, not investments.
  2. Ignoring the combined ratioThe combined ratio is a crucial metric to assess an insurer's profitability.
  3. Assuming past low CAT losses mean future safetyCatastrophic events are unpredictable and can occur anytime, regardless of past experiences.
Combined Ratio.Efficiency
Combined Ratio = (Claims + Expenses) / Premiums. If it's over 100%, the insurer is losing money on underwriting.
If you only remember three things

  1. General insurance covers pure risks, not investments.

  2. Motor TP pricing cycle affects industry profitability.

  3. Catastrophic events can disrupt insurers' profitability.

Recency bias makes investors ignore low-probability catastrophe risks after a few quiet years.
Shekar
Amit
We haven't had a major flood in years. Let's sell our insurance stocks, they are doing nothing.