-profits if the total insurance paid to customers is lower tha | Groww Digest
-profits if the total insurance paid to customers is lower than total amount collected as premiums – this is called underwriting profit
-profits from investing the amount collected (float) – this is called investment income
You’d be surprised to know this:
In most years, many insurance companies don’t make any underwriting profits – they have underwriting losses.
Investment income becomes the main source of earnings for them.
In some bad years, the company may make overall losses instead of profits.
Underwriting profit/loss and float are only two vital metrics. There are more.
If you’re planning to invest in insurance company stocks, it is good to know more about how insurance companies actually work.
Research more.
Check before taking insurance
But what about insurance takers? What if you are taking insurance?
Yes, even in that case, knowing what is written above helps.
Insurance comes in all forms.
Life, health, car, home, travel – these, you already know about.
But there’s a lot more.
Property. Loan repayment. Electronic devices. Watches. Paintings. Sculptures. You name it.
Actors have their faces insured. Singers have their vocal cords insured. Sports persons have their arms and legs insured.
In each case, the insurance company comes up with a premium amount that they think will be the right amount.
They like giving insurance to people who are less likely to ask for the insurance amount.
This is why:
-if you are a non-smoker, you health insurance premium is lower
-if you own a sports bike (instead of a similar price car), the premium is higher
-if you work in a dangerous profession (like oil rig engineer), the life insurance premium is higher (compared to a software engineer)
The insurance industry is heavily regulated. Insurance companies can’t do whatever they wish to.
The banking system has RBI and the stock markets have SEBI, the insurance industry has IRDAI.
Insurance Regulator and Development Authority of India.
There are strict rules about where insurance companies can invest the float.
There are regulations about what information they have to reveal to the public – mandatorily.
One of the main things you should check – no matter which insurance you are buying – is the claim settlement ratio.
Claim settlement ratio: the percentage of insurance claims the company has paid (compared to total claims received).
A claim settlement ratio of 98% means the company paid the insurance amount in 98% of the total insurance requests/claims they got.
This is a valid metric for every kind of insurance – life, medical, car, etc.
Besides the claim settlement ratio, in each kind of insurance, there are different things to check. You’ll have to research that.
Why so complicated?
Insurance is almost never very simple.
Example:
You might have taken a Rs 10 lakh worth of medical insurance. Does this mean everything under Rs 10 lakh will be covered if you fall sick?
No, there are limits.
There is a limit to the amount that can be spent per day on room rent, on food, on medicines, on treatments, on tests, etc.
Many things might not even be covered at all.
The list can be long.
It takes some time. But it really is worth the effort.
Do research carefully before buying insurance – not just medical insurance or life insurance, but any insurance.
Why is it so complicated?
The answer itself is complicated.
But in short, because people try to take wrong advantage of insurance.
So to limit their chance of being scammed by insurance-takers, companies put in all sorts of clauses and terms.
Of course, that isn’t to say insurance companies are clean.
Many companies try to scam their customers too – using complicated language.
By the way, the example given above – of John Darwin?
That doesn’t end there.
His wife claimed the insurance amount.
A few years later, it was discovered that John didn’t die.
He was in fact living in the same house. He faked his death so his wife could claim insurance.
They both lived together for a few years and then moved to another country.
