An insurance company acts as a risk manager as well as an investment manager.
The main source of operating income, Premium collection, remains mostly volatile. Unless legally enforced, insurance premium does not show up in household bills. If unavoidable, the lowest cost is a key consideration. This results in hyper-competition, liberal underwriting, and a lack of sufficient risk-adjusted premiums.
The other major source of income is net income due to investment of the float (upfront collected premium). For this money pool, Liquidity remains the top priority to honor the ever-growing and scheduled future liabilities. Hence, most of this is invested in safe instruments such as fixed income securities, which are historically known for single-digit returns.
Property and Casualty (P&C) insurance: Policy coverage is short term but claims are lumpy. Liabilities, both the amount and timing of the cash expense, are unknown as they depend upon unpredictable events such as weather, and accident. In an extremely negative event scenario, this business is a likely candidate for bankruptcy.
Life and Health insurance: Policy coverage is long term and claims are predictable. The amount and timing of the cash expense are certain when compared to P&C business. However, a low-interest environment is a major risk for this business. To mitigate the same and generate enough returns to cover the liabilities, the investment manager ends up taking risks of duration and leverage. Long-term liabilities involve extensive discretion from management for various assumptions. This leaves ample room for management to window dress the PnL on an ongoing basis. On top of all this, the star investment manager (Buffet’s replica) will always be looking for green pastures.
Considering the sources of income, nature of expenses/liabilities, and Indian context, the industry is not expected (personal opinion) to create exponential wealth.
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