Types of insurers
Like most industries, insurance companies can be divided into subcategories, so here’s a quick explanation of the main types of insurers and what they do:
- Property and casualty: Property and casualty (P&C) insurers write insurance policies that cover property damage and provide liability protection. Auto and homeowners insurance are two common forms. Renters insurance and pet insurance are two other common examples. P&C insurance is typically the easiest type to understand and analyze, especially for beginners.
- Life: Life insurance provides money to a designated beneficiary upon the death of the insured person.
- Health: As the name implies, health insurance helps cover healthcare expenses for the insured. Health insurance products vary significantly in type and scope, and they have their own unique risks, particularly in terms of regulatory issues.
- Specialty: Specialty insurance, also known as the excess and surplus (E&S) lines, includes anything that cannot be covered by a standard insurance company. This includes difficult-to-assess situations and high-risk versions of other types of insurance. For example, liability insurance for a demolition business could fall under the category of specialty insurance.
- Reinsurance: Insurance for insurance companies. To protect themselves against catastrophic losses, insurers often purchase reinsurance policies that cover losses above a certain threshold. This can be extremely important in the event of natural disasters or mass-casualty incidents.
Benefits and risks of investing in insurance stocks
Insurance stocks can be a great way to build wealth over time without excessive risk. Since insurance companies generate revenue not only from profitable underwriting but also from investments, they can be excellent total return investments. This is especially true with companies like Markel, which branches out into stock and venture capital investing with its float.
Of course, there's no such thing as a risk-free stock investment, and insurance stocks aren't an exception. By nature, insurance has an element of unpredictability -- after all, the definition of insurance is transferring risk from one party (customers) to another (the insurance company). For example, if a particularly severe natural disaster occurs, it can be potentially devastating to insurance company profits.
Future outlook for insurance companies
One big trend we're seeing in insurance is the rapid evolution in technology. Telematics in the auto insurance industry is a good example. You may be familiar with the devices that some insurance companies send to their customers, which plug directly into your vehicle and record driving behavior and relevant data. Not only can using a telematics device help you qualify for a discount if you're a safe driver, but it can also provide valuable driver data to help the insurance company underwrite more efficiently.
We're also seeing a big trend of artificial intelligence (AI) being incorporated into insurance businesses. AI can be used to help process claims, detect fraud, approve new policies, and improve efficiency.
A recession-resistant business with excellent return potential
Insurance companies have highly attractive economics. Other people give them money to hold until a claim needs to be paid, and the insurer can invest it for its own benefit in the meantime. This is why Warren Buffett is so attracted to insurance and chose it as the backbone of Berkshire Hathaway’s empire.
Insurance is a recession-resistant business as well. During tough times, people still need to maintain auto and homeowners coverage, for example. In short, insurance is a business that can produce excellent long-term returns without too much volatility.
