Insurance is a unique product. We pay for it, but we hope we never actually have to use it. Yet, homes do get burgled, cars do get dented, flights do get cancelled, and pets do get sick. So, we can’t afford to ignore it. If something unfortunate like this happens to you, you’ll be thankful that you put insurance in place beforehand.
For investors, the insurance sector can be a source of lucrative opportunities, as selling the product can be very profitable. With that in mind, eToro has recently launched InsuranceWorld, a Smart Portfolio focused specifically on insurance stocks.
Protection from life’s uncertainties
Insurance is a financial product designed to safeguard us against unexpected scenarios. Insurance provides protection in the event of loss, damage, or injury. A powerful risk management tool, it is purchased by individuals, families, and businesses globally, who use it to hedge risks and protect themselves against unplanned expenses.
The concept of insurance is easy to understand. You pay a monthly or yearly fee to an insurance company to insure your life, health, car, home, etc. for a certain period of time. In return, the insurer agrees to pay out a certain amount of money if you’re unlucky and need to make a claim.
Insurance has been around for thousands of years
Insurance is nothing new — its origin can be traced back thousands of years. Believe it or not, evidence of a written policy was found engraved on an ancient Babylonian monument dating back to 1750 BC. Written code on the monument states that if a sailing merchant received a loan to fund a shipment, he would pay the lender an additional sum in exchange for the lender’s guarantee to cancel the loan should the shipment be lost or stolen at sea.
Insurance as we know it, however, can be traced back to the Great Fire of London, which occurred in the year 1666. After the fire destroyed more than 13,000 homes across the city, a man named Nicholas Barbon launched the first insurance company. Located in a small office behind London’s stock market, it was known as the “Insurance Office,” and offered insurance for buildings.
The insurance industry today
Since then, the insurance industry has come a long way.
Today, companies offer a range of insurance products including:
- Life — this pays out a lump sum to your loved ones upon your death.
- Health — this provides cover if you need private medical treatment.
- Income — this covers you if you are sick or injured and cannot work.
- Home — this provides cover if your house is damaged.
- Contents — this covers loss or damage to items in your home.
- Car — this provides cover if you are involved in a car accident.
- Travel — this protects you if something goes wrong while you are travelling.
- Pet — this provides cover if your pet needs an operation or diagnostic tests.
Some companies specialise in a certain area of insurance such as life or travel insurance. Others take a more comprehensive approach, offering a wide range of different products for their customers.
Then, there are companies that offer what is known as “reinsurance.” This is essentially insurance for insurance companies. These companies provide protection for traditional insurers by taking on some of their risk.
There are also companies that specialise in “InsurTech” solutions. InsurTech refers to technological innovations designed to increase the efficiency of the insurance industry. Across the world today, InsurTech is seeing rapid adoption as insurers look to streamline processes and cut costs.
Why insurance stocks can be good long-term investments
From an investment point of view, there’s a lot to like about insurance companies.
For a start, the insurance model is typically very profitable. Insurers take fees or “‘premiums” from each customer on a regular basis. Yet, customers rarely make claims. This means that the insurers can build up significant levels of excess capital (as long as they ensure that their premiums accurately reflect the risks of each policy). They can then reinvest this excess cash to generate further returns.
It is also a relatively stable business model. In a recession, people often cut back on luxuries such as new clothes, electronics, and holidays. But they don’t cut back on home insurance, health insurance, and car insurance as the financial ramifications could be disastrous. So, insurers’ earnings are not correlated to the economy. Meanwhile, insurers are not allowed to take big risks with customers’ capital due to regulations such as the EU’s Solvency II directive. This kind of regulation states that insurers must hold a certain amount of capital in order to ensure the adequate protection of customers. Thanks to this strict regulation, you rarely see insurers becoming insolvent.
In addition, many insurers reward their shareholders with dividends. These are cash payments made from company profits, and the yields can be quite generous. This means that investors potentially have two sources of return.
Finally, the world’s developing countries offer a source of growth. In countries such as China, India, and South Africa, only a small proportion of the population have insurance in place today. So, companies that operate in these countries, such as China’s Ping An Insurance and the UK’s Prudential — which is focused solely on Asia and Africa — are well-placed to grow their businesses in the years ahead.
Warren Buffett, the billionaire investor — widely acclaimed for his mastery of value investing — leveraged the advantages of the insurance business model through his initial investment in GEICO, the largest insurance company in the US. He demonstrated sharp investment acumen by utilising the “float” to make prudent investments, which eventually led to the creation of one of the most successful holding companies worldwide — Berkshire Hathaway.
Having been involved in the industry for over five decades, Buffett’s company now owns approximately 70 domestic and international insurance companies that offer a range of services such as life, accident, health, property, and casualty insurance. Moreover, Buffett’s recent $11.6 billion acquisition of insurer Alleghany suggests his unwavering optimism towards the industry.
One-click access to a basket of top insurance stocks
To help investors gain exposure to the insurance industry, eToro has launched the InsuranceWorld Smart Portfolio. This is a diversified investment product that is focused on insurance stocks.
Via the InsuranceWorld Smart Portfolio, eToro customers can invest in some of the biggest names in the insurance world, including the likes of AXA, Allianz, UnitedHealth, and Zurich Insurance.
For more information on this Smart Portfolio, click here.
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