How to Analyse an Insurance Company in India – Beginner’s Guide to Valuation & Risk
A step-by-step guide to analysing Indian insurance stocks. Understand float, combined ratio, solvency, and how to value non-life insurance companies.
1. Why Insurance Companies Are Hard to Analyse
At first glance, insurance may seem like just another financial business — collect premiums, pay claims, make a profit. But in reality, it works very differently from most companies.
Let’s break that down.
1.1 How Insurance Works (Life vs Non-Life)
Insurance companies don’t deliver a product or service right away.
They collect money upfront — called a premium — and make a promise: if a specific event happens in the future, they’ll pay out a claim.
That event could be:
In life insurance: the death of the policyholder or maturity of a long-term policy
In non-life (general) insurance: a car accident, a medical emergency, property damage, or a crop loss
In both cases, there's a time gap between collecting money and paying out costs.
That gap creates something unique to insurers: the float.
1.2 What Is the Float?
The float is the money insurance companies hold between collecting premiums and paying claims.
This money doesn’t sit idle. It’s invested — often in government bonds, corporate debt, or equities.
If managed well, the float can generate strong investment income.
If managed poorly, it can magnify losses — especially when claims spike.
In simple terms: The longer and safer the float, the more money the insurer can make.
1.3 Why Insurance Profits Can Be Misleading
Unlike most businesses, high revenue doesn’t always mean good performance.
Here’s why:
Premiums can be underpriced to chase growth — leading to big future claims
Profits may come from investments, not from the core insurance business
Claims may be delayed — and not reported until months or years later (called IBNR: Incurred But Not Reported)
Accounting rules often let insurers spread recognition of premiums and claims over multiple years
That’s why you can’t judge an insurance company by just one quarter or even one year.
1.4 What Makes Insurance Companies Tricky to Analyse?
You need to evaluate two separate engines:
Underwriting Quality — how well the company prices and selects risks
Investment Strategy — how smartly it uses the float to earn returns
You also need to understand some industry-specific metrics:
Combined Ratio: % of premium used to pay claims and expenses (lower is better)
Loss Ratio: % of premium paid out as claims
Solvency Ratio: Measures capital buffer — ability to withstand large claims
IBNR: Claims expected but not yet reported
Reserving Triangle: Tracks how claim estimates change over time for a given year
These metrics matter more than just revenue or profit growth — especially in non-life insurance.
⚠️ A Note on This Guide
This article focuses specifically on non-life insurance companies — also called general insurers. These include businesses that sell:
Health insurance
Motor insurance
Fire, marine, travel, or crop policies
Life insurers work very differently — they deal with long-term contracts, actuarial assumptions, and persistency. Those require a different analysis altogether.
So if you want to understand general insurers like ICICI Lombard, HDFC Ergo, or New India Assurance, you’re in the right place.
2. How Insurance Companies Make Money
To analyze an insurance company, you first need to understand how it earns profits.
It’s not like a company selling phones or running hotels.
Insurance companies collect money before they provide a service — and if the service (a claim) is never needed, they keep the money.
They make money in two main ways:
2.1 Underwriting Profit: The Core Insurance Business
Underwriting is the process of assessing risk and setting the right price for it.
For example: charging ₹10,000 for a motor insurance policy if they expect, on average, to pay only ₹7,000 in claims and costs.
Here’s how it works:
The company collects premiums from policyholders.
It pays claims when covered events happen.
It also spends money on salaries, agents, tech, and admin.
If claims + expenses are less than the premium, the insurer makes a profit.
If they’re more, it takes a loss.
The key metric here is the Combined Ratio:
Combined Ratio = Claims + Operating Expenses ÷ Earned Premium
If the ratio is below 100%, underwriting is profitable.
If it’s above 100%, the company is losing money on its core insurance operations.
2.2 Investment Income: Profit from the Float
Insurance companies don’t just sit on the premiums they collect.
They invest the money until claims need to be paid — this pool is called the float.
This float is usually invested in:
Government bonds (safe, steady returns)
Corporate bonds
Sometimes equities (stocks and ETFs)
Returns on this investment become a second source of profit.
Even if the company loses money on underwriting, it can still make a net profit if investment returns are strong enough.
But that comes with risk:
Equity markets can be volatile
Interest rates affect bond returns
A bad investment year can erase profits
What Does the Ideal Insurance Business Look Like?
✅ Combined ratio consistently under 100%
✅ Profits primarily from underwriting, not just investing
✅ A safe and diversified investment portfolio
✅ Steady returns without chasing high-risk bets
In summary:
Good insurers price their policies smartly, manage claims well, and invest conservatively.
Bad ones chase growth, underprice risk, and rely too much on the stock market.
3. How to Read Premium Growth (and Spot Red Flags)
When you open an insurance company’s financials, one number usually stands out: premium growth.
But not all growth is good. And not all slowdowns are bad.
Let’s understand what this number really means — and how to tell if it’s healthy.
3.1 What Are Premiums?
Premiums are the payments customers make to buy insurance.
This is the main revenue line for any insurance company.
There are a few terms you’ll see:
Gross Written Premium (GWP): Total premium collected, including any part that’s passed to other insurers (reinsurers).
Gross Direct Premium Income (GDPI): Premium collected directly from customers — usually the cleanest number to track.
Net Earned Premium (NEP): The portion of premium that the company actually earns in a given period, after accounting for time and reinsurance.
Most analysts focus on GDPI to judge growth — but you need to dig deeper.
3.2 What Healthy Premium Growth Looks Like
✅ Steady growth over time
Are premiums growing year after year?
Not just one good quarter — look for consistency.
✅ Growing in the right segments
Is growth coming from retail health, private cars, or fire insurance?
Or is it coming mostly from volatile areas like crop insurance or group health?
✅ Good customer selection
Is the company targeting customers who are likely to claim often?
Or is it building a balanced, low-claims portfolio?
3.3 What to Watch Out For
🚩 Fast growth, but rising claims or losses
Some insurers chase growth by underpricing — charging less than they should.
This can look good initially, but leads to high future claims and losses.
🚩 Too much dependence on one product
If 60% of premiums come from one segment (e.g. crop or group health), the business becomes risky.
🚩 Accounting noise
Some long-term policies (like 3-year motor insurance) are now accounted for differently under IRDAI rules (1/n method).
This can make quarterly growth numbers hard to compare — check footnotes or adjusted figures.
3.4 Bonus Insight: Compare with the Industry
If the entire insurance industry grows 12%, and the company grows just 2%, it’s falling behind.
If the company grows 20% while the industry grows 5%, ask why — is it smart growth or risky underwriting?
Premium growth is important — but only when it’s profitable, sustainable, and well-diversified.
4. How to Assess Underwriting Quality
This is where most investors — even professionals — go wrong.
Underwriting is the core engine of an insurance company. It’s the process of deciding:
What risk to cover
How much to charge
Who to insure — and who to avoid
Great insurers don’t just grow premiums.
They pick the right customers, price correctly, and avoid big future losses.
4.1 The Most Important Metric: Combined Ratio
The combined ratio tells you whether the company is profitable at its core.
Combined Ratio = (Claims + Operating Expenses) ÷ Earned Premium
Here’s how to read it:
< 100% → underwriting profit
> 100% → underwriting loss
95–98% → considered healthy for most Indian insurers
✅ Lower is better. It means the insurer is collecting more than it’s paying out.
4.2 Dig Deeper: Loss Ratio and Expense Ratio
The combined ratio has two parts:
Term Meaning Loss Ratio How much of the premium goes to claims Expense Ratio How much is spent on running the business
Example: If an insurer collects ₹100, pays ₹70 in claims, and spends ₹20 on operations, the combined ratio is 90% — a healthy number.
4.3 Look at Segment-Level Ratios
Underwriting strength can vary by product line:
Motor (private car, two-wheeler): usually stable
Health (retail): growing and profitable
Crop: volatile, politically sensitive
Group Health or Credit-Linked Insurance: often used by banks/NBFCs, but risky in downturns
Check if the company discloses ratios by product. The best ones do.
4.4 Reserving Tells You Even More
Some claims don’t show up immediately.
Insurers have to set aside money for future claims — this is called reserving.
Check for:
✅ Reserving triangles: Tables showing how actual claims change over time
✅ IBNR (Incurred But Not Reported): Money set aside for claims that haven’t appeared yet
✅ Redundancy in reserves: Actual claims turn out lower than expected = strong discipline
If reserves are too low, profits look good today but losses pile up later.
4.5 Final Questions to Ask
Is the combined ratio consistently below 100%?
Are claims well-managed and predictable?
Is the company improving on both risk selection and cost control?
Strong underwriting is what separates great insurers from the rest.
Without it, no amount of investment income can protect long-term profitability.
5. How to Analyse the Investment Book
When an insurance company collects premiums, it doesn’t need to pay all claims right away. Until it does, it gets to hold and invest that money — this pool is called the float.
Understanding how the insurer invests the float is key to judging its long-term profitability and risk.
5.1 Why Investment Income Matters
Insurance companies earn money in two ways: underwriting profit and investment income.
Even if underwriting breaks even (combined ratio ~100%), they can make a profit from investing the float.
That’s why investment performance can make or break an insurer’s bottom line — especially in low-margin segments like crop or group health.
5.2 Key Concepts — Explained Simply
Float: Premiums collected but not yet paid out as claims
Investment Book:The pool of all invested assets (bonds, stocks, etc.)
Investment Leverage: How large the investment book is compared to the company’s net worth
Realised Return: Actual income from interest, dividends, or sale of assets Unrealised Gain: Gains on investments that haven’t been sold yet (paper profits)
Think of the float like a savings account the company gets to use temporarily. A good insurer invests it safely and earns more than it pays out in claims.
5.3 What to Look For
✅ Stable returns across years
Are investment earnings steady even in weak market years?
Or are profits rising and falling with the stock market?
✅ High-quality assets
Most of the portfolio should be in safe instruments:
Government securities (G-Secs)
AAA-rated corporate bonds
Blue-chip equities (if allowed)
✅ Reasonable risk exposure
Small exposure to equity is fine — but 30–40% in equities or low-rated bonds is risky.
Avoid companies that are “chasing yield” (taking more risk to earn slightly higher returns).
✅ Healthy investment leverage
A ratio of 3x–4x (investment book ÷ net worth) is normal.
If leverage is much higher, losses can wipe out equity quickly in a downturn.
5.4 Red Flags
🚩 Heavy reliance on unrealised gains
These are paper profits — they vanish if markets fall.
🚩 Overexposure to equities or risky debt
Equity returns are volatile.
Low-rated bonds can default — leading to real losses.
🚩 Investment returns covering for poor underwriting
If underwriting is weak but profits look good, it’s probably due to float income — that’s not sustainable.
5.5 Bonus Insight: Match Investment Strategy to Business Model
A company with strong underwriting can afford a conservative investment strategy.
A company with weak underwriting may need to take more risk to show profits — that’s dangerous.
A well-run insurer earns from both sides — risk selection and float. That’s where long-term compounding happens.
6. How to Read Solvency, Capital, and Risk Buffers
Insurance is a promise. And in a bad year — say a flood, pandemic, or earthquake — insurers must keep that promise by paying out large claims.
Solvency tells you whether the insurer can actually do that.
6.1 What Is Solvency?
Solvency is the insurer’s financial buffer — the cushion between its available capital and the claims it may have to pay.
The key metric here is the Solvency Ratio:
Solvency Ratio = Available Capital ÷ Required Capital
In India, IRDAI (the insurance regulator) requires all insurers to maintain a minimum solvency ratio of 1.50x.
If the ratio is below 1.5x, the company may face regulatory action.
A ratio of 2x or higher is considered healthy.
6.2 Why Solvency Matters
Claims are unpredictable.
Markets are volatile.
Solvency ensures the company can survive a tough year — without defaulting on customers or raising emergency capital.
Think of it like the emergency fund of an insurance company.
6.3 What to Look For
✅ Solvency ratio consistently above 2.0x
Not just one quarter — look for a stable trend.
✅ Capital generated from profits
Is the company growing its capital by being profitable?
Or is it constantly raising funds from the market?
✅ Reinsurance usage
Smart insurers use reinsurance to reduce the capital they need to hold for high-risk claims.
Red Flags
🚩 Solvency ratio close to 1.5x
Any shock — like a natural disaster or stock market crash — can push it below safe levels.
🚩 Frequent equity dilution
If the company often raises capital, it may not be managing risk well.
🚩 Unrealised gains propping up solvency
In rising markets, paper profits boost solvency. In falling markets, they disappear.
6.4 Bonus Insight: Solvency Alone Isn’t Enough
A 2.5x solvency ratio looks great — but not if:
Underwriting is weak
Investment book is risky
Claims are highly concentrated in one product or region
You need to assess solvency alongside everything else.
7. How to Analyse Risk and Claim Shock Exposure
Insurance is a business of predicting the future — and preparing for the worst.
But no matter how careful an insurer is, unexpected events can cause big losses. These include:
Natural disasters (like floods, cyclones, earthquakes)
Sudden changes in government policy
A surge in health claims during a pandemic
That’s why understanding how an insurer manages risk is just as important as analyzing its profits.
7.1 Key Types of Risk
Catastrophic Events (CAT Risks)
Big, rare events that cause massive claims — e.g. a major flood wiping out homes and vehicles.
Product Concentration
If most of the company’s business is in one segment — like crop insurance or group health — one shock can hurt the entire book.
Geographic Risk
If a large portion of the business comes from one region (say, Maharashtra or Gujarat), a local event can create outsized losses.
Reinsurance Gaps
Insurers don’t bear all risk themselves. They pass some to reinsurers (global insurance companies). If they don’t do this well, even a single event can wipe out profits.
7.2 What to Look For
✅ Well-diversified business
No over-dependence on crop, group health, or commercial vehicles
Strong presence in stable retail segments like health or motor
✅ Balanced regional exposure
Business spread across India — not too concentrated in flood- or cyclone-prone zones
✅ Clear catastrophe protection
Look for comments about “CAT protection” or “reinsurance programs” in investor presentations
✅ Tech-driven claims systems
Companies that use technology (like AI or cloud platforms) can process and settle claims faster — reducing fraud and customer complaints
7.3 Red Flags
🚩 High claims during every major disaster
Suggests poor risk selection or lack of reinsurance
🚩 No segment-level disclosures
If the company doesn’t break down performance by product, they might be hiding problems
🚩 Heavy focus on government-linked schemes
Products like crop insurance or state health schemes can be politically driven and unpredictable
7.4 Bonus Insight: Match Risk with Outcomes
Check how the insurer performed during recent disasters:
Did they absorb losses well?
Did claims spike more than competitors?
Were solvency and profits stable?
The best insurers lose less than their market share suggests — that’s a sign of strong risk management.
8. How to Evaluate Reserving Quality and IBNR Provisions
When an accident happens, the insurer doesn’t always know about it right away.
The claim might be reported weeks or months later — or even years in complex cases.
That’s why insurance companies set aside money today for claims that haven’t happened yet — or haven’t been reported. This is called reserving.
8.1 What Is Reserving?
Reserving is the practice of estimating and saving for:
Claims that will come in the future (but haven’t yet)
Claims already known, but not fully settled
A special part of reserves is called IBNR:
Incurred But Not Reported — claims the company expects, even though they haven’t been filed yet
Reserving well means the company is planning for the future.
Under-reserving means it may be overstating profits today and setting itself up for losses later.
8.2 How to Know If Reserves Are Strong
✅ Stable IBNR trends
If the IBNR amount is jumping around every quarter, the company may not be forecasting claims accurately.
✅ Use of reserving triangles
These are tables that track how actual claims develop over time.
Few insurers disclose them — but when they do, it shows transparency and strong internal controls.
✅ Redundancy, not deficiency
If actual claims are lower than expected, that’s called redundancy.
It means the company was cautious — a good sign.
✅ Clear disclosures and footnotes
Look for details in earnings presentations or investor reports explaining reserve movements.
8.3 Red Flags
🚩 Reserves revised sharply downward later
This inflates short-term profits and hides real issues
🚩 No explanation for IBNR changes
Lack of transparency makes it hard to trust the numbers
🚩 Deficiencies in triangle analysis
If actual claims keep exceeding past estimates, the reserving process is broken
8.4 Why Reserving Matters So Much
Reserves affect everything:
Reported profit
Solvency margin
Investor trust
Future stability
An insurer that’s too aggressive on reserves looks great today — but may crash in the next claim cycle.
Look for conservatism, consistency, and clarity.
9. How to Value an Insurance Company
Valuing an insurance business is different from valuing a regular company.
Earnings can be volatile. Book value can be distorted. And reported profits often depend on investment markets and reserving assumptions.
But with the right tools, you can still figure out what a fair price looks like.
Common Valuation Methods
✅ Price-to-Book (P/B) Ratio
Simple and widely used
Useful when return on equity (ROE) is stable
Works well for insurers with consistent solvency and reserve quality
What’s a good P/B?
Depends on ROE.
A company with 18–20% ROE may trade at 3–4x book.
One with <10% ROE might deserve only 1–1.5x.
✅ Price-to-Earnings (P/E) Ratio
Best used when earnings are underwriting-driven
Be careful: investment income and reserve releases can inflate profits
Check: Are earnings stable across cycles? Are they mostly from operations?
✅ Embedded Value (EV) — Less common for non-life
Mostly used in life insurance
For general insurers, it’s rarely disclosed
But conceptually, EV = Net Worth + Value of Future Profits
What to Look For
✅ Stable and improving ROE
Consistency is more important than spikes
A rising ROE trend justifies a higher P/B multiple
✅ Profits backed by underwriting
If profits are coming from float and not core business, apply a lower multiple
✅ Clean balance sheet
No aggressive reserving, no low-rated assets, no off-balance sheet risks
✅ Industry position
Market leaders often trade at a premium
Smaller players with improving ratios can offer upside
Red Flags
🚩 High P/E with weak ROE
Signals overvaluation or market hype
🚩 Book value inflated by unrealised gains
Especially in rising markets — it may reverse in downturns
🚩 Frequent changes in accounting or reserving policy
Can distort key metrics and mislead investors
Bonus Insight: Use Relative and Absolute Benchmarks
Compare with peers in the same industry
Track valuation across cycles (pre- and post-catastrophe years)
Anchor your view around normalized ROE and underwriting quality
10. Investor Checklist: How to Analyse Any Insurance Company
You’ve gone through the details. Now here’s a quick-reference checklist to help you apply everything when analyzing a non-life insurance stock.
Use this list to cut through the noise and get to the heart of what really matters.
✅ Business Model
Are they growing premiums sustainably?
Is growth diversified across products and regions?
Are they writing policies for good risks — or just to grow?
✅ Underwriting Quality
Is the combined ratio consistently below 100%?
Are loss and expense ratios trending well?
Do they break down performance by segment (motor, health, crop, etc.)?
✅ Risk Management
Are they protected against CAT events (floods, cyclones)?
Is reinsurance strategy clearly explained?
Is there concentration in one risky segment (like crop or group health)?
✅ Reserving Discipline
Do they disclose reserving triangles and IBNR?
Is there a track record of reserve redundancy, not deficiency?
Are reserve policies stable over time?
✅ Investment Book
Are returns stable across cycles?
Is the portfolio conservative (G-Secs, AAA bonds, limited equity)?
Any overexposure to risky debt or volatile equities?
✅ Solvency and Capital Health
Is the solvency ratio >2x consistently?
Are they self-funding growth (not diluting too often)?
Do they have a buffer to absorb shocks?
✅ Valuation
Is P/B justified by long-term ROE?
Are profits driven by underwriting, not just markets?
How does valuation compare with peers and historical averages?
✅ Final Gut Check
Is this a business you’d want to own through a crisis year?
Are disclosures clean, clear, and transparent?
Does management show long-term thinking?
🧠 Pro Tip: Focus on quality, not just growth
The best insurance companies don’t just grow fast.
They grow smart, underwrite well, and compound steadily — year after year.
If you find one that checks all the boxes… hold on to it.
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