How to invest in the booming insurance market

Insurance is probably the least exciting but most crucial sector in the world. From the food we eat to the communication satellites that form the backbone of communications in our 21st-century world, the insurance industry touches every part of the global economy, and without it, we would be in a very different place.

Most people are familiar with the basics. Car insurance, for example, is a legal requirement in the UK, so anyone who drives or has driven will have some understanding of how this market works. The same applies to anyone who has bought a home with a mortgage. Banks usually require home insurance before lending on a property. These are two excellent examples of how insurance helps lubricate the global economy. In both cases, the policyholder is offloading the risk of a significant loss onto an insurance company for a small up-front payment – an insurance premium.

A significant amount of work is required to calculate insurance premiums. The premium figure is the result of hundreds or thousands of data points, looking at everything from past weather trends to crime rates in the local area. It also incorporates the cost of operating for the insurance company, broker commissions, reinsurance commissions and potential investment returns (more on that later).

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The whole concept of insurance only works if the insurer is accurately pricing the risks it is underwriting. Insurers such as Admiral (LSE: ADM) write millions of different policies every year, knowing all too well that a certain percentage of these policies will result in a significant claim or loss, such as a significant car accident involving multiple vehicles. However, because millions of different customers are contributing to the same pool, the risk of a substantial loss is spread across the portfolio. If the company has done its sums right, it should be able to meet the claims when they arise and still make a profit.

How insurers offload risk

The key principles of insurance are exactly the same for the giant oil rigs in the North Sea, the cargo ships that bring goods from China, rockets that carry satellites into space and the cranes that help build infrastructure. In all of these cases, risk can be offloaded to a third party, freeing up capital for the oil rig, cargo ship, rocket or crane owner. It would be virtually impossible for these firms to keep enough cash on hand to meet all potential liabilities in the event of a disaster.

BP found this out in the years after the Deepwater Horizon oil spill. The company had chosen to self-insure its drilling activities in the Gulf of Mexico in an effort to reduce costs. It originally budgeted around $100 million for drilling the Macondo oil well, which was expected to hold about 50 million barrels of oil. By deciding to self-insure rather than contract out the risk by acquiring insurance policies, the company would certainly save money, and had done so before. As one of the world’s largest oil and gas companies, BP knew what it was doing. But insurance is required for the unexpected, not the expected, and what happened next was unexpected. Deepwater Horizon exploded, killing 11 rig workers and kicking off the beginning of what has become the largest oil-related environmental disaster in history. The ultimate cost of the disaster to the company, including all settlements and penalties, has been pegged at roughly $65 billion. The right insurance policies could have helped BP offload some of this risk.

A total of $65 billion would have been difficult to absorb even for the largest insurers in the world. That’s where reinsurance and retrocession insurance come into play. Both types of insurance help spread the risk across the insurance industry. For example, an insurer might underwrite $100 million a year and reinsure $80 million of that risk with a reinsurer, or a panel of reinsurers. The reinsurers may then decide to keep a percentage of this risk and shift the rest onto another party, so ultimately the risk is spread across multiple companies.

A key metric in the insurance industry is the combined ratio, which gives a valuable insight into a company’s performance. A combined ratio is composed of several factors. On one side of the equation, we have costs, such as the amount of money the company is paying out in claims every year, the cost of servicing those claims and finding new customers. These are balanced against the income received from premiums. If the company is receiving more money in premiums than it is paying out in claims, the ratio of premiums to costs would be below 100%. But if the business is paying out more in claims than it’s receiving in premiums, the combined ratio would exceed 100%.

A combined ratio above 100% indicates that a company is not generating a profit from underwriting insurance. This isn’t a terminal indicator. In fact, many insurance companies can and do consistently report combined ratios more than 100%. It’s especially common in periods of significant volatility and unpredictability. Still, if a business is consistently reporting a combined ratio of more than 100%, it can indicate a lack of care and attention with underwriting.

A company’s investment portfolio can help cover underwriting losses if the combined ratio exceeds 100%. Every insurance group will have a large investment portfolio to backstop underwriting activity and provide capital for unforeseen losses. Insurers generally have to report this solvency every quarter, which shows the size of the investment portfolio compared to potential underwriting losses. Most insurance companies tend to invest in risk-free or low-risk assets such as government debt and corporate bonds. These generate a steady and predictable stream of income every year without much risk of significant capital loss. The income also helps paper over the cracks when combined ratios exceed 100%. An investment portfolio today would be expected to achieve a return of about 4% to 5% a year. That means the company can have a combined ratio of 105%, losing money on the underwriting side of the business but making money from its investments, and still record an overall profit.

A big shift in the insurance sector

There are four main sectors in the global insurance market. There’s life insurance (which deserves its own feature), property and casualty (P&C) insurance, health insurance and reinsurance. The P&C market is the one most consumers will be familiar with. P&C covers car, home, business and other day-to-day risks as well as speciality risks, such as marine, aviation, energy and political risk insurance, often requiring specialised underwriting expertise. Of the estimated $7.7 trillion in gross written premiums (GWP) the industry is expected to write in 2025, about 40% will come from life insurance, roughly 10% from reinsurance, 20% from health (two-thirds of which will come from the US) and the balance in P&C.

Perhaps unsurprisingly, the US is the world’s largest insurance market. Based on 2022 total premium volume data from Swiss Re, the US was the world’s largest insurance market by a substantial margin, accounting for 43.7% of global premiums. China sat in second position with a 10.3% share, followed by the UK (5.4%), Japan (5.0%) and France (3.9%). The top 20 markets collectively represented 91% of global premiums in 2022.

Over the past five years, the insurance industry has undergone one of the most significant shifts in profitability seen in recent memory, driven by a confluence of factors. The shift really began in 2017, when global insured losses from catastrophic events hit $144 billion, the highest-ever recorded in a single year. The biggest losses came from three hurricanes – Harvey, Irma and Maria – that struck the US and the Caribbean in quick succession. The losses occurred after a period of relative stability for the industry, which had begun to take that stability for granted. As a result, many companies hadn’t priced their risks correctly and ended up taking huge underwriting losses on the catastrophes.

Most P&C and reinsurance contracts are so-called short-tail, and are renegotiated every year, giving insurers the opportunity to re-price risk every 12 months. Companies immediately started to re-price risk, but then in 2020, the pandemic hit. With the world stuck at home, 2020 and 2021 were good, but not great, years for the market. But in 2022, as the world reopened, losses started to grow. Insurers were hit by a triple whammy in the years immediately following the Covid lockdowns. When the world reopened, accidents surged and inflation took off, so companies had to deal with both more claims and a higher cost of each claim. At the same time, interest rates were at a record low, so income from investments didn’t fill the gap.

Companies reacted quickly to re-price risk. In the US, P&C premium growth hit 9.4% in 2021, 9.8% in 2022, and 10.5% in 2023. This “hard market” phase, where insurers have increased prices substantially to offset rising claims costs resulting from economic inflation, social inflation (the increase in P&C insurance-claims costs beyond what can be attributed to economic factors), and losses from catastrophes, has continued into 2024 and 2025, with regions most at risk experiencing premium growth of 20% or more. Rising rates took some time to filter through to companies’ bottom lines, but in 2024 the impact started to show through. In the US P&C market, the industry combined ratio rose to 102.7% in 2022 from 99.7% in 2021, and ticked down to 101.8% in 2023. In 2024, the combined ratio improved dramatically to 96.4% in 2024. Globally, Swiss Re estimated the P&C combined ratio improved to 98% in 2024 from 102% in 2023 and an average of more than 100% in 2020, 2021 and 2022.

The reinsurance industry also adjusted quickly to the changing environment. Reinsurers tend to bear the brunt of large losses from catastrophes, and losses from these events have jumped since 2020. Prior to the pandemic, annual insured losses from catastrophes rarely exceeded the $10 billion mark. Last year, according to Gallagher Re’s 2025 Natural Catastrophe and Climate Report, losses topped $154 billion and the average annual loss from natural catastrophes from 2017 to 2024 has topped $146 billion. The ten-year average is $12 billion.

Reinsurance rates have adjusted to this new normal. Despite some softening coming into 2025 (quickly reversed after the California wildfires), the Guy Carpenter Index of global property catastrophe reinsurance pricing remains up by 60% since its last low in 2017, having risen each year until the January 2025 renewal season. According to Gallagher Re’s in-depth analysis of a subset of 16 reinsurers, these rate hikes have helped push the average combined ratio down to 86.8% in 2024, from 87.3% in 2023. Higher rates have also made the sector more resilient to increasing losses. “Assuming a ‘normal’ level of natural catastrophe losses, we expect an underlying return on equity (ROE) of around 15% and a headline ROE of approximately 18%-19%” for the reinsurance sector, Gallagher Re noted in its annual reinsurance report. In the P&C market, too, ROE figures are expected to jump. Swiss Re forecasts global P&C industry ROE for key markets to reach approximately 10% in 2024, 2025, and 2026, a significant jump from around 5%-6% in 2022-2023.

Insurers’ bottom lines have also been helped by higher interest rates. Companies are now earning much higher returns on investment portfolios, up from about 1% before and during the pandemic, to 3.6% in 2024 and 3.9% in 2025 for the P&C industry, according to Swiss Re forecasts. As insurers tend to stagger the duration of the bonds in their portfolios, it has taken some time for the higher rates to filter through, but now the firms are really starting to feel the benefits of higher rates.

Best buys in the insurance sector

One of the best-performing insurers that’s benefiting from all of the trends outlined above is the US giant Chubb (NYSE: CB). A primarily North American-focused P&C insurer, the company’s core operating profit has broken records every year since 2022. Net premium growth has been driven by strong pricing and growth in commercial lines, as well as in consumer lines globally. Global net written premiums across the group increased 10% in 2023 and 9.6% in 2024. However, the firm’s key differentiator is its industry-leading P&C combined ratio. It reported a combined ratio of 86.6% in 2024, 86.5% in 2023, 87.6% in 2022, 89.1% in 2021 and 96.1% in 2020 – a five-year average of 89.2%, compared with the US P&C industry average of 99.7%. Combined with increased investment income, that meant the firm could report an ROE of 13.9% for 2024.

Chubb is one of the world’s largest pure-play publicly traded insurance companies. Berkshire Hathaway Inc (NYSE: BRK-B) is the largest and deals predominantly with reinsurance at the holding company level. Its subsidiaries, primarily GEICO, offer consumer-focused P&C policies. GEICO competes mainly with State Farm and Progressive, the latter of which is the only large listed player.

Progressive (NYSE: PGR), which specialises in car and truck insurance, reported a 19% jump in fourth-quarter income at the end of last year. Net income for the year doubled, as the combined ratio for the year came in at 88.8%, including a 3.6-point contribution from net catastrophe losses. Overall net personal line premiums rose 23%. At the end of the first quarter of 2025, Progressive had 35.1 million personal insurance policies in force, 18% higher than a year earlier.

Chubb’s peer, Travelers (NYSE: TRV), highlighted the trends shaping the industry in its first-quarter results call. The company more than doubled its earnings expectations and said the growth was driven by three factors: a “terrific” 79.9% underlying combined ratio in personal lines; a 2.9 percentage point year-on-year improvement in its overall combined ratio; and pricing up in all lines except workers’ compensation.

Beazley (LSE: BEZ) and Hiscox (LSE: HSX) have exposure to P&C, speciality and reinsurance, focused mainly on the Lloyd’s of London insurance market, which gives them an edge. In particular, they’ve carved out a niche in the speciality insurance market, where there’s far less competition than the standard global P&C market. Skilled and conservative underwriting, combined with rate increases, have helped both firms recover from combined ratios of over 100% in 2020 to 79% for Beazley in 2024 and 89.2% for Hiscox on an undiscounted basis. ROE last year was 27% and 19.8%, respectively. Both celebrated their strong results last year by launching new buybacks and hiking dividends. Following its 2024 results, Beazley launched a $500 million share buyback, and Hiscox outlined plans to buy back $175 million in shares.

Outside the P&C space, Swiss Re (Zurich: SREN), the world’s second-largest reinsurer (Berkshire is the largest on a market capitalisation basis), has used the firming of rates over the past five years to put past errors behind it. It has addressed US liability reserving concerns, and management has outlined a plan to surpass Munich Re (Frankfurt: MUV2), the global number one in reinsurance. Munich is well-placed to capitalise on further strengthening in reinsurance pricing, but has historically been the go-to reinsurance stock for investors, so it tends to trade at a slight premium to the rest of the sector. Peer Hannover Re (Frankfurt: HNR1) offers similar growth potential to Swiss with a middle-of-the-pack valuation.

Allianz (Frankfurt: ALVE) and Axa (Paris: CS) are best known for their insurance businesses, but they offer a wide range of financial services products. Both have adopted aggressive M&A strategies, boosting their presence in sectors such as asset management and life insurance. Still, a lack of specialisation is evident in their combined ratios. Axa reported a P&C combined ratio of 91% for 2024, and Allianz reported a combined ratio of 93.4%. However, diversification does provide some cushion throughout the insurance cycle.

Aviva (LSE: AV) has carved out a niche for itself in the UK insurance market, and recently agreed to buy Direct Line to bulk up its presence in motor insurance. Across its Canadian and UK general insurance businesses, the group reported an undiscounted combined ratio of 94.9% in the UK and 98.5% in Canada last year. Overall, general insurance premiums rose 14% and the group reported an undiscounted combined ratio of 96.3%. Contributions from the group’s life insurance and retirement savings arms helped it to a rise in operating profit of 20% to £1.77 billion.

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