Fisher Investments on Financials

CHAPTER 4

INSURANCE INDUSTRY GROUP

The Insurance Industry group includes five sub-industries. Each has unique characteristics, but all are involved in the business of transferring risk. Further, the core of the group is Life & Health Insurance (L&H) and Property & Casualty Insurance (P&C). The other three sub-industries are derivatives of these two: the Brokers sub-industry sells the insurance, Reinsurance offers insurance to insurers and Multiline Insurers is a combination of insurers.

Definition: Indemnification

Indemnification is the act of compensating for actual loss or damage.

Accordingly, in most major global indexes, the largest sub-industries are typically L&H and P&C, combined averaging about 70% of the Insurance weight.1 Additionally, because most insurance industries are similar across the globe and the US is the world’s largest insurance market (about 35% of the global market),2 much of this chapter will focus on the US.

This chapter covers the characteristics of the two major sub-industries but also touches on the smaller groups. Topics include:

• Characteristics of L&H and P&C
• The makeup of an insurance company
• How do insurance companies make money?
• How do insurance stocks act?
• Drivers of L&H and P&C
• Insurance regulation

CHARACTERISTICS OF INSURERS

First, what is insurance? An insurance contract is the transfer of risk—a legally binding agreement between an insurer and an insured whereby the insurer will indemnify the insured in exchange for a fee. Insurance ...