If you’re looking at insurance stocks as a safe investment, here’s why you might be mistaken

Insurance stocks may appear to only be up there with the banks in terms of money ‘on the books’. But things aren’t as easy as they may appear to be at first glance.

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How insurance stocks operate?

In other words, what is their business model? Insurance companies – from corporate-facing types like QBE to consumer facing companies like Medibank – operate under a distinctive business model that revolves around risk pooling and underwriting.

The aim is to have a high difference between premiums collected and claims paid out (plus expenses) and this is the company’s profit. Instead of premiums collected, companies may mention ‘Gross Written Premium’ (GWP) which is essentially the same thing.

Insurance companies collect premiums up front, but don’t always pay out claims immediately….

Insurers invest that “float” (the pool of premium money) into bonds, equities and real estate, among other asset classes. Money can be held for decades, especially in life insurance.

What does this mean for investors?

Well, it means that even if underwriting is breakeven, insurers can be profitable through investment income. Of course just like any fund managers, the money has to be managed well (i.e. allocated properly) and make a return.

Many companies did well post-COVID because rising rates helped insurers earn more on their bond portfolios. And of course many companies saw the need to buy insurance for many reasons including extreme weather events.

However…the very reason you buy insurance is to protect yourself from catastrophes. And if they do happen, money had to be paid out well beyond what was invested in the first place.

It is also important to keep in mind that (eerily similar to banks) insurance is highly regulated. Laws may include certain capital adequacy requirements and limits to premium increases (as happens with Australia’s health insurance space). Some laws can add layer of protection but can also limit rapid growth.

How can companies differentiate themselves?

There are many ways. One is superior underwriting discipline. Better risk assessment means fewer claims which means stronger margins. Also helping margins is low expense ratios (via tech, scale, or smart distribution) improve combined ratios.

Brand and distribution help too as does product diversification. A diversified insurer (across auto, health, life, reinsurance, etc.) can weather downturns better.

Insurance companies can be very attractive long-term investments if they manage underwriting risks well, invest their float wisely, and maintain strong capital discipline. They’re particularly interesting in rising interest rate environments due to improved investment returns.

However, investors must watch out for: poor underwriting years (catastrophes, pandemics), aggressive pricing to chase growth, and overexposure to risky assets.

What are some of the top ASX insurance stocks?

There are 6 key companies: QBE, IAG, Suncorp, Tower, Medibank and NIB and they’re all worth over $80bn cumulatively. The largest of these is IAG because it has a broad portfolio of brands, but QBE has a foothold in the corporate sector and the name Medibank would stand out (Even if for the wrong reasons). Suncorp got out of retail banking, selling its retail bank to ANZ, and is focusing on insurance – tells you where it sees value, doesn’t it?

Insurance in Australia is facing significant scrutiny, there are regulatory concerns about high premiums and market concentration. Notably, a political announcement in February 2025 led to sharp share declines across insurers like Suncorp, IAG, and QBE.

Climate change is a problem

There is also concern about what climate change means in the longer-term. Increased frequency and severity of extreme weather (floods, wildfires, cyclones, droughts) means more claims payouts.

Insurers may raise premiums in vulnerable areas or withdraw coverage entirely (e.g., in fire-prone or flood-prone regions). But this can hurt customer trust and lead to regulatory pushback (e.g., calls for price caps or public insurance schemes). A no-win situation if ever there was one.

But here is where it gets more complicated. Traditional actuarial models that these companies use rely on historic weather patterns — which are now increasingly unreliable. Insurers must invest in better climate models, AI, satellite data, and catastrophe reinsurance to stay ahead. So look out for such companies.

By ‘must’ we don’t mean they are being regulated to do so, but are being forced by competitive pressures. This does not mean there may be regulations in the future to disclose climate risks and model scenarios.

Another thing to consider is the role of reinsurers. Reinsurers are raising prices or reducing coverage due to escalating climate risk. This pushes more risk back onto primary insurers or increases reinsurance costs, hurting margins.

Conclusion

Insurers are no ‘set and forget’ investment, especially in an era of climate change. Investors need to look for companies that are adjusting to the new era and have competitive differences in the market.