---
title: "Should You Invest in Insurance Stocks?"
description: "Should you buy insurance stocks? Insurance is boring, but sometimes the most boring investments offer great opportunities to buy!"
canonical_url: https://trendshare.org/how-to-invest/should-you-invest-in-insurance-stocks
markdown_url: https://trendshare.org/ai/should-you-invest-in-insurance-stocks.md
published: 2014-02-27
last_updated: 2020-06-07
content_license: https://trendshare.org/about/disclaimer
---
# Should You Invest in Insurance Stocks?

Source: https://trendshare.org/how-to-invest/should-you-invest-in-insurance-stocks
Updated: 2020-06-07
If the phrases "car insurance", "health insurance", or "life insurance" make
you yawn, you're not alone. Many necessary components of modern life aren't
exciting. Actuarial tables and mortgage amortization tables have the cocktail
party conversation zing of pocket lint. When something catastrophic happens
you'll be glad you had a current policy and paid your premiums, but most of the
time you never think about your plans.

The same goes for insurance stocks. They don't have the zip or zing of a
unicorn tech startup or a biotech firm or the twists and turns of a penny
stock, but the boring stability the insurance business strives for can be very
good for investors.

## Insurance Companies are Big, Stable, and Boring

Insurance works by spreading the risks and costs of catastrophic events over
a large population. If one in every thousand homes will suffer a fire this
year, and one in every hundred fires causes a million dollars of damage,
selling millions of policies for a few dollars will cover the cost of fire
damage for everyone.

The more expensive the catastrophe, either the more money each subscriber
has to pay or the more subscribers there have to be. That's math—but the
higher the premiums, the fewer potential customers can afford them.

That's why insurance companies are big. To handle millions and billions of
dollars of payouts every year, they need millions of customers, each paying
tens to hundreds or thousands of dollars every year. Losing a few here or there
doesn't threaten the business. They're stable at their large size.

Hundreds of millions or billions of dollars waiting to be paid out is a lot
of money to handle, and those payout dates are unpredictable. This is an
important point to remember.

## Big Insurance Payouts are Rare

A natural disaster like [Hurricane Katrina](http://www.history.com/topics/hurricane-katrina),
the [Deepwater Horizon oil spill](http://ocean.si.edu/gulf-oil-spill), or [Superstorm Sandy](https://weather.com/storms/hurricane/news/superstorm-sandy-anniversary-20141029) is tragic. For the billions of dollars in damage and irreparable
consequences, it doesn't happen often. For everyone paying into an insurance
pool, a claim of that magnitude *almost* never happens.

The premiums you *personally* pay, over time and on average, will
cover the benefits the company expects you to claim. If you are unfortunate
enough to suffer a catastrophe, you may come out ahead (cold comfort to the
suffering you go through—and you certainly have our best wishes and
sympathies).

If a big insurance company has many, many customers and if the frequency of
catastrophic events is low and if the average customer payout is a break even
event for the customer at best, *an insurance company may only pay out a
fraction of what it takes in in any given year*. It has a lot of money and
it doesn't pay it out very often.

## Insurance Companies Hate Risk

Auto insurance rates take into account demographic information (younger
drivers may be riskier than older, red cars have more moving violations than
other colors, a boring station wagon is safer than a zippy mid-life crisis
convertible). Home insurance rates consider earthquake, flood, and tornado
zones. Health insurance rates factor in personal risks such as smoking or drug
use. These risk factors are all part of actuarial and underwriting
calculations.

Insurance companies use this information to answer two specific questions.
How much money will *you* get paid out over the span of your coverage?
How much money do people in your insurance cohort need to pay in to cover those
costs?

*Insurance companies hate risk* because miscalculating the likelihood
of expected and catastrophic payouts could end up costing the company
*billions*.

In any single year, payouts might exceed revenue, but catastrophes are
unpredictable by nature. Instead you *can* predict that over time things
will balance out. Maybe that's a ten year window or a five year window or a
fifty year window, but with armies of statisticians and number crunchers
working on your models, you can figure out how much money you need to have in
reserve to account for that one year when your company has to pay out billions
of dollars in claims.

Insurance companies must be rich to make this work.

How much money does an insurance company have in reserve? Billions. Where
does it keep that money? Investments. Conservative, conservative investments.
They won't make 10% or 20% a year; probably 2% a year in a very safe
investment—but 2% of hundreds of billions of dollars is hundreds of
billions of dollars.

The [rate of return](https://trendshare.org/how-to-invest/what-is-a-good-annual-rate-of-return) is
low, but the dollar amount is high.

The costs for the company aren't fixed. Sure, the actuaries have a very
precise dollar amount for every expected claim for every customer, but the
money keeps coming in year after year. If there's no big payout, that money
sits there, slowly growing, making more money.

That means more profits for investors.

## Are Insurance Companies Good Investments?

An insurance company isn't as exciting as the new social media dot-com
that's just gone IPO and made a whole bunch of [Silicon Valley nerds](https://www.hbo.com/silicon-valley) rich on
paper (at least until the company craters in two years), but that's good for
the individual investor. Less volatility in the stock and less attention from
traders mean that there are more opportunities for value investors. No one
wants to admit that he or she made a bundle of money in the stock market on a
waste treatment center, a chain of long term care adult homes, or an auto
insurance company. There's always a hot biotech startup instead.

That leaves these businesses as a possible investment opportunity for the
rest of us: life insurance stocks, investment insurance companies, car
insurance stocks, you name it.

Insurance companies plan for the future. They simply *must* be around
in ten or fifty or a hundred years. That's stability. Their big books of
invested money make them relatively easy to evaluate, financially speaking. If
they pull an [AIG](/stocks/AIG/view) and dump money into exotic
financial instruments, that's easy to measure too. Capitalization—how
much money they have in reserve—is the important thing here.

Boring? No—stable. Conservative? Yes—not wasting investor money.
Are you looking for insurance companies to invest in? Maybe you never thought
of it before. If you can [find a good value](https://trendshare.org/how-to-invest/what-is-value-investing), maybe you should.