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Rising Insurance Is Killing More and More Deals

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𝐑𝐞𝐚𝐥 𝐄𝐬𝐭𝐚𝐭𝐞 𝐈𝐧𝐯𝐞𝐬𝐭𝐨𝐫 𝐈𝐧𝐬𝐮𝐫𝐚𝐧𝐜𝐞 𝐯𝐬. 𝐑𝐞𝐧𝐭𝐞𝐫’𝐬 𝐈𝐧𝐬𝐮𝐫𝐚𝐧𝐜𝐞 In short, Rental Insurance is purchased by the tenant to protect their interests, and Real Estate Investor Insurance is taken out by the property owner to protect the dwelling and their interests. It is important that both parties (property owner and renter) maintain both of the coverages, as they protect vastly different things. 🔺 Learn more about 𝐑𝐞𝐚𝐥 𝐄𝐬𝐭𝐚𝐭𝐞 𝐈𝐧𝐯𝐞𝐬𝐭𝐨𝐫 𝐈𝐧𝐬𝐮𝐫𝐚𝐧𝐜𝐞 𝐯𝐬. 𝐑𝐞𝐧𝐭𝐞𝐫’𝐬 𝐈𝐧𝐬𝐮𝐫𝐚𝐧𝐜𝐞 >> https://bit.ly/3UOA3Xm

𝗗𝗲𝗰𝗼𝗱𝗶𝗻𝗴 𝗮 𝗴𝗲𝗻𝗲𝗿𝗮𝗹 / 𝗻𝗼𝗻-𝗹𝗶𝗳𝗲 / 𝗽𝗿𝗼𝗽𝗲𝗿𝘁𝘆 & 𝗰𝗮𝘀𝘂𝗮𝗹𝘁𝘆 𝗶𝗻𝘀𝘂𝗿𝗮𝗻𝗰𝗲 𝗯𝘂𝘀𝗶𝗻𝗲𝘀𝘀 𝗺𝗼𝗱𝗲𝗹 General Insurance business makes money largely the same way as a traditional bank. Sounds weird, right? But, it's true. Read on please! A bank gives us an interest on our deposits, which the bank uses to give out loans at a higher interest rate. The bank makes money on the interest rate differential. A well-run general insurer is able to raise money many a time at a lower interest rate than a bank (at times even at 0% or -ve interest rate). Much like a bank, the insurer then invests that money at higher interest rate and earns on the differential. But, where do the insurance premiums and claims go? Let's use a very simple 𝗲𝘅𝗮𝗺𝗽𝗹𝗲 to understand a general insurer's business model - Remember, premiums are received upfront and claim payments come at a later point in time. Let's say premiums received in a year are $110. 𝗔 𝗽𝗮𝗿𝘁 𝗼𝗳 𝗽𝗿𝗲𝗺𝗶𝘂𝗺𝘀 𝗲𝘃𝗲𝗿𝘆 𝘆𝗲𝗮𝗿 𝗮𝗿𝗲 𝘀𝗲𝘁 𝗮𝘀𝗶𝗱𝗲 -- let's call this "𝗳𝗹𝗼𝗮𝘁" -- to cover future claims (Insurer invests this reserve money and earns an interest). Let's say $10 is reserved for future claims, leaving the insurer with $100 net premium in that year. The net premium money i.e., $100 goes towards $32 worth of expenses (agent commissions, policy underwriting, etc.) and $70 worth of claims payments of that year. So this insurer makes a $2 loss on the net premium in that year -- this is called 𝘂𝗻𝗱𝗲𝗿𝘄𝗿𝗶𝘁𝗶𝗻𝗴 𝗹𝗼𝘀𝘀. Put simply, this UW loss of $2 is akin to the 𝗰𝗼𝘀𝘁 𝗼𝗳 𝗿𝗮𝗶𝘀𝗶𝗻𝗴 𝗺𝗼𝗻𝗲𝘆 or the 𝗰𝗼𝘀𝘁 𝗼𝗳 𝗳𝗹𝗼𝗮𝘁 -- as Buffett calls it. Like, previously stated, 𝗶𝗻𝘀𝘂𝗿𝗲𝗿 𝗲𝗮𝗿𝗻𝘀 𝗶𝗻𝘁𝗲𝗿𝗲𝘀𝘁 𝗼𝗻 𝘁𝗵𝗶𝘀 𝗳𝗹𝗼𝗮𝘁 Let's say the "accumulated" float overtime (including the $10 set aside this year) is $100, so the cost of float this year is $2/$100 = 2% i.e., cost of float 2% this year < market rate of raising money Like a bank, an insurer makes money on the differential between investment returns (say 8%) and the cost of float 2% Return = 8% - 2% = 6% But, 𝒊𝒇 𝒄𝒐𝒔𝒕 𝒐𝒇 𝒇𝒍𝒐𝒂𝒕 "𝒐𝒗𝒆𝒓𝒕𝒊𝒎𝒆" 𝒊𝒔 > 𝒎𝒂𝒓𝒌𝒆𝒕 𝒓𝒂𝒕𝒆 𝒐𝒇 𝒎𝒐𝒏𝒆𝒚 𝒕𝒉𝒆𝒏 -- 𝒊𝒏 𝒕𝒉𝒆 𝒍𝒂𝒏𝒈𝒖𝒂𝒈𝒆 𝒐𝒇 𝑾𝒂𝒓𝒓𝒆𝒏 𝑩𝒖𝒇𝒇𝒆𝒕𝒕 -- 𝒕𝒉𝒆 𝒊𝒏𝒔𝒖𝒓𝒆𝒓 𝒊𝒔 𝒘𝒐𝒓𝒕𝒉 🍋 Handful of Indian insurers like Star Health and Care Health have a -ve cost of float i.e. they are paid to acquire float. Hope this helped! —————————————————————- If you want to understand #WarrenBuffett method of evaluating a general insurer in detail, then I'd suggest you to watch this linked video: https://lnkd.in/ePDYak4f I simplify #businessanalysis / business models and mentor students / working professionals who intend to learn #financialstatementanalysis #valuation #equityresearch Follow Gautam Rastogi for related content #investandrise #emergingmarkets #generalinsurance #nonlifeinsurance

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🔮 Tap into the future of property insurance with Jencap's EVP of Property, Ben Beazley! Beazley shares insights on the transitional market and the challenges brokers face in this insightful Insurance Business America article. https://lnkd.in/eQT9ucdF

Want to learn about the latest trends affecting the property insurance market? Read my esteemed colleague Denise Perlman, CIC of Marsh McLennan Agency must-read column in @Forbes Finance Council to learn how to expertly steer in the #PropertyInsurance market. #MarshMMA

Want to learn about the latest trends affecting the property insurance market? Read my esteemed colleague Denise Perlman, CIC of Marsh McLennan Agency must-read column in @Forbes Finance Council to learn how to expertly steer in the #PropertyInsurance market. #MarshMMA