Why aren’t insurers’ results comparable?

April is the season of financial results of companies. Mailboxes are filled with press releases on company earnings. Unlike companies from other sectors, jargons like net earned premium, annualised premium equivalent, individual rated premium and gross written premium dominate the statements released. One wonders how an ordinary man reads an insurance company’s earnings.

Ask any insurance company executive and they will tell you that looking at quarterly profits is not the right way to measure their performance. Unlike an auto or bank company, the insurance business is highly cyclical. The first quarter is usually the slowest for the sector, while the March quarter brings in a majority of the business.

Given this, the fourth quarter will usually see a higher growth in premiums, since it directly correlates to the tax-saving season. The last quarter is the one when salaried employees are required to submit their investment proofs for tax purposes and they rush to buy products like insurance as this allows them deduction under Section 80C of the Income Tax Act.

Investors are often told that annualised premium income is the right measure to adjudge which life insurance company is performing well. This measures all the regular premiums plus 10 percent of single premiums.

The general assumption is that group premiums cannot be clubbed with individual business to measure topline. Because of this, some life insurers report individual rated premiums as the growth metric since this includes premiums collected from individual products as well as 10 percent from single premiums.

On the general insurance business as well, the real measure of an insurance company is its underwriting performance. If the insurer reports profit but its books show an underwriting losses, then it means that there is a mismatch between the premiums collected and claims paid. If these losses keep rising, the ability of the company to pay claims is hampered and its capital position is impacted.

Unless all these minor intricacies are read into carefully, a simple glance at the topline and bottomline may not reveal much about an insurance. The devil is in the details here, unlike other sectors.moneycontrol

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