Best insurance stocks to invest in 2023

India started the process of liberalising its insurance sector in 1993 with the setting up of the Malhotra committee that recommended opening up the market to private companies. It was, however, only in April 2000 that Insurance Regulatory and Development Authority was formed to regulate the sector and in August of the same year that private insurers were allowed to set up shop with a maximum 26% foreign direct investment. In 2002, HDFC Standard Life Insurance Company got the licence to operate in India, soon to be followed by several other private players.

Top 5 Insurance Stocks to Invest

Many of these private companies listed their stocks on public exchanges in years to come and India now many insurance companies whose shares are available to retail investors.

These private companies, along with state-owned insurers, have seen a stellar rise in their growth as India’s economy boomed and more people started to take insurance cover with growth in their income and a rise in awareness about the need for insurance.

Understanding the Insurance Industry and Market Trends

The industry is broadly classified into life insurance and non-life insurance, which includes health and general.  India has 57 insurance companies, of which 24 are life insurers, 28 general insurers and five health insurers.

India is one of the fastest growing insurance markets in the world, and will be the sixth largest by 2032, SwissRE said in a recent report. It expects total insurance premiums to grow on average 14% annually in nominal local currency terms (9% per annum in real terms) over the next decade.

New business premium or the premium from new policies sold grew at a CAGR of 7.1% between 2017 and 2021 and reports peg India’s insurance market at USD 222 billion by 2026.

In 2021, the FDI limit in the insurance industry was raised to 74% from 49%, and many expects the limit to scrapped soon. As more foreign money chases insurance companies in India, it augurs well for those investors who bought stocks of insurance companies.

Factors to Consider When Evaluating Insurance Stocks

As only a few of the 57 insurance companies of India are listed, it is important to have a close look at different terms that are used to measure their performance before buying insurance stocks.

Micro factors

Persistency Ratio: This ratio measures whether a person is sticking to a policy or not. Express over various months such as 13th month retention or 25th month retention, persistency ratio will give an idea of how many of an insurance company’s customers are renewing their policies.

New Business Premium: IRDAI released data on new business premium of all insurance companies. This is the money collected as premium by insurers from new policy holders. Thus, it gives a good idea of how the company is doing in expanding its business.

Annual Premium Equivalent: This is sum of premium from recurring policies or policies that are expected to be renewed and 10% of the new single premium policies. This gives a better measure of a company’s performance than just new business premium.

New Business Margin: This gives the idea of profitability margin of an insurer. New business margin is arrived at dividing the profit on new business by the present value of net new business.

Claims Ratio: The ratio of the claims made by an insurer to the total premiums collected by it. A lower claim ratio is desirable.

Macro factors

Regulatory Issues: IRDAI and the government keep updating the insurance sector regulations to help customers and the companies as well. One should keep an eye on the changes in these regulations and their impact on the earnings of insurer before and after investing in insurance stocks.

Market Trend: Although insurance is a rising sector in India as awareness about it grows, still it is a good idea to keep an eye on company-wise data released by IRDAI on insurance sector.

Top Insurance Stocks

Life Insurance Corporation of India – LIC is the country’s biggest insurance company and had come out with what was the biggest Indian IPO ever in May 2022. It has more than 60% market share in life insurance sector and has a market capitalisation of around Rs 3.5 trillion.

HDFC Life Insurance Company – One of India’s top private insurers, HDFC Life Insurance Company had a market share of around 8% in new business premium in FY23. The market capitalisation of the company was around Rs 1.25 trillion.

SBI Life Insurance Company – Having a marquee name as founder helps any insurance grow faster than peers, and having one as State Bank of India is certainly huge. SBI Life Insurance Company had market share of around 8% in FY23 and its market cap was at around Rs 1.2 trillion.

ICICI Prudential Life Insurance Company – The company had a market share of 4.57% in FY23 on the parameter of new business premium. The market capitalisation of the company was around Rs 65,000 crore.

ICICI Lombard General Insurance – The company is among the leading players in the general insurance space with around 8.2% market share on an overall basis. It had a market capitalisation of around Rs 52,000 crore.

Overview of Insurance Companies Listed Stock

Of the 57 insurance companies in India, only a handful are listed on public exchanges, limiting the scope of investment in the sector. But the sector’s growth expectation makes them a compelling opportunity with a long-term view. It is expected that more insurance companies will list on stock exchanges in the future, giving investors in the sector better opportunity to diversify risks.

Benefits of Investing in Insurance Companies

India is among the fastest-growing insurance markets and is already the 10th largest in terms of total premium volumes. Insurance companies will reap the benefit as more and more Indians take cover against health and other risks, offering investors a good long-term opportunity to be part of this growth cycle.

Risks and Opportunities in Investing in Insurance Stocks

Like any other sector and insurance stocks, too, have their risks and also offer opportunities.

Risks of Investing in Insurance Stocks

Regulatory Risks: In the Budget for 2023-24 the government decided to tax income from most high premium insurance policies. This led to a fall in stocks of insurance companies in a knee-jerk reaction. Insurance companies are prone to such regulatory changes.

Individual performance: Insurance companies’ market share and other performance parameters keep changing over a period. The stocks of these companies are also prone to these performance parameters.

High claims: India has high claim ratio, leading to impact on the results of the insurance companies.

Macro risks: No stock is untouched by any major event in economy as demonetisation or impact of COVID-19.

Opportunities in Investing in Insurance Stocks

Growing market: Due to low penetration of insurance cover, India is still a fast-growing market for insurance companies.

Liberalization: The government has been taking many reform measures for the insurance sector, including higher FDI cap.

Regulatory easing: IRDAI has been trying to let insurance companies grow by giving them freedom to launch policies on their own and giving post facto approval.

Diversifying Your Portfolio with Insurance Stocks

Insurance stocks are also considered defensive stocks, helping you diversify your portfolio. Insurance companies invest a large part of the premium they receive in safe instruments such as government bonds whose value rise in times of uncertainties.

Conclusion

Insurance stocks offer you an opportunity to be part of the sector’s growth in India as people get more and more aware of the importance of taking cover against risks to health and life. Also, there is a rise in other insurance products such as vehicle insurance etc. But as with any other sector, insurance companies too are prone to various risks. The investment in insurance stocks should be considered with two prisms – long-term play and defensive hedge.

FAQs

Why invest in Insurance stocks?

India is emerging as the one of the fastest growing insurance markets in the world, helping insurance companies grow at a fast clip.

What are the best strategies for investing in insurance stocks?

It is a good idea to spread your investment among life and non-life insurance companies.

How do insurance companies make money?

Insurance companies collect premium for the cover they offer. They make money from these premium, plus the profit made from investment made from these premiums.