When you think of insurance you probably think of Geico’s Gecko or Progressive Insurance’s Flo. Your investment portfolio likely owns one or many insurance companies. A few companies that may sound familiar include Cincinnati Financial, Chubb Insurance, Travelers Insurance, and Met Life.

There are two broad categories of insurance companies.  Property and casualty insurance will reimburse you for losses from a car accident or when your house burns down.  These policies also include liability coverage for damages to other people and their property which are caused by you.   It is likely you also own life insurance which insures unexpected mortality risk and usually pays the benefit to your spouse or children when you die.

Each insurance company underwrites risk based on an aggregated loss in a particular type of category and then an expected loss rate. As a regulated industry, similar to banking, insurance companies must maintain certain levels of capital based on the risks they are underwriting.

When a major event such as an earthquake, wildfire, or hurricane occurs, and multiple different insurance companies are impacted by losses, the industry's aggregate capital base starts to shrink.  A smaller capital base forces a company to reduce how much risk they can take, reducing competition which results in increased insurance prices.

As artificial intelligence, big data, and cloud computing have become more prevalent in recent years, companies are looking to use these capabilities to improve underwriting and offer price savings to clients.

One example is Kinsale Capital Group, founded in 2009 by prior industry executives. They focus on insuring companies that are smaller in revenue size and operate businesses in higher-risk categories. Generally, insurance companies underwrite these risks in a standardized manner given the small premium amount to lower underwriting costs. Kinsale has created an underwriting process using big data and artificial intelligence to offer lower-cost insurance to these customers.

Another company using big data is Palomar Holdings which is an insurer focused on specialty insurance for residential and commercial customers in areas such as earthquakes, excess property, professional liability, and flood insurance. Through technology, they’ve been able to reduce costs and help customers.

Every individual’s risk and return objectives are unique to themselves and require discussion with their investment professional before making any investment decision.

Sources: Factset, Company Reports

Beese Fulmer Private Wealth Management was founded in 1980 and is one of Stark County’s oldest and largest investment management firms.  The company serves high-net-worth individuals, families, and non-profits, and has been ranked as one of the largest money managers in Northeast Ohio.