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What Are the Usual Profit Margins for Companies in the Insurance Sector?

The profitability of insurance companies depends on the number of premiums they write, the return on their investments, business costs, and how much they have to pay out in claims. As of Q2 2021, life insurance companies had a net profit margin (NPM) of 4.1% for the trailing 12 months (TTM). Property and casualty insurance companies had an NPM of 23.26% TTM. Insurance brokers averaged 8.7% TTM. Accident and health insurance companies had a net profit margin of 5.53% TTM. 

Key Takeaways

  • Insurance companies generate revenue through the insurance policies they write (collecting insurance premiums) as well as from the returns generated through their investment activities.
  • The costs that insurance companies incur are the typical costs that all businesses incur, such as operating costs. Insurance companies also have to pay out insurance claims.
  • The net profit margins for the insurance industry vary depending on the type of insurance provided, though most large insurance companies provide a variety of insurance.
  • Regardless of the size of the company, a strong profit margin depends on how well an insurer runs its business, from marketing to sales to managing its cost and its risk models.

Varying Profit Margins

Individual insurance companies can have varying profitability ratios based on how they are run. This comes down to everything from marketing to sales to operations to risk models. Here’s a look at some of the sector’s top companies. To start, there’s Progressive, which has a $56.7 billion market cap as of August 2021.As of June 30, 2021, Progressive had a net profit margin of 11.95%.

There’s a host of other insurers, including Chubb, Allstate, and Travelers. Of these major insurers, Allstate has the lowest net profit margin at 8.27%, Chubb has the highest at 20.42%, and Travelers in the middle at 11.30%.

Expenses of Insurers

Like all other businesses, companies in the insurance sector incur costs and sell products, and they must find a profitable balance between operating costs and the prices the market will bear. 

Costs for firms in the insurance business include the money the insurer pays to service providers. For health insurers, this would be payments made to hospitals or doctors. In the case of automotive insurance, this includes payments made to repair shops or medical costs if injuries were involved.

Changes in the costs of services rendered, policy price changes, and the number of claims received are all factors that can cause an insurance company’s net margin to change from year to year. For the purposes of long-term evaluations of companies in the insurance business, analysts consider annualized net margin data to be the most useful information.

Insurers and Profit Margins 

The calculation of net margins is significant to companies in the insurance sector because the values are so low. Many insurance firms operate on margins as low as 2% to 3%. Smaller profit margins mean even the smallest changes in an insurance company’s cost structure or pricing can mean drastic changes in the company’s ability to generate profit and remain solvent. 

The largest insurance company in the world is Ping An Insurance Group, which is based in China.

For example, the net profit margin for Aegon (AEG) is 0%. The life insurer, which has one of the lowest NPMs in the industry, also has other low profitability measures. Its return on assets (ROA) is 0.52%, while its return on equity (ROE) is 9.07%, as of June 30, 2021.]

Compare that to one of the top life insurers in the industry, China Life. China Life has a 7.73% NPM, ROA of 1.55%, and return on equity of 14.55%. 

What Are the Different Types of Profit Margin?

The different types of profit margin are gross profit margin, operating profit margin, and net profit margin. All three capture a different aspect of the revenue/cost structure of a firm. Gross profit margin looks at net sales minus the cost of goods sold to net sales. Operating profit margin looks at operating income to revenue. Net profit margin looks at net profits to net sales.

What Is a Good Profit Margin?

There is no specific number that is considered to be a good profit margin. Each industry and sector operate differently from one another so companies in different sectors will have different costs. For example, a technology company won’t have the same costs as an airline company, so their profit margins would drastically differ. When comparing profit margins, it is important to compare companies in the same industry to gauge what is considered “good.”

How Often Do I Have to Pay My Insurance Premium?

Depending on the contract that you sign with your insurance provider, you can pay insurance either monthly, quarterly, or annually. The choice is typically up to the individual and you can choose whatever works best for you financially.

The Bottom Line

Insurance companies make money from the insurance policies that they write, collecting insurance premiums. They also invest in these premiums with the goal of generating returns. Insurance companies have a variety of costs, as do all businesses: salaries, rent, etc., and then the insurance claims they payout when a customer needs insurance coverage.

Regardless of the size of a company, the net profit margin differs across the industry, depending on how well an insurer does business and manages its expenses. As with all financial analyses, the net profit margin is just one metric to look at. To truly understand the financial health of a company, an individual must look at multiple aspects of the company.

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