In essence, the business of insurance works something like this:...

In essence, the business of insurance works something like this:

"We insurers know ahead of time what our Revenues are going to be (they are effectively the monthly premiums we charge our customers).

But we will only know what our real Operating Costs are at some point in the future (because our Operating Costs are an outworking of the claims that end up being made compared to how much we had budgeted for claims)."

(And that's before we even get to considering fluctuations in technical profits due to things like the vagaries of capital market conditions)

So, Insurance Profits are literally impossible to forecast.

And who invests in a business where the future profits are indeterminate?


The general insurance industry in Australia has become a lot less competitive over the past decade because the GFC, and its aftermath, caused a lot of capital to exit the local market.

As a result, the premium cycle over the past several years has been stronger and more enduring than any time before.

Yet, despite that favourable change in the industry structure, IAG's share price (along with the share prices of other listed insurers) has gone nowhere for more than a decade, and is indeed still lower today than it was pre-GFC, when the industry was not as benign as it is today.  

Which just goes to highlight the extent to which the general insurance business model is fundamentally flawed.

If one wanted to play to insurance cycle, there are ways to gain exposure to rising insurance premiums without the any exposure whatsoever to insurance risks, such as the kind manifesting in today's market update.

.