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The corona is not going anywhere.
So how do insurance companies continue to make a profit?
You fly less, travel less, the new vehicles are not sold as before and in general you also do not leave the house as you used to and are less exposed to risks - so why did the insurance companies earn so much in the third quarter of the year?
Eyal Debbie, director of the analysis desk at Leumi Capital Markets, explains
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Insurance
Eyal Debbie
Tuesday, 01 December 2020, 10:52
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Despite the encouraging progress on the road to the corona vaccine, the epidemic is still with us, and with it hundreds of thousands of unemployed, the continuing severe restrictions on business activity and a sharp decline in the private consumption of the Israeli public.
In the midst of all this, the big insurance companies yesterday finished publishing their financial reports for the third quarter (July-September), and it was a miracle: the three summer months were one of the best in a long time, with a net profit of NIS 1.3 billion for the five big companies in the industry. More than that, most companies recorded a double-digit return on equity (total profit) of 20-30 percent.
For the general public, the boom in insurance companies may seem surprising. How is it possible that while the entire economy is faltering, insurance companies continue to thrive? For those who are familiar with the structure of the profits of insurance companies, there is no shocking surprise here.
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Sparse traffic at Ben Gurion Airport, but travel insurance is only a small part of the companies' profits (Photo: Reuven Castro)
It was immediately stated: the insurance companies also suffered an injury in some of their areas of activity - but the effect of this injury on their profits is small.
Thus, for example, the field of travel insurance abroad was severely damaged - but its weight in profits was negligible. Some damage was also recorded in the purchase of car insurance for new vehicles, as the showrooms were closed at times and people were afraid to buy new vehicles. They had existing car insurance and continued to pay for it. Some damage was also recorded in the health insurance - as a result of the economic insecurity. A 5-10 percent damage was also recorded in the pension provisions for long-term savings, because people who leave for health insurance stop retiring.
But even here the damage for insurance companies is not large, as in leaving unpaid leave has most low earners, the difference in their smaller, and therefore part of their income is smaller, and most of the public still continue contributing as usual.
So how do insurance companies enjoyed a spacious yet The main reason is that the insurance companies' profits come mainly from investment management from the capital market - the money that the public deposits in pension funds, provident funds, executive insurance, study funds, savings policies and the like are managed in the capital market, as well as the large nostro portfolio of insurance companies. The company's equity, unlike customers' savings money) The capital markets in Israel and around the world performed excellently in the third quarter, and the insurance companies are among the biggest beneficiaries.
The positive trend in the capital markets continued, by the way, in the fourth quarter: The last of the year is expected to be even better.
The company takes your money and invests it, and when the markets go up it makes a force.
Eyal Debbie
Why are capital market profits so significant to insurance companies?
Because customers pay them premiums on the insurance they purchase, however, they will receive the payment from the insurance company, if and when, only when an insurance event occurs.
What are the insurance companies doing with all the money accumulated in the meantime?
Invest it in the capital market in order to maintain its value and even increase its value as much as possible.
The insurance company's model basically includes a key component of managing the premium money that customers pay up to the date of payment of a claim, if and when.
Another reason that also contributed to the nice profits of the insurance companies, which even exceeded the early expectations, is regulatory and interest rate effects, which resulted in a one-time reduction of the insurance reserves (reserves).
So is the future of insurance companies rosy anyway?
Not necessarily.
The main risk for insurance companies is the high dependence on the capital market, which is characterized by high volatility, especially during the corona crisis.
However, developments in the real economy affect them less dramatically than is commonly thought.
If the real economy continues to suffer, the whole economy will be hurt, but the insurance companies will not be at the head of the victims but will be moderately hurt.
Eyal Debbie is the director of an analysis desk at Leumi Capital Markets
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