The mass of premiums collected but not yet paid out in claims, which the insurer invests for its own account, a key source of profit in the insurance model.
Float is one of the most illuminating notions for understanding the real economics of an insurer. It denotes the mass of cash made up of premiums already collected but not yet paid out as claims, a sum the insurer holds and invests for its own account in the interval. Because premiums are received before claims are settled, sometimes years later in long-tail lines, the insurer permanently holds a pool of capital that does not truly belong to it, since it is destined to pay future claims, but which it puts to work in the meantime. Warren Buffett popularized the idea that this float is the true engine of insurance profitability, the vivid expression being the use of other people's money. The decisive point is the cost of that float, determined by the underwriting result. If the insurer underwrites with a combined ratio below one hundred percent, it makes money on underwriting while holding free of charge, or even being paid to hold, this pool of capital to invest. If the ratio exceeds one hundred percent, the float has a cost that investment income must offset. Float thus links underwriting discipline directly to overall financial performance.
An insurer collects one hundred million in premiums and will pay the corresponding claims only over several years. In the meantime, it invests this float. With a combined ratio of ninety-five percent, it is in effect paid to hold capital that it grows on the markets.
float, réserve d'investissement, trésorerie de portage