Float
Premiums collected but not yet paid out as claims, which the insurer invests for its own account, a key source of profit in the insurance model.
Berkshire Hathaway buys National Indemnity in 1967 for $8.6 million, and Warren Buffett learns there what float is worth: premiums already collected and not yet paid out as claims, which the insurer invests for its own account in the meantime. Premiums come in before claims are settled, sometimes years before in long-tail lines. So the insurer always holds a pool of capital that does not really belong to it, since it will pay future claims, but that it puts to work in the meantime. Everything turns on the cost of that float, set by the underwriting result. If the insurer writes at a combined ratio below one hundred percent, it makes money on underwriting and holds the pool for free, or is even paid to hold it. If the ratio exceeds one hundred percent, the float has a cost that investment income must offset.
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 puts to work in the markets.
float, insurance float, investable float
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