Insurance Float

# Insurance Float **Insurance float** is the most important financial concept unique to the insurance industry. It represents the premiums collected by an insurance company that have not yet been paid out as claims. This money sits in the company's accounts, available to be invested, until claims come due. ## The Mathematics of Float When an insurance company writes a policy, it collects the premium upfront. Claims may not be paid for months or years. During that interval, the insurer has the use of that capital. The cost of float is the " underwriting loss"—the difference between the premiums collected and the claims and expenses paid. When an insurer achieves an **underwriting profit**, the float is essentially free. When it has an underwriting loss, the float has a cost. > "The insurance business produces float—premiums collected that have not yet been paid out in claims. This float is a source of funds we can invest." ## Berkshire's Float Advantage Berkshire's insurance subsidiaries, particularly **GEICO** and **General Re**, have generated enormous float over the decades. In recent years, Berkshire's total insurance float has exceeded $100 billion. The key to Berkshire's success is that it has consistently achieved underwriting profits, meaning that its float has been essentially cost-free—and often has actually earned a profit from underwriting itself. ## The Compounding Power The magic of float is that it can be invested at Berkshire's high rates of return. While competitors must return float to policyholders through competitive pricing, Berkshire can invest its float at above-market rates. This creates a powerful compounding effect: the float grows, and the returns on that float compound over time. ## Quality Over Quantity Not all float is equally valuable. Buffett is selective, preferring insurance businesses that can generate float at low cost over long periods. The worst insurance businesses are those that write policies at inadequate prices, generating float that actually costs more than it earns. The goal is to find insurance businesses where the float is cheap, sustainable, and large.