Insurance Float is the substantial sum of money an insurance company holds between collecting Premiums from customers and paying out Claims. Imagine you pay your annual car insurance premium on January 1st. You might not have an accident all year, or even for several years. During that entire time, the insurance company holds onto your money. Now, multiply that by millions of policyholders. This creates a massive, revolving pool of capital—the float. It’s not the insurer’s own money; technically, it belongs to the policyholders and is recorded as a Liability on the balance sheet. However, the insurer gets to invest this float for its own benefit until claims need to be paid. The legendary investor Warren Buffett brilliantly harnessed this concept to help build his conglomerate, Berkshire Hathaway, turning its insurance operations into a powerful engine for generating long-term investment capital.
For an investor, insurance float is one of the most beautiful concepts in business. It functions like a loan from the policyholders to the insurance company. But it’s a very special kind of loan: a loan that often costs nothing and can sometimes even pay you to hold it.
The mechanism is simple yet powerful:
The key is that the money paid out for today's claims often comes from premiums collected long ago, while the money coming in today will be used to pay claims far into the future.
Unlike a bank loan that requires interest payments, float is a form of financing with unique advantages. A disciplined insurer can use this stable, long-term capital to patiently pursue a Value Investing strategy without the pressure of looming debt repayments. This gives well-run insurance companies a structural advantage over almost any other type of business. The ultimate success of this model depends on two key factors:
Float is not free money. Its value to an investor hinges entirely on its cost, which is determined by the insurer's underwriting discipline. Underwriting is the process of evaluating risks, pricing policies, and deciding who to insure.
An insurer achieves an Underwriting Profit when the premiums it collects are greater than the claims and expenses it pays out. This is measured by the Combined Ratio.
A combined ratio below 100% indicates an underwriting profit. In this scenario, the insurer is essentially being paid to hold and invest its customers' money. This is the holy grail. The Cost of Float is negative, meaning the insurance operations are a source of both free capital and profit.
More commonly, insurers operate at an Underwriting Loss, meaning claims and expenses are higher than the premiums collected. This results in a combined ratio above 100%. For example, a combined ratio of 103% means the insurer paid out $1.03 for every $1.00 of premium it earned. That 3% loss is the Cost of Float. However, this isn't necessarily a bad thing! If the company can reliably generate investment returns of, say, 8% on its float, paying a 3% “interest rate” for that capital is a fantastic deal. The danger lies with undisciplined insurers who chase “growth” by writing bad policies, leading to a high and volatile cost of float that can wipe out any investment gains.
When analyzing an insurance company, don't just look at the stock price. Dig into the quality and cost of its float.