Float: why the best insurers get paid to hold your money
Insurers collect premiums long before they pay claims. The ones that price risk well get to invest that money for free.
Key points
- Insurers hold premiums for months or years before paying claims. That money is called float.
- A combined ratio below 100% means the insurer makes a profit on underwriting before any investment income.
- Disasters and underestimated claims are the main risks.
When you pay for car or home insurance, the insurer gets your money now and pays claims later, sometimes much later. In between, it can invest that cash. The pool of money held this way is called float.
Warren Buffett built much of Berkshire Hathaway around this idea. Its insurance businesses, including GEICO, have supplied large amounts of float that Berkshire invested in stocks and in whole companies.
The number that decides everything
Float is only valuable if the insurance itself doesn’t lose money. Insurers measure that with the combined ratio: claims plus expenses, divided by the premiums earned.
- Below 100%: underwriting made a profit. The insurer is effectively being paid to hold the float.
- Above 100%: underwriting lost money, and investment income has to cover the gap. The float has a cost.
Many insurers run a little above 100% in an average year and rely on investment income to make a profit. The best-run ones stay below it most years, which is why investors care more about underwriting discipline than about growth.
Why interest rates matter here too
Insurers invest float mostly in high-quality bonds. When rates rise, new money earns more, and investment income climbs with a lag as older bonds mature and are replaced. That is one reason insurers’ profits improved as rates rose from the very low levels of the early 2020s.
What can go wrong
- Catastrophes. Hurricanes, wildfires and floods can produce years’ worth of claims at once. Insurers buy reinsurance to limit the damage, but that protection has become more expensive.
- Underestimated claims. Some claims, such as liability lawsuits, take years to settle. If an insurer set aside too little, it has to add to its reserves later, which hits profit long after the policy was sold.
- Price wars. When competitors cut prices to win customers, combined ratios drift up across the industry.
Progressive and Chubb show two different ways to win. Progressive leans on data and pricing in car insurance; Chubb focuses on commercial and high-value personal policies, where expertise matters more than price. Both are judged in the end by the same thing: whether their underwriting makes money.