Insurance
Float (insurance)
Premiums an insurer holds and invests before it pays claims.
Last reviewedWhat does Float (insurance) mean?
Float is the money an insurer holds because customers pay premiums up front while claims are paid later, sometimes years later for liability or life cover. The insurer invests this money and keeps the investment income. Example: an insurer collects 1,000 of premium and pays the claims on average two years later. If it earns 4 percent on that money, it makes about 40 a year while it holds it, even if underwriting only breaks even. Warren Buffett made the idea famous in his letters to Berkshire Hathaway shareholders. Float is only cheap if the combined ratio stays near or below 100 percent.
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Related terms
- Combined ratioLoss ratio plus expense ratio. Below 100 percent means an underwriting profit.
- Working capitalCash tied up in running the business day to day.
- Loss ratioClaims as a share of premiums earned.
- Expense ratio (insurance)An insurer's costs of selling and running policies as a share of premiums.
- ReinsuranceInsurance for insurance companies.
- PersistencyThe share of policies still in force and paying after a set time.
- TakafulIslamic insurance built on mutual help, where members share each other's losses.