“Property casualty insurers receive premiums upfront and pay claims later… This collect-now,
pay-later model leaves P/C companies holding large sums—money we call “float”—that will
eventually go to others. Meanwhile, insurers get to invest this float for their benefit. Though
individual policies and claims come and go, the amount of float an insurer holds usually
remains fairly stable in relation to premium volume.”
Multiple sources of capital
Shareholder Equity (like any other guys)
Reserves from Policyholders (unique to insurance)
Better than banks
insurance cos can reduce their cost of float down to zero
Competition
fierce competition creates mediocre returns
low barriers-to-entry
as Buffet says
“Unfortunately, the wish of all insurers to achieve this happy result creates intense
competition, so vigorous in most years that it causes the P/C industry as a whole to operate a
significant underwriting loss. This loss, in effect, is what the industry pays to hold its float. For
example, State Farm, by far the country’s largest insurer and a well-managed company
besides, incurred an underwriting loss in nine of the twelve years ending in 2012… Competitive
dynamics almost guarantee that the insurance industry—despite the float income all
companies enjoy—will continue its dismal record of earning subnormal returns as compared
to other businesses.”
AmitKumarDas
commented
6 years ago
Float as per Buffet
Multiple sources of capital
Better than banks
Competition