Protect your alpha

The unique float

A unique thing for the insurance industry is the so-called float. The float is the premiums that flow in from customers. The insurance companies hold them until they get to the claimants. And the uniqueness of the float is that insurance companies can use the cash to earn excess returns until it has to be paid out. As you know, this was something Warren Buffett figured out early on.

Differences within areas of insurance

There are various ways that insurance companies make money, and obviously, some differences between real estate insurance companies and healthcare insurance companies, for example. Although, in the big scheme of things, the insurance industry makes money by calculating, pricing, and diversifying risk, charging premiums, earning underwriting profits, and reinvesting its float.

Breaking even

However, many big insurance players are indifferent regarding the profitability of their underwriting and often settle for breaking even. This is because they have the ability to invest in the premiums at attractive returns.

Pretty resistant to recession

Insurance businesses also tend to be fairly recession-resilient and stable, as people need risk coverage for their health, homes, and cars during good and bad times.

Key insurance-specific metrics to be familiar with:

  • Loss ratio. The amount of losses due to claims in relation to the earned premiums.

  • Expense ratio. The amount of expenses in relation to the earned premiums.

  • Combined ratio. The amount of losses due to claims and expenses in relation to the earned premiums.