Buffett on insurance "float" · Transcript

WarrenThe insurance business provides us with float, and float is money that we hold that doesn't belong to us. It's like a bank having deposits, a bank has deposit, that money doesn't belong to it, but it holds the money. In the insurance business, a similar phenomenon takes place in that policyholders give us their money at the start of the policy period, and therefore we get the money paid in advance for the product. And secondly, it takes time to settle losses, particularly in the liability. area. If you bang up a fender on your car, it's going to get settled very quickly. So there's, but if there's a complicated injury or something, it may take some years to settle. And during that period, we hold the money. So we have, in effect, something that is tantamount to the deposits of a bank. But whereas the deposits of a bank, it's quite easier to calculate the approximate costs. In the case of the float that the insurance company has, you don't really know what the cost of that float is until all your policies and losses, the policies have expired and your losses have all been settled. Well, that's forever in some cases. So you're only making an estimate as you go along of what that float is costing. To date with Berkshire, in the 29 years we've been in the business, it appears never certain, because you don't know for sure what's going to happen, but it appears that our float has not cost us anything on average. It's been years when we've had an underwriting loss, when there's a cost. There's been years when we had an underwriting profit, and so we had a reverse cost. So we have obtained that float on very advantageous terms over the years. Far more, I mean, fully as important as that. It's important to get it at a low cost, in our case, no cost. But the other important thing is that we've grown it. dramatically. And so we've gotten more and more money without having any cost attached to it. Float, per se, is not a blessing. We can show you many insurance companies that thought it was wonderful to generate float, and they have lost so much money in underwriting that they'd be better off if they'd never heard of the insurance business.