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Matthias Knab, Opalesque:

Vintage Value Investing writes on Harvest Exchange:

Most people know about insurance industry terms such as premiums (the money a policyholder pays every month or every year for an insurance policy) and claims (the money an insurer must payout when the policyholder gets in a car accident, has a medical operation, etc.).

But do you know what happens to your paid premiums once they're actually sent to the insurance company?

Insurers don't pay out all the money they collect right away. Rather, an insurance company will collect money in the form of premiums, invest that money , and then pay out claims as needed at some future date. The difference between premiums collected and claims paid out is called insurance float.

It's a lot like how a bank will collect deposits, invest that money (through loans to other people or companies), and then will repay your money at some future date when you eventually make a withdrawal.

Insurance float has been a huge contributor behind Warren Buffett's success with Berkshire Hathaway . Because premiums received are essentially like loans from policyholders (that only need to be paid back when a claim is made sometime in the future), Buffett has been able to use insurance float as leverage when investing in stocks and private ......................

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