When most people think about how insurance companies make money, they imagine a straightforward equation: collect premiums, pay claims, and keep whatever remains. That remaining balance—if there is one—is known as underwriting profit.
Yet underwriting profit is only one part of the insurance industry's financial model. For many major insurers, underwriting contributes far less to overall profitability than another, often misunderstood mechanism: the insurance float.
What Is Insurance Float?
The float consists of funds insurers hold between collecting premiums and paying claims. During that period—which can extend months or even years—the insurer controls large sums of money that it didn't have to borrow, raise from shareholders, or pay interest on.
Warren Buffett, whose success at Berkshire Hathaway is deeply tied to insurance operations, has explained the float better than anyone.
Warren Buffett on Insurance Float:
"Insurers receive premiums upfront and pay claims later. … This collect-now, pay-later model leaves us holding large sums—money we call 'float'—that will eventually go to others. Meanwhile, we get to invest this float for Berkshire's benefit. … This combination allows us to enjoy the use of free money—and, better yet, get paid for holding it."
—Warren Buffett, quoted in NPR, Jacob Goldstein, "Warren Buffett Explains The Genius Of The Float" (March 1, 2010)
This description makes clear why float is such a powerful tool: it functions as interest-free investment capital that insurers can deploy for their own benefit.
Some insurers even operate at underwriting losses because the investment returns generated by their float more than compensate for the shortfall. Understanding this dynamic requires examining underwriting profit and float profit separately.
Underwriting Profit: The Insurance Operation on Its Own
Underwriting profit is the financial result of the insurance operation itself, calculated by subtracting claims and operating expenses from the premiums collected. It reflects how effectively an insurer prices risk and manages its operations.
While underwriting results are important, they rarely give a complete picture of an insurer's financial performance. Many insurers operate at an underwriting loss. Yet those same companies often report substantial overall profits.
The reason? Investment income from the float.
Float Profit: The Investment Engine Behind the Insurance Industry
The float consists of the premiums insurers hold before paying claims. While these funds ultimately belong to policyholders or claimants, insurers are free to invest them in the meantime. The investment income generated from the float frequently exceeds underwriting margins.
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For many insurers, float profit is not merely a supplement to underwriting results—it is the primary driver of profitability. Buffett's success at Berkshire Hathaway is perhaps the clearest example of how transformative the float can be when managed effectively.
The South Carolina Debate: Why Float Matters in Tort Reform
This distinction between underwriting profit and float profit is at the center of ongoing tort reform debates in South Carolina. State lawmakers have held multiple hearings examining insurance profits and premium hikes, and experts have emphasized the extraordinary financial power that float provides to insurers.
In testimony before the South Carolina legislature, one point was especially striking: if a large insurer such as Berkshire Hathaway delayed claim payments by even a single day, the investment income generated from that additional day of float could reach as much as twelve million dollars.
This creates a striking incentive for insurers to delay paying claims.
The Financial Incentive to Delay Your Personal Injury Claim
This highlights the immense value of float, even over extremely short periods. It also shows why relying solely on underwriting data can give policymakers a distorted picture of an insurer's real financial condition.
An insurer operating at an underwriting loss may still be generating enormous profits through investment of the float—and those profits can far outweigh any underwriting shortfalls. In other words, focusing exclusively on underwriting performance ignores the true economic engine of the insurance industry.
The South Carolina hearings demonstrate that understanding float is essential to understanding insurance profitability. Without acknowledging float income, discussions surrounding tort reform risk being incomplete or misleading.
Why This Matters for Personal Injury Victims
If you've been injured in an accident and are waiting for your insurance settlement, understanding the float explains why insurance companies may drag out the claims process. Every day they delay paying your claim is another day they earn investment income on your money.
This is one reason why having an experienced South Carolina personal injury attorney matters. Insurance companies have sophisticated financial incentives to delay, deny, or undervalue your claim. You need an advocate who understands these tactics and will fight to get you the compensation you deserve without unreasonable delays.
Insurance Companies as Investment Institutions
This evidence leads to the conclusion that insurance companies don't simply sell policies. They function as large-scale investment entities that use the float as a form of cost-free capital. Their financial strength depends not only on how well they underwrite risk, but on how effectively they invest the vast pool of money they hold between premium collection and claim payment.
Underwriting profit shows how the insurance operations are performing. Float profit reveals how the company as a whole is performing. The difference between the two explains why insurance companies today are, in many respects, more like investors than insurers.
Protecting Your Rights Against Insurance Delay Tactics
At Pracht Injury Lawyers, we understand the financial incentives that drive the behavior of insurance companies. We understand why they delay claims, and we know how to counter their tactics effectively.
If you've been injured in any incident caused by someone else's negligence, don't let the insurance company profit from delaying your claim.
Contact our South Carolina personal injury attorneys today for a free consultation. We'll review your case, explain your options, and fight to get you the full compensation you deserve.
