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This is some confusion about this, most of our insurance premiums go to paying claims. Most insurance companies operate with a slight "underwriting loss" or sli

by joshe 8y ago

This is some confusion about this, most of our insurance premiums go to paying claims. Most insurance companies operate with a slight "underwriting loss" or slight "underwriting profit", but usually quite close to even. The companies then make money by investing the "float". So premiums going down by 90% is an implied 90% reduction of harm from cars. That's both property damage and human injury. Warren Buffett: "...so vigorous indeed that it sometimes causes the P/C industry as a whole to operate at a significant underwriting loss. This loss, in effect, is what the industry pays to hold its float". [1] [1] https://www.businessinsider.com/warren-buffett-insurance-float-2017-4 https://www.businessinsider.com/warren-buffett-insurance-flo... (with a nice explanation).

rubyfan 8y ago
GEICO and Berkshire Hathaway are a unique beast in the industry. Their ability to gainfully employee capital is somewhat unmatched. Historically many companies managed to eek out an underwriting profit but distracted driving and bodily injury changed the game for many auto underwriters over the years following the iPhone's debut. Just in the last year or two or so years have some companies returned to modest profitability in this line. If you are not Warren Buffett your need to generate an underwriting profit is more or less essential. Weak returns on low risk investments vehicles which have performed worse in a post crash world make it even harder for insurance companies in general and make underwriting profit even more essential. If you are a multi-line writer at this point you are well aware of the impact that autonomous, vehicle services and mobility services will have on auto. At this point its slightly better than a loss leader for other more profitable lines.
riskneutral 8y ago
There is no confusion, 90% reduction in premiums directly leads to a 90% reduction in “float.”
- codyb 8y ago
  Wouldn't the insurance companies keep any float they'd received up until the sharp decline in coverage costs?
  - riskneutral 8y ago
    Yes, "float" is on the asset side of the insurer's balance sheet. As coverage costs decline, the liability side of the balance sheet will shrink, causing the insurance company to be overcapitalized. Shareholders will then demand that the excess capital be used to pay for share buybacks and dividends (thereby returning the excess capital to investors so that it can be more efficiently allocated).

by joshe 8y ago

rubyfan 8y ago

GEICO and Berkshire Hathaway are a unique beast in the industry. Their ability to gainfully employee capital is somewhat unmatched. Historically many companies managed to eek out an underwriting profit but distracted driving and bodily injury changed the game for many auto underwriters over the years following the iPhone's debut. Just in the last year or two or so years have some companies returned to modest profitability in this line. If you are not Warren Buffett your need to generate an underwriting profit is more or less essential. Weak returns on low risk investments vehicles which have performed worse in a post crash world make it even harder for insurance companies in general and make underwriting profit even more essential. If you are a multi-line writer at this point you are well aware of the impact that autonomous, vehicle services and mobility services will have on auto. At this point its slightly better than a loss leader for other more profitable lines.

riskneutral 8y ago

There is no confusion, 90% reduction in premiums directly leads to a 90% reduction in “float.”

codyb 8y ago
Wouldn't the insurance companies keep any float they'd received up until the sharp decline in coverage costs?
- riskneutral 8y ago
  Yes, "float" is on the asset side of the insurer's balance sheet. As coverage costs decline, the liability side of the balance sheet will shrink, causing the insurance company to be overcapitalized. Shareholders will then demand that the excess capital be used to pay for share buybacks and dividends (thereby returning the excess capital to investors so that it can be more efficiently allocated).