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An example to the last part in the real-world: Geico is widely known to be the cash float of Berkshire Hathaway, Buffett’s main investment vehicle. It’s basical
by rolleiflex 5y ago
An example to the last part in the real-world: Geico is widely known to be the cash float of Berkshire Hathaway, Buffett’s main investment vehicle. It’s basically a costless margin loan for Berkshire that it can freely use in investment. The main savings Geico passes onto you in part comes from the fact that they have a better use for capital (i.e. BH is wildly good at investing) than most other insurance companies.
- Scoundreller 5y agoI’ve always wondered about this logic: it makes sense for life insurance where the average person pays in for decades before withdrawing. But for geico (primarily auto), where’s the float? I thought it was like a pyramid scheme: this years payments pay out this year’s claims. There would be minimal float for the future except to cover black swan events like a hurricane hitting a state every 10 years, and that might be what Reinsurance is for (something else BH does a lot of, and probably self-deals a lot). Float would be great for the insureco, but any insurer charging anything more annually than average annual claims will lose all their business.
- DangitBobby 5y ago> Float would be great for the insureco, but any insurer charging anything more annually than average annual claims will lose all their business. What are you basing the assumption that insurance companies are working with low margins on? There are many competitors, sure, but what reason is there to believe that they must compete on price?