What is insurance float, and how does a captive use it?
Float is premium that no claim has come for yet.
According to Jack Meskunas, Managing Director at Oppenheimer, float is the premium a captive holds before it has to pay claims. The money is not needed the day it arrives, so it can be invested instead of sitting in a checking account. Meskunas says the returns build up the assets inside the captive, and that surplus can eventually be paid back to the insureds.
Owners who ask about float have usually heard the term from Warren Buffett. Meskunas allows that it was Buffett's word for it, then describes the same mechanic in a captive: when an owner pays premium, that payment is not covering a claim due the next day.
The money goes into the account and stays there. Sometimes, in his words, essentially forever, if the claims never come. The gap between premium arriving and claims being paid is the whole idea.
Key takeaways
Premium paid into a captive is not covering a claim that comes due the next day.
Cash with no immediate claim against it can be invested rather than held idle.
Meskunas says the returns build assets and surplus, which may eventually go back to insureds.
His point is about what happens to the cash in the meantime. It does not have to sit in a money market fund or a checking account waiting for a loss. It can be put to work.
Meskunas says those returns make the captive more viable and financially healthier. He notes that some large group captives earn a credit rating from A.M. Best, which lets them take on other business, and that the surplus built along the way can eventually be dividended back to the insureds. Those are his observations about what the industry does, not a promise about any particular captive's results.
How float works
Premium timing is what creates investable assets.
- 01Premium is paid into the captive.
- 02Claims may not be due for some time, if at all.
- 03The cash can be invested instead of sitting idle.
- 04Returns build the captive's assets and surplus.
From the conversation
Jack Meskunas
Managing Director, Oppenheimer
“In other words, cash builds up, and there isn't any immediate claim on those assets.”
Transcript
Read the full transcript 20 turns
So, it brings us to our next question, which is when a lot of people
that are looking to enter a captive, they're sophisticated business people. They look up to
a guy from Omaha, and they mourn buffet. And, they point to him and they say, he, uses
something called the float. I want the float. What is float and how do we use it in captives?
Well, I, I think, I mean, that was sort of his term, but it's, what we're talking about.
What we're talking about is that when you pay your insurance premium, when the captive owner,
or the insured, pays his insurance premium, it's not to cover a claim that needs to be paid back
the next day. It goes into the account, and that money sits there, sometimes,
essentially forever, you know, if claims don't get, if they're on, if they're on
insurance claims. And so, that's loosely referred, many people refer to that as the float. In other
words, cash builds up, and there isn't any immediate claim on those assets. So, that money
can be invested. That's the idea. The idea is that it doesn't just sit in a money market account.
It doesn't just sit in your, in your checking account. It doesn't just sit in the captive's
checking account waiting for a claim to come in. It's put to work to, generate returns,
and those returns build up the, amount of, assets in the captive, which does a few things.
It makes the captive, first of all, makes it more viable. It makes it financially
healthier. Some big captive, some group captives actually get credit ratings. They get rated by
AMBEST, and they can turn around and take on other, business because they're a rated entity.
And it also, importantly, builds up surplus that can eventually be dividend back to the insurance.
So, they're, getting a return of their, of their premium over time
The views expressed are those of the featured guest, drawn from a recorded conversation, and reflect their own professional experience. Nothing on this page is insurance, tax, legal, or investment advice. Consult your own advisors about your specific situation.
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