I was listening to a program introducing Geico Insurance, and was wondering how on earth Warren Buffet could amass such a pile of wealth when they began to describe the idea of ‘float’, the money that comes from the members or insured. This money accumulates at such a rate and doesn’t have to be deployed quickly at all.
This means that the money can be invested for a longer period. Now in my business, we have a float of 3 months. This is a wonderful thing to have, we get money from customers and the costs are defrayed slowly over about 12 weeks, until the rebill date. But compared to insurance, such as medical malpractice rates, this is a relatively short period.
For many kinds of insurance, there is negligible risk that a policy will actually be ‘called’ on; and even if it is, you can sell the risk on to a re-insurer to mitigate the costs. While there is inherent investment risk in any investment you make, you can get at least 1% if you put the cash in the bank in the short term, with almost no risk.
Of course, when you sell insurance, commissions and costs come straight out the pot up front. But it has made Warren Buffett one of the richest in the world, simply leveraging OPM. Brilliant!