What does the term "float" refer to in insurance?

The term "float" in insurance primarily refers to the time between when a claim is paid and when the premium for that insurance coverage is received. This period can create a financial buffer for insurance companies, as they manage the cash flow associated with payouts and incoming premium payments.

During this float period, the insurance company may invest the premium amounts for a time before they are needed for claims. This can be beneficial for the company’s liquidity and overall financial health. Effective management of float allows insurers to maximize their investment income while still maintaining sufficient reserves to cover claims as they arise. Understanding this concept helps insurance professionals grasp the financial dynamics of how insurance companies operate, particularly regarding cash flow and investment strategies.