What happens to the insurance premiums you pay before you make a claim? They float.
Many insurance policyholders are familiar with two terms insurance companies use. A premium refers to the money paid toward a policy. A claim denotes the money that an insurance company pays out to a policyholder. However, the term float is often only known by insurance industry insiders.
Float refers to money that rightfully ought to be paid out to claimants but remains, for whatever reason, in the possession of the insurer. It's money that isn't actually owned by the insurance company but stays on the books for a few extra days or weeks regardless.
And those few days of delay make billions for the insurance industry.
Why Are Claims Delayed?
The insurance industry has evolved considerably since the 19th century.
In the early days of insurance, underwriters only profited from unclaimed premiums. Insurers had no immediate interest in holding on to people’s money longer than it took the bank to pay out claims. To increase profits, insurers focused on attracting cautious, accident-free clients while scaling up. Insurers eventually started investing premiums into low-risk assets, allowing profits to grow so long as paid claims stayed below a certain threshold.
But in the 1980s, business consultants pitched insurers on a new source of 'pure' profit: float. When a claim is approved, there's a small period where the money officially belongs to the claimant but remains on the insurer's books. What's important to note is that this money still accrues interest. By stretching that period to a few days or a few weeks, insurers can earn interest on money that doesn't belong to them.
The interest earned on one or two claims is negligible to large insurers, but tens of thousands of claims delayed by years in total time? A few days' delay meant billions in profits. The insurance industry was permanently transformed.
One of the industry’s most successful figures has admitted that holding on to float is crucial for profits. In a 2009 address to shareholders, Warren Buffett stated that “We were paid $2.8 billion to hold our float in 2008.” This quote reveals that not only does more float make more money, but insurance companies also strategically cling to float to make that money. Delaying claims allows insurance companies to squeeze as much interest out of unpaid claims as possible.
Does Float Cause Harm?
"Delaying a day or two won't hurt anyone," adjusters may say. But that conveniently ignores how insurance companies are profiting from money that belongs to claimants. Regardless of whether it causes discomfort or pain for claimants, it's simply wrong. And in our experience, a delay of any kind does harm people. For insurance companies, a few thousand dollars after a car accident is a number in a column, a data point. For the car accident survivor, it's a lifeline. When you don't know how you're going to cover rent or feed the kids, the difference between today and tomorrow is enormous.
What's more damaging is that insurance companies are deeply incentivized in direct opposition to their stated purpose: to provide relief when the unexpected occurs. Modern insurance companies differ from 18th- and 19th-century insurance companies in that shareholders have different interests from insureds (and in fact are two different groups in the first place). There's always been a balancing act between serving shareholders vs. serving claimants, but the implementation of float interest throws that balancing act way off.
Claimants Need an Advocate Against Insurance Companies
Insurance companies now use float in a way that has shifted their focus away from serving payors. Instead, they’ve discovered that they can increase profits and make shareholders happy by delaying claims and making slightly more money. After all, the law does not always specify that insurance companies must pay out a claim within a certain amount of time—it only dictates that they must respond to their claimants.
If your insurance claim is being unfairly denied, you do not have to be forced to suffer while your insurer is profiting. Call our Louisiana insurance claims attorneys today at (225) 209-9943 for a free consultation of your situation!