Insurance Reserve Market

March 12, 2022 10:59 AM

I am a public librarian and I received a call from someone asking how he can invest in insurance reserves. From my searching, I didn't see any information on a market for those funds. Those funds are the money insurance companies are required to set aside to meet future claims. It seems to me a strange type of fund to want to invest in, anyway. Any idea what this guy actually wanted?
posted by zzazazz to Work & Money (5 answers total)

Insurance companies invest their own money, primarily in bonds. These companies are investing the cash they have in order to generate a return for themselves rather than seeking money from others in order to invest it (or at least when they seek money from others to invest, they do it in the form of premiums they charge or by selling stock in the company). You can't invest in insurance reserves because the flow of money would be in the wrong direction, in other words.

A person can buy shares in an insurance company, which is effectively investing in both of the things an insurance company does to earn income: selling insurance and investing the money from premiums until it is needed.

A person can also buy bonds and other investments like those an insurance company would own. Here is a PDF with details on what insurance companies in the US hold. The best way to approximate the holdings of an insurance company would be to purchase a handful of ETFs that would cover the bonds, mortgages, stocks, etc.
posted by ssg at 12:22 PM on March 12, 2022 [2 favorites]

The inquiring party has the concept backward. Insurers have a pool of money that they need to invest short-term while they wait for claims that need to be paid. They are not looking for investors to add to the pool.
posted by yclipse at 3:03 PM on March 12, 2022 [3 favorites]

Warren Buffet’s company, Berkshire Hathaway owns an insurance company. This company manages a large insurance float, and has done so very profitably for many years.

Buffet has mentioned this source of profit a number of times in his annual letters, and also the lauds the manger of this insurance float.

If you misread this stuff a bit, you might think you could invest your own money in the float, but the closest thing would be to buy Berkshire shares back in the 1980’s. (It’s a conglomerate now, so shareholders are exposed to much more than insurance float.)
posted by thenormshow at 6:56 PM on March 12, 2022 [1 favorite]

Response by poster: Thank you, excellent answers.
posted by zzazazz at 12:30 PM on March 13, 2022

The short answer is, he could buy an insurance policy. That's where insurance companies get the money to invest: from premiums paid by policyholders. With mutual insurance companies, you'll even get an ownership share, rather than just being a customer.

There are two usages of the word "reserves" here that are kind of confusing to me. (I work at an insurance company.) On the one hand, there's reserves as in cash reserves, the money you have just laying around. On the other hand, my company (and most other companies as I understand it; I don't think we're unique) use "reserve" to mean a specific amount of money set aside to pay a claim. Like, you get rear-ended and take your car into the shop for a new bumper. We open a reserve for $2000. Then when the shop sends us the bill for $1897.32, we pay $1897.32 and the $103.68 left over just goes back into the bigger pool of money. So investing in that kind of reserve is incredibly stupid. That $2000 will never increase, and is almost certain to decrease by >90%. I am pretty sure this guy is referring to the cash-on-hand usage, but it's amusing to me as an industry person to think of the latter.

As a more general rule of thumb, I will say that if you need to ask a public librarian how to invest in something, it's probably not something you should be investing in.
posted by kevinbelt at 2:26 PM on March 14, 2022 [1 favorite]