Property and casualty insurance works through a simple but powerful model: collect premiums, invest the float and pay claims. The combined ratio — claims paid plus operating expenses as a percentage of premiums collected — is the essential metric. Below 100 means underwriting profit; above 100 means claims and costs exceed premiums, and the business must rely on investment income to generate any profit. Buffett built a significant part of Berkshire Hathaway's value on GEICO's low-cost auto insurance and the investment float it generates. Pricing cycles are driven by loss experience: after severe catastrophes, capacity withdraws, prices rise and terms tighten — creating hard market conditions that are typically the most attractive entry points for investors. Climate change is increasing the frequency and severity of weather-related losses, which is forcing significant repricing in homeowners and commercial property insurance. For investors, insurers with conservative reserving, disciplined underwriting and strong investment portfolios offer attractive compounding; the worst outcomes come from underwriting without adequate pricing for actual risk exposure.
