The Quiet Power of Insurance: Float, Trust, and the Long Road Ahead for Sri Lanka

Insurance is not usually an industry people get excited about. It lacks the glamour of technology, the visibility of property development, or the excitement that surrounds fast-growing consumer businesses. Most people only really think about insurance when something goes wrong — a car accident, a hospital bill, a flood, a fire, or the loss of a loved one. Yet historically, some of the strongest and most enduring financial institutions in the world were built on top of insurance businesses.

There is a reason Warren Buffett spent decades building Berkshire Hathaway around insurance operations. Behind the scenes, insurance creates one of the most powerful financial mechanisms in capitalism: float.

Float itself is actually a very simple concept. An insurance company collects premiums from customers today and promises to pay claims sometime in the future if a particular event occurs. Between the moment the premium is collected and the moment claims are paid out, the insurer is holding a large pool of money. That money belongs to policyholders, but the insurer has control over investing it in the meantime.

If underwriting is done properly, this becomes incredibly valuable. The insurer may not only earn profits from underwriting policies correctly, but also earn investment returns on the float it holds. Over long periods of time, this creates a powerful compounding effect because the float base itself often grows alongside the economy.

This is what made insurance so attractive to some of the world’s great investors and business builders. Most companies require debt or new equity to grow. Insurance businesses, however, can generate investable capital naturally through their operations. In some cases, insurers are effectively being paid to hold money. That is a very unusual business model.

The key, however, is discipline. Insurance can become extremely dangerous if management pursues growth recklessly. Premium growth looks attractive in the short term, but insurance liabilities often emerge years later. Poor underwriting decisions can remain hidden for long periods before surfacing all at once. This is why insurance has historically produced both extraordinary compounding businesses and catastrophic collapses.

Buffett often explained that float is only valuable if it is “cheap” or profitable. If an insurer continuously loses money underwriting policies, then the float is no longer an advantage because the company is effectively paying heavily for access to that capital. The magic only exists when underwriting remains rational and disciplined over long periods.

What makes insurance particularly interesting in Sri Lanka is not necessarily where the industry stands today, but rather where the country may be heading over the next two or three decades.

Insurance penetration in Sri Lanka remains relatively low compared to more developed economies and even several parts of Asia. In many advanced economies, insurance premiums as a percentage of GDP are significantly higher because insurance becomes deeply embedded into everyday economic life. People insure their homes, health, retirement, businesses, liabilities, logistics networks, and investment portfolios almost automatically. In many countries, insurance is not viewed as optional — it is simply part of how society functions.

Sri Lanka has not fully reached that stage yet, and there are understandable reasons for that. For much of the country’s post-independence history, Sri Lanka remained a relatively lower-middle-income economy where household disposable income was limited. When families are focused primarily on food, transport, schooling, housing, and daily living costs, insurance naturally falls lower on the priority list. Long-term financial protection becomes secondary to immediate survival and consumption.

There is also an important behavioural and cultural dimension to insurance adoption. Insurance fundamentally depends on trust. A customer pays premiums consistently for years hoping they may never actually need to use the service. The value proposition is invisible until something goes wrong. In countries where trust in institutions is weaker or where financial systems are still developing, insurance penetration often remains low because people are sceptical about whether claims will actually be honoured fairly and efficiently.

Asian societies historically also relied heavily on family structures as informal protection systems. Parents supported children, children supported ageing parents, and extended families absorbed financial shocks collectively. In many cases, those social structures reduced the urgency for formal insurance products. However, as economies urbanise and incomes rise, lifestyles become more financially complex. Families accumulate larger assets, vehicle ownership increases, home ownership expands, and medical costs rise sharply. Businesses become more interconnected and leveraged, while consumer finance and mortgage markets deepen. Insurance gradually transitions from being viewed as optional to becoming embedded within the financial architecture of society.

You can already see signs of this evolution in Sri Lanka today. Vehicle insurance has become widespread largely because regulation effectively forces adoption. Health insurance awareness has also grown considerably among urban middle-class households, especially after the pandemic exposed the fragility and limitations of healthcare systems globally. Corporate medical coverage is now viewed as an important employee benefit in many industries. Property insurance and catastrophe-related insurance may also become increasingly important over time as climate-related risks intensify and urban property values continue to rise.

The interesting thing about insurance businesses is that they often become stronger as economies mature. As insurance penetration rises, insurers accumulate larger pools of float. Larger float pools increase investment capacity. Stronger investment returns improve capital positions. Better-capitalised insurers can then underwrite larger and more sophisticated risks across the economy. Over time, insurers become important financial institutions in their own right.

This matters more than many people realise because insurance companies indirectly help finance economic development itself. In many developed economies, insurers are among the largest institutional investors in government bonds, infrastructure projects, property developments, and equity markets. Insurance pools long-duration savings and channels them back into productive parts of the economy. Countries that successfully build deep insurance industries, pension systems, and capital markets often become less dependent on volatile foreign capital because domestic savings pools become large enough to fund development internally.

Sri Lanka still has significant room to develop in this regard. The broader financialisation of the economy will likely play an important role over the next few decades. As societies become wealthier, more economic activity moves into formal financial systems. Savings increasingly shift away from cash and physical assets into structured financial products. Retirement planning becomes more important. Risk management becomes more sophisticated. Insurance naturally sits at the centre of that evolution.

This does not mean the path will be linear or easy. Insurance remains a difficult business. Competition can destroy pricing discipline very quickly. Inflation can distort claims assumptions. Weak investment management can damage returns. Catastrophic weather events or economic crises can expose weak balance sheets rapidly. However, from a long-term perspective, the runway for growth still appears substantial.

One of the interesting characteristics of developing economies is that some of the greatest opportunities are often found in industries that quietly compound alongside formalisation and rising incomes. Banking historically followed this path in many countries. Insurance may eventually do the same in Sri Lanka, albeit gradually and without much public excitement.

In many ways, insurance is ultimately a reflection of how a society manages uncertainty. Poorer societies tend to absorb risks informally through family networks and personal resilience, while wealthier societies institutionalise risk management through formal financial systems. That transition tends to happen slowly at first and then accelerate over time as incomes, assets, and financial sophistication rise across the broader population.

The irony is that insurance often appears boring on the surface precisely because the best insurance systems are designed to create stability. But underneath that stability sits a remarkably powerful economic model built on trust, patience, disciplined capital allocation, and compounding over very long periods of time.