Originally Posted by
mistaTea
As the whole float thing doesn’t quite pass the sniff test, I asked my ‘personal consultant’ to review that 21 page document for me and comment on the idea of ‘float’ in the retirement village context.
Come on, you gotta admit this is fun?
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Geoff Gannon's application of the 'float' concept to the retirement village sector, particularly in the case of Summerset, is innovative and presents an interesting financial perspective. However, there are critical points and nuances that suggest this might not be a precise or fully applicable comparison to the traditional understanding of 'float'. Here's why the analogy may be considered incorrect or overly simplistic:
1. **Nature of 'Float'**: In its most common financial context, particularly in insurance, 'float' refers to money collected from premiums before claims are paid out. This money can be invested for the benefit of the insurer during the interim. The critical aspect is that this money is, theoretically, not the company's but will be used to cover future claims. In contrast, the money collected from residents in retirement villages, while it does serve as upfront capital (akin to interest-free loans), represents a contractual obligation to provide housing and services, not to cover claims or losses. This fundamental difference in the nature of obligations makes the retirement village 'float' conceptually different from insurance float.
2. **Risk Profile**: The risks associated with managing 'float' in insurance are significantly different from those in operating a retirement village. Insurers use the 'float' to make investments that can cover the future claims and still generate profit. For retirement villages, the collected funds (considered 'float') are primarily used for development and operational costs. The risk of real estate market fluctuations and the demographic shifts affecting demand for retirement villages do not parallel the insurance industry's investment and claim risks
3. **Return and Utilization**: Insurance companies can invest 'float' in a wide range of assets, aiming for returns that exceed their claims and operational expenses. For retirement villages, the use of funds is more restricted, primarily funneling into real estate and operational services. This limitation impacts the potential for generating additional income from these funds, unlike 'float' in the insurance sector, where investments can lead to significant profits beyond the core business model.
4. **Accounting and Financial Implications**: 'Float' in insurance is an understood and accepted financial concept with clear accounting practices for handling these funds. Applying the 'float' concept to retirement villages introduces complexity into financial statements, as these funds must be accounted for differently, reflecting obligations to residents rather than potential claims payouts. This complexity could lead to challenges in financial analysis and valuation.
5. **Regulatory Environment**: The regulatory oversight for insurance companies managing 'float' is stringent, with specific requirements for reserves to ensure claims can be paid. The regulatory environment for retirement villages, while also stringent, operates under different principles, focusing on consumer protection and quality of service rather than financial solvency related to claims payouts. This difference highlights another area where the analogy between insurance 'float' and retirement village funds breaks down.
In conclusion, while the comparison can offer interesting insights into the financial management of retirement villages, the fundamental differences in obligation nature, risk profile, utilisation of funds, and regulatory considerations suggest that equating retirement village funds to 'float' in the traditional sense may not be entirely accurate or appropriate.