Buffett, Jain Speak the Hard Truth About Insurance

"You get those surprises in insurance, practically all of them are unpleasant."

Buffett, Jain Speak the Hard Truth About Insurance

Berkshire Hathaway held its annual shareholder meeting on Saturday and offered their perspectives on everything from Bitcoin (not good) to tech stock valuations (reasonable).

But with Berkshire being one of the largest insurers in the world, Chairman Warren Buffett and Vice Chairman of Insurance Operations Ajit Jain offered their thoughts on where the industry and its risks are headed.

Below are some of their comments, which have been edited for accuracy and clarity.

On a short tail vs. a long tail future

Ajit Jain

Clearly contract certainty is an issue for us in the insurance industry. It is an issue that cuts across not only the long tail lines that you mentioned, but even short tail property focused lines. The most recent example is business interruption, which is an integral part of any property insurance policy that is bought and sold by corporations."

It is a risk. Every time we issue a contract that either, because of sloppiness in terms of how that contract is written or because of the regulatory environment, we all have to live in that the words in the contract. [The contract wording] may be tortured too. And normally when they are tortured, they ended up going against the insurance industry and not in their favor. So it is a risk.

It's an unknown risk in terms of how bad it can be. I hope we price for it when we price for the product [and] we throw in something for the unknown unknowns, if you will. And we try and aggregate our exposures by major risks categories. Hopefully that'll give us some comfort in terms of having some boundaries on what the exposure really can be, but there's no question.

Warren Buffet

"You get those surprises and insurance, practically all of them are unpleasant. I mean, you get the premium on upfront and that's pleasant. And then from there on, you get some very imaginative losses that come through it and you get some that you've taken on.

We are willing to lose, in terms of sort of the outside limit, $10 billion in a single event. And we want to get paid very appropriately for that, but we've got the resources to do it. But we don't want to lose $10 billion in something where we only thought we could lose $50 million or something like that. "

On Geico vs Progressive


"There's no question, Progressive is a machine.

They are very good at what they do, whether it's underwriting in terms of matching rate to risk or whether it's admin claims.

Having said that, I think Geico is catching up with Progressive. More than a year ago Progressive had margins that were almost twice as much as Geico's and growth rates that were almost twice as much as Geico. If you look at the results as of now, Progressive is still crushing it in terms of growth relative to Geico, but Geico is certainly caught up with Progressive in terms of margins. And hopefully that gap will be non-existent in the future.

The second point I want to make on the issue of matching rate to risk. Geico clearly missed the bus and were late in terms of appreciating the value of telematics. They have woken up to the fact that telematics plays a big role in matching rate to risk. They have a number of initiatives and hopefully they will see the light of day before, not too long, and that'll allow them to catch up with their competitors in terms of the issue of matching rate to risk. "


"State Farm is still the largest auto insurer, but I will predict that five years from now it's very likely that the top two will be Geico and Progressive. In which order we'll see, but, but both companies are going to do very well in my opinion. Geico's done well extremely well, But Progressive was better at that setting the right rate.

Progressive has certainly done better, but when it comes to branding Geico is miles ahead of Progressive. And in terms of managing expenses as well, I think Geico does a much better job than anyone else in the industry."

On Covid-19 and what is has taught insurers about systemic and correlated risk


"In the insurance business, we often think about pandemic risk as one of the risk factors that we need to cope with in our business. Having said that, I think the big lesson for us having gone through recently is that while we were aware of the fact that pandemic risk is a risk factor, if it's totally, totally under-priced by all of us in the industry

So I think the big lesson for us is to recalibrate and rethink about what the return time is for something like pandemic risk. Separately, we haven't yet done a good enough job as an industry in terms of correlating the risk and aggregating the risk and making sure that we can deal with the aggregate numbers."

In terms of reserves, starting from last year to the end of the first quarter of this year, we have put up $1.6 billion and change in terms of reserves. Now, what that doesn't take into account is some of the frequency benefit because of COVID-19 that results because of fewer accidents and Geico has had a huge tailwind because of that.

But in terms of what the insurance operations collectively are going to be writing checks for that number, as of now, $1.6 billion. y guess is that will probably grow because if you look upon it, the industry as a whole is reserved about $25 to $30 billion for COVID-19. As of now, if you believe the pundits in the industry, they will tell you that number is probably going to be closer to a $100 billion. So there's another about $70, $75 billion of COVID 19 losses that need to flow through insurance industry's balance sheet and income statement.

Therefore, our number of $1.6 billion is going to be a lot, lot higher, but it's something we can manage.


It's one great human catastrophes of all time, but it's not that big an insurance. I would say this; if the insurance industry thinks they're going to lose $100 billion, $100 billion ought to be up on their books. Our goal is to put up the liability when we think it happened.

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