How Berkshire writes insurance policies
Mr. Buffett, Mr. Munger, my name is Dave Lankes. I’m a senior editor at Business Insurance Magazine.
A two-part question for you. Can you explain a little bit regarding your primary insurance operations? What drove up written premiums by more than 50 percent last year, and if you expect that to continue this year?
And then regarding your earlier comments on the stupid things reinsurers can do en masse, can you explain what potential pitfalls that the new cat facilities in Bermuda will have to avoid that you feel Berkshire Hathaway won’t fall into?
Well, the first question about our primary insurance figures, you’ll find it way in the back someplace. But they’re a little distorted because we bought Central States Indemnity, what would it be, late in the year ’92. So there’s a lot more premium volume in
there for Central States in ’93 than there was in ’92.
Our basic… National Indemnity’s basic insurance, which is commercial, auto, and general liability, premium volume was fairly flat, the Homestate operation fairly flat, Cypress up somewhat. But those numbers were not anything like the changes…
So our business last year, pro forma for including Central States Indemnity for all of ’92, would not have shown a dramatic change. There really hasn’t been much happening in our primary business, except that it’s been run, it’s done very well, but it is not growing or exploding. And that’s true this year as well as last year.
It’s a good business. And it could grow in certain kinds of markets very substantially, but it is not growing in this market, and it did not grow last year, although its underwriting was very good.
In the reinsurance business, I think, essentially, the difference in our reinsurance business from many others, you know… it doesn’t include them all in a place like Bermuda… is essentially the difference that may exist in our operations and securities versus other people.
We will offer reinsurance at any time in very large quantities at prices we think make sense. But we won’t do business if we don’t think it makes sense, just like we will buy securities, to the extent of the cash we have available, if they make sense. But we have no interest in being in the stock market per say just to be in it. We want to own securities that make sense to us.
I think for most managements, if the only thing they’re in is the reinsurance business, they may like it better when prices make sense, but they will, I think they will be prone to do quite a bit of business when prices don’t make sense as well, because there’s no alternative, except to give the money back to the owners. And that is not something that most managements, you know,
do somersaults over.
So, I think we are in a favored position, essentially being… having the flexibility of capital allocation that lets us take the lack of business with a certain equanimity that most managements probably can’t, because of their sole focus on the business.
Rates will get silly, in all likelihood, after a period when nothing much happens, when you’ve had a couple of years of good experience.
We price to what we think is exposure. We don’t price to experience. I mean, the fact that there was no big hurricane last year… I forget the name of the one that was coming in at North Carolina and then veered out essentially… but to us, it has nothing to do with the rates next year whether that hurricane actually came in in a big way or veered out into the Atlantic again. I
mean, we are pricing to exposure.
And everyone says that, but the market tends to price and respond to experience, and generally to recent experience. That’s why all the retrocessional operations in London, you know, in the spiral, went busted, because they priced, in our view, they priced to experience rather than to exposure.
It’s very hard not to do that, to be there year after year with business coming by and investors expecting this of you and not do that.
But we will never knowingly do that. We may get influenced subconsciously in some way to do that, but we will not do that any more than we will accept stock market norms as being the proper way for us to invest money and equities.
Basically, when you lay out money or accept insurance risks, you really have to think for yourself. You cannot let the market think for you.
Yeah, I think Berkshire is basically a very old-fashioned kind of a place. And it tries to exert discipline to stay old-fashioned.
And I don’t mean old-fashioned stupid, I mean, you know, the eternal verity, so to speak, basic mathematics, you know, basic horse sense, basic fear, basic discriminations regarding human nature, all very old-fashioned. And if you just do that with a certain amount of discipline, I think it’s likely to work out quite well.
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