Berkshire Hathaway 2006 Annual Meeting Audience Question # 39

It will be very hard to increase Berkshire’s float of 48, 49 billion at a big clip in the future

Warren Buffett:

Number 12.

Audience Member:

David Winters, Mountain Lakes, New Jersey.

Would you please discuss how your underwriting standards have changed as the weather patterns seem to become more severe, the challenges of global terrorism seem to escalate, and unforeseen super-cat events, such as earthquakes and pandemics, go into your thinking, and just what the prospects are for the development of the float?

Warren Buffett:

Well, the development of the float is a different question. That really depends on how much business we write in the future and the nature of the business, whether it’s long-tail or short-tail.

I think it will be very hard to increase our float of 48 or -9 billion at a big clip in the future. I mean, I’ve been amazed as what’s happened in the past. And it’s done way better than Charlie and I ever would’ve dreamt.

But, you know, we have… we’re getting to where we’re close to 10 percent of the float of the entire American insurance… property-casualty insurance industry… and some of it’s abroad that we have.

But it just can’t… it can’t grow at very rapid rates. But it can be very attractive, and so far, it has been.

In terms of the questions about underwriting in terms of pandemics or terrorism and all of that, I mean, you know, I’m aware of them. You’re aware of them.

We get propositions offered to us virtually every day, and in the end I… mostly Ajit, I mean, in this particular case, in terms of big-type contracts… financial-type contracts I would evaluate. He would…

But we talk about what we think the probabilities are of $50 billion events and up, or $20 billion events and up. And, he’s the fellow that does most of… he applies it, but we kick around the possibilities.

But that’s all there is to it. I mean, it’s a question of making judgments about whether you’re getting paid enough. And if we have a lot of money, you know, 30 years from now, it will mean that our judgments overall were decent.

And if we have a big loss on one this year, it does not mean that our judgment’s wrong because it… it’s going to lead to peaks and valleys. But there’s no magic to it.

There’s probably… I would feel that the earthquake experience of the last 100 or 200 years has more validity than the windstorm or the hurricane experience of the last hundred or 200 years. I don’t know that for sure, but I would bet real money that way, and we have.

What is… what will hurricane experience be like 10 years from now, in terms of the number of those that hit the United States and the ferocity of the ones that do hit? You know, I don’t know. But I’ll keep thinking about it every day.


Charlie Munger:

Well, I think the laws of thermodynamics are such that if the oceans get warmer… I think they are getting warmer… the weather is going to be… have more high- energy uproar in it.

So I think we’d be out of our minds if we wrote weather-related insurance on the theory that global warming would have no effect at all. And the natural reaction is to raise your prices, as the risks go up.

And whether you’ve raised them enough, and carefully controlled your risks enough, that’s the art of the business.

Warren Buffett:

Yeah. And you have this possibility that, you know, 1 percent changes or 2 percent changes in something can produce 100 percent of probabilistic changes in cost.

It’s an explosive sort of equation that you’re dealing with. And, you know, but that’s the game we’re in, and we don’t have to play it ever.

If we don’t like what we’re being offered… and we didn’t like what we were being offered a while back in many areas… somebody else can take our place in line. We’ll be happy to have them.

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