Berkshire Hathaway 2009 Annual Meeting Audience Question # 43

The worst case scenario for Berkshire’s insurance business

Warren Buffett:

Becky.

Becky Quick:

This is a question from Paula Sauer. And, since Charlie seems to be getting more optimistic, maybe we should ask him this question first. And then Warren, you can try and top it.

But Paula writes in, “What’s the worst-case scenario you could imagine with respect to the insurance business?”

Charlie Munger:

You mean ours or generally?

Becky Quick:

I believe she means yours in particular.

Charlie Munger:

Yeah. Well, the very worst case is some catastrophe where we lose quite a few billions of dollars pretax. Even that, I don’t think, significantly impairs the basic business in place.

So I think we have a marvelous insurance business. I don’t want to trade it for any other that I know. How about you, Warren?

Warren Buffett:

Yeah, no, it is a fabulous business.

The worst… I used to say we would probably play 4 percent to 5 percent of the industry loss… from any mega-catastrophe.

I’m not sure where Katrina finally came in. I don’t know whether it was 60 billion or something in that area. And we probably did pay close to… we were in that 4 percent to 5 percent range.

We’re lower than that, probably, right now, not necessarily way lower. But if we had $100 billion catastrophe, you know, we would probably pay 3 to 4 percent of that, currently, so that you’d be talking 3 to 4 billion.

You know, the worst… I think the worst situation that could occur is if we ran into so much inflation that people got very, very unhappy with anything that they had to buy in their daily life.

This applies in the utility business, too, but certainly like auto insurance, and in effect, that they express their outrage at inflationary increases and said, “Let’s nationalize the whole thing.” I mean, that would not… that would be a huge asset that would disappear, if that occurred.

I don’t think that’s a high probability. But if you’re asking me to look at worst cases, that’s probably the one I would come up with.

I…

Charlie Munger:

Well, that happened. Auto insurance was nationalized somewhere, New Zealand or somewhere.

Warren Buffett:

Oh sure.

Charlie Munger:

But it’s not… if you want the absolute worst cases, you found it.

Warren Buffett:

Yeah, we nationalized, to some extent, the annuity business, you know, when we went into Social Security. I think it was a good thing.

But when people get outraged enough about something, you’ve heard talk about the banks. I mean, when the public gets outraged, the politicians will respond.

And inflation would be… wild inflation… would be the most likely cause, it seems to me, if something like that… I don’t think that’s probable… but something like that happening in auto insurance.

It’s a bill that most people pay, you know, every six months, or even more frequently than that. And if they see that bill going up and they don’t want to get rid of their car, they’re going to get mad.

And utility companies are going to get… utility customers… are going to get very mad during inflation. Because they need to turn on the lights. And they hate to see, you know, those monthly bills going up.

It’s the… it’s something they can’t give up. And it’s very visible. And the reaction will be to go to their public representatives and say, “Do something about this.”

And one of the things they can do about it is take it over. So very low probability of that, but it’s not nonexistent.

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