Berkshire Hathaway 2013 Annual Meeting Audience Question # 23

Warren doesn’t think Progressive’s selection process is better than GEICO’s

Warren Buffett:

OK. Cliff?

Cliff Gallant:

Thank you. I wanted to ask a follow-up question about Snapshot at Progressive.

Now, I realize that GEICO’s first quarter numbers are very good, things are going very well at the company.

But Progressive is claiming that the data is profound, that they’re getting from Snapshot. That they can give their best drivers 30 percent rate cuts, and those customers are still their most profitable customers.

We have a lot of GEICO policyholders here today. I’m sure they’re very good drivers.

Why shouldn’t they go try Snapshot and try to save 30 percent or more? Why isn’t GEICO investing in what I think appears to be a credible underwriting tool and potential threat?

Warren Buffett:

Yeah. They… I don’t think… but obviously Progressive disagrees with us… but I don’t think their selection method is better than ours. And I would say that I might even feel that ours is a little bit better than theirs.

But every company has a different approach to it.

Peter Lewis, who runs Progressive, when he started the company…he told me this story himself. I mean, it was a tiny, tiny little company. It came out of a mutual company, as you know.

And he went in the motorcycle business. And the first guy that he insured…or the first loss, I think, that was reported…came from some guy that was redheaded, and he just decided not to insure any redheads for a while.

That… you know… when you don’t have very much money, you can’t afford to experiment too long.

Well, Peter learned that that was not a criteria, and he knew that, but he had fun telling the story.

But all we’re trying to do…if I’m looking at all these people here and I’m going to issue them insurance policies for the next year, I’m going to charge different rates to different people.

And, if I’m going to sell them life insurance, I’m going to charge different rates to them. If I’m going to sell them health insurance, I’m going to charge different rates.

There’s a different… there’s a different probability attached to each individual, based on a whole lot of variables.

And Progressive… before Snapshot, they had a different selection approach than GEICO.

And like I say, ours has worked very well and we think it will continue to work well.

And we are obtaining, under our selection system, we are obtaining a hugely disproportionate number of new policyholders compared to the growth in the market, so our rates are attractive and our underwriting results are attractive.

And we continue, always, to look for further ways, obviously, to refine the selection technique.

But we don’t do any of it lightly because what we’re doing now is working very well.

And I just invite you to compare the Progressive results with the GEICO results in the next two or three years, and I will… if we’re wrong… I will be here to freely admit that we were wrong, but

I don’t think we will be.

OK, station 8?

Oh, Charlie, you want to add something?

Charlie Munger:

Well now, obviously, we’re not going to immediately copy the oddball thing that every single competitor does in the world, particularly when we’ve got an operation that’s working so well.

Warren Buffett:

If I were starting in the direct auto insurance business, I think I would attempt to copy GEICO.

It wouldn’t work, but it would offer you the best chance, I think. It’s a remarkable system.

And Tony Nicely, you can’t give him enough credit. I mean… you know, we will… I hope we will… gain a million policies this year.

The entire industry, I don’t think, will gain more than a million-and-a-half. So we will probably get two-thirds… in my view… we’ll get two-thirds of all the growth and we’ll do it profitably, and we’ll save people a lot of money. So I think that’s quite a company.

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