Insurance should be conducted as a rational activity
This question comes from Laurence Endersen in Dublin, Ireland.
And he asks, “What factors have enabled Berkshire’s insurance pricing policy to stay so rational while also being a very sizable market participant?”
In insurance, was that the…
In insurance, yeah.
Yeah. Well, I would say this: I really do think that Berkshire is an unusually rational place.
I mean, we know what we want to accomplish. We’ve had the benefit of a very, very long run, and we’ve had the benefit of a… you can argue whether it was a benefit or not… but of controlling shareholders, so we did not have outside influences that pushed us in directions that we didn’t want to go.
So, you know, insurance should be conducted as a rational activity. And one of the problems that some insurers have had is that they would have a pressure for increasing premium volume every year, brought upon by Wall Street, you know…very few…
We actually contracted the business written by National Indemnity, formerly our main business, its traditional business, I think we contracted it, probably, by 80 percent or something of the sort when the business became less attractive.
I’m not sure any manager of a public company that was answering to quarterly earnings calls and that sort of thing, I’m not sure whether they could’ve really stood up to the kind of pressure that they would receive if they followed a similar policy.
We have no… if we do something stupid, it’s because we did something stupid. It’s not… no external factors are pressing on us. And that’s a great way to operate, and it’ll continue to be the way we operate.
Most people, if you own a half of 1 percent of the company or less, you know, and other people are doing things that Wall Street is applauding and you’re not doing them, it could be very hard to resist.
And you know, you respond to media criticism and all kinds of things that—
We don’t have… we don’t have to do it. And there’s no reason for us to do anything stupid in insurance.
You get offered a lot of opportunities to do things that are stupid. We were major writers of catastrophe… natural catastrophe… insurance in the United States some years ago when the prices were right.
We don’t think the prices are right now, so we don’t write it. We haven’t left the market, the market left us, and… but we are not about to do something where we get paid 90 cents for running the… running a probabilistic loss of a dollar.
It just doesn’t make any sense and we won’t do it. And we don’t put any pressure on anybody to do it, and their incomes are not dependent on doing it. So it’s not hard to be rational at Berkshire.
Yeah. There are pressures on other people that we don’t want and therefore don’t have.
It is very hard to shrink an insurance operation by 80 percent when the people who come in every day don’t have enough to do, and it’s just… it’s a counter-intuitive thing to do.
But it’s absolutely required that you do it in a place where people go as crazy as they do in insurance.
Well, it’s like buying Internet stocks, you know, in the late 1990s. I mean, the… all around you, you have these people that have high IQs and they’re doing it and they’re being successful in it.
So, you know, everybody from your, you know, your spouse to your employer to the press says, you know, “How come all these other… how come you think you’re so smart, you know, avoiding this when everybody else is doing it and they’re making a lot of money?”
And, of course, it creates this social proof where it works for a while.
That’s the great danger period in all of these bubbles, is that what starts out with skepticism ends up with your neighbor getting richer than you are because he went along and you didn’t.
And that sort of thing… the bandwagon effect and everything… those things are very hard to resist.
But we don’t have any pressures to do that sort of thing. I mean, we just don’t give a damn, you know, and if…
We don’t necessarily think we’re smarter than the other person on that. We just think we don’t understand what it’s all about.
And if they can make a lot of money, you know, day trading or whatever it may be, you know, good luck to them. But we’re not envious of them, but we certainly are not going to do it just because they’re doing it.
Charlie, any more on that?
Oh, I always say there’s a reason why all that stuff is in the Bible. You can’t covet your neighbor’s ass or…
I mean, they were having trouble with envy a long time ago. And it’s a perfectly terrible thing to do, and how much fun can you have being envious?
We always say it’s the one sin there’s no fun in.
Gluttony is a lot of fun.
Lust has its place, too, but we won’t get into that.
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