During Berkshire Hathaway’s May 2024 annual meeting, Warren Buffett provided his signature insights into the insurance industry. With a wealth of experience, Buffett’s reflections on business are both enlightening and unpretentious.
Warren Buffett described the insurance business as particularly attractive. “It’s a lot of fun because you get the money first, you know, and then you find out if you did something stupid later,” he said.
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Insurance companies get their money up front when people pay their premiums, even though the actual costs (claims) may come later. This makes it an attractive way to do business.
Buffett noted the deceptive simplicity of the industry: “Insurance always looks easier than it is.” This simplicity arises from the basic premise where “someone gives you money and you give them a piece of paper”. However, the real challenge lies in accurately assessing risks and pricing policies.
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Discussion around the insurance industry centered around the potential impact of autonomous vehicles on GEICO, the auto insurance arm of Berkshire Hathaway. A Tesla and Berkshire Hathaway shareholder questioned Elon Musk’s ambition to reduce car accidents by 50% with autonomous driving technology. As the shareholder sees it, if Musk’s vision becomes a reality, it could drastically lower insurance premiums due to reduced underwriting risks.
Buffett said that if there were fewer accidents, insurance companies would save money. He used an exaggerated example to make his point: “Let’s say there are only three accidents in the United States next year … prices will go down.”
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“Anything that reduces accidents will reduce cost,” he explained. However, he noted that it has historically been difficult to achieve such large reductions, saying, “General Motors used to be very big in the insurance business, and when Uber first started, they used a firm that is now .. .close to bankruptcy … for putting things out at the wrong prices.”
Buffett explained that deaths per 100 million miles driven have dropped significantly over the years. He credited Ralph Nader for making cars safer, saying, “Ralph Nader has probably done more for the American consumer than anyone in history.”
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Ajit Jain, in charge of insurance operations, added that even if autonomous cars cause fewer accidents, repairing these high-tech cars is more expensive. “The cost of repairing each of these accidents has skyrocketed,” Jain said, meaning the total savings may not be as large as people hope.
“I’m not sure the overall number has dropped as much as Tesla would like us to believe,” he said. According to him, Tesla has toyed with the idea of writing insurance directly or indirectly, but has not had much success. “Time will tell, but I think … automation just shifts a lot of costs from the operator to the equipment provider,” he said.
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This article Warren Buffett says the insurance business is very tempting: ‘Someone gives you money and you give them a piece of paper’ originally appeared on Benzinga.com
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