Warren Buffett’s Letter to Shareholders… The Insurance part

Insurance Premiums are Floats for investment

It is a norm for Warren Buffett to write personally to his shareholder including the minority… And he is pretty direct with his words. This year he released his yearly letter to Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-A) shareholders on Saturday, 26 February. Here’s what you need to know what he thinks about Insurance and how it should be operated….


Insurance float is booming
In the insurance business, you collect money up front and pay out claims later. The money held in the meantime is called “float,” and it can be invested for your benefit.

Berkshire’s float is now $66 billion — more than double from a decade ago. If this float were a company, it’d be the 40th largest in the S&P 500.

Berkshire’s insurance managers have done such a phenomenal job pricing policies that insurance claims and expenses have been covered by premiums alone, without tapping into investment income, for eight consecutive years — almost unheard of in the industry. That makes its float like a $66 billion interest-free loan. Better than that, actually. Shareholders “benefit just as we would if some party deposited $66 billion with us, paid us a fee for holding its money and then let us invest its funds for our own benefit.”

As simple as it gets — he thinks the premium that we collect as insurer must be able to pay for expenses and claims that may surfaced during the policy coverage period. As this premium is being disbursed out in whatever the nature of payment, premium collected are deemed a float for investment… nothing new, just a reminder from Mr. Buffet.

In this context I must say, I had the opportunity to meet up with some managers from Gen Re a few years ago… and found them to be very focus towards underwriting risks on the basis of their degree of EXPOSURE rather than just on the risks’ past years’ loss experiences. Most of them stressed, even if the risk did not met with a loss over the past few years this does not means the exposure is not there — as far as the exposure is showing… signs and possibilities, the loss potential is likely to be high — you can always measure it as 1 out of 5 years a loss is likely to occur and so on.

Exposure is always the more important component than Experience…. THINK ABOUT IT… The Buffet’s way!

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2 comments for “Warren Buffett’s Letter to Shareholders… The Insurance part

  1. Jay
    March 18, 2012 at 23:00

    Is there an Arjit Jain in the Berkshire’s insurance investment operations? It is about the umbrella when the chips are down for the competitors – but of course this comes with a hefty price!

  2. March 1, 2011 at 06:13

    [New Post] Warren Buffett’s Letter to Shareholders… The Insurance part – via #twitoaster http://www.malaysiainsurance.info/grapev

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