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….
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!