At Berkshire Hathaway’s annual meeting in May 2024, Warren Buffett provided his signature insights into the insurance industry. With a wealth of experience, Buffett’s reflections on the industry are both insightful and unpretentious.
Warren Buffett described the insurance industry as particularly seductive. “It’s so much fun because you get the money up front, you know, and then you find out later if you did something stupid,” he joked.
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Insurance companies get their money up front when people pay their premiums, even though the actual costs (claims) 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 stems from the basic principle that “someone gives you money and you give them a little piece of paper.” The real challenge, however, lies in accurately assessing risk and pricing policies.
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The insurance industry debate has centered on the potential impact of autonomous vehicles on GEICO, Berkshire Hathaway’s auto insurance subsidiary. A Tesla and Berkshire Hathaway shareholder questioned Elon Musk’s ambition to reduce car accidents by 50 percent with autonomous driving technology. According to the shareholder, Musk’s vision, if realized, could dramatically reduce insurance premiums due to reduced underwriting risk.
Buffett said that if there were fewer accidents, insurance companies would save money. He used an exaggerated example to make his point: “Suppose there are only three accidents in the United States next year … prices will fall.”
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“Anything that reduces accidents is going to reduce costs,” he explained. However, he pointed out that historically it has 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 company that is now … almost bankrupt … because they underwrote things at the wrong prices.”
Buffett explained that the number of deaths per 100 million miles driven has dropped significantly over the years. He praised Ralph Nader for making cars safer, saying, “Ralph Nader has probably done more for the American consumer than any other man in history.”
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Ajit Jain, who oversees insurance operations, added that even if autonomous cars cause fewer accidents, these high-tech cars are more expensive to repair. “The cost of repairing each of these accidents has gone through the roof,” Jain said, meaning the total savings may not be as big as people hope.
“I’m not sure the total number has gone down as much as Tesla wants us to believe,” he said. He said Tesla has toyed with the idea of taking insurance directly or indirectly, but hasn’t had much success. “Time will tell, but I think … automation just shifts a lot of the cost from the operator to the equipment supplier,” he said.
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This article Warren Buffett Says Insurance Industry Is Very Seductive: ‘Someone Gives You Money, You Give Them a Little Piece of Paper’ originally appeared on Benzinga.com
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