Buffett’s Insurance Commandments

Warren Buffett had some words of wisdom for insurers and underwriters in his annual letter to shareholders released Saturday.

In the letter, the Oracle of Omaha noted that a sound insurance operation needs to adhere to four disciplines.

These are:

  1. Understand all exposures that might cause a policy to incur losses;
  2. Conservatively evaluate the likelihood of any exposure actually causing a loss and the probable cost if it does;
  3. Set a premium that will deliver a profit, on average, after both prospective loss costs and operating expenses are covered; and
  4. Be willing to walk away if the appropriate premium can’t be obtained.

Buffett went on to comment:

Many insurers pass the first three tests and flunk the fourth. They simply can’t turn their back on business that their competitors are eagerly writing. That old line, “The other guy is doing it so we must as well,† spells trouble in any business, but in none more so than insurance.†

Given that Berkshire Hathaway’s insurance operations have now delivered nine consecutive years of underwriting profits, totaling about $17 billion, some may want to heed this advice.

One thought on “Buffett’s Insurance Commandments”

  1. The comment of the 4th discipline “Be willing to walk away if the appropriate premium can’t be obtained”. Is he saying that if the cost of being properly insured can’t be obtained reduce the amount of coverage you should have? Huh…

Leave a Reply

Your email address will not be published. Required fields are marked *