Warren Buffett Says The Insurance Business Is Very Tempting: ‘Somebody Hands You Money And You Hand Them A Little Piece Of Paper’
During the May 2024 Berkshire Hathaway annual meeting, Warren Buffett gave his signature insights into the insurance industry. With a wealth of experience, Buffett’s reflections on the business are both enlightening and unpretentious.
Warren Buffett described the insurance business as particularly enticing. “It’s so much fun because you get the money at the start, you know, and then you find out whether you’ve done something stupid later on,” he quipped.
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Insurance companies get their money upfront when people pay their premiums, even though the actual costs (claims) might come later. This makes it an appealing way to do business.
Buffett noted the industry’s deceptive simplicity: “Insurance always looks easier than it is.” This simplicity arises from the basic premise where “somebody hands you money, and you hand them a little piece of paper.” Still, the real challenge lies in accurately assessing risks and pricing policies.
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The discussion about the insurance industry centered around 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% 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 going to be three accidents in the United States next year … the prices will come down.”
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“Anything that reduces accidents is going to reduce cost,” he explained. However, he pointed out that it’s been historically tough to achieve such big reductions by saying, “General Motors used to be very big in the insurance business, and when Uber first started, they used some firm which now is … close to bankruptcy … because of taking 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 probably has done more for the American consumer than just about anybody in history.”
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Ajit Jain, in charge of the insurance operations, added that even if autonomous cars cause fewer accidents, fixing these high-tech cars is more expensive. “The repair cost of each of these accidents has skyrocketed,” Jain said, meaning that the total savings might not be as big as people hope.
“I’m not sure that total number has come down as much as Tesla would like us to believe,” he said. According to him, Tesla has been toying with the idea of writing insurance directly or indirectly but hasn’t had that much success. “Time will tell, but I think … automation just shifts a lot of the expense from the operator to the equipment provider,” he said.
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