2001: Buffett comment's on GEICO's underwriting.

WARREN BUFFETT: In the question of GEICO and underwriting, you know, that — it’s a fascinating business because there are — in this audience — there are people with hugely different propensities to have an accident. And of course, most people figure they’re better than average.

Now, part of the propensity to have an accident will depend on how many miles you drive. Obviously, somebody who never takes the car out of the garage is — no matter what their driving skills might be — is not going to have an accident.

They drive 10 miles a year, you know, you’re pretty safe with almost anybody. But — so there’s a relationship to miles driven. But there’s a relationship to all kinds of other things.

And the trick, in insurance, is being able to figure out the variables and not have them too many, because you still have to get people to fill out a form, and you don’t want something that has practically no significance.

But the trick is to find out what questions you need to ask to determine in which category to place people as to their propensity to have an accident.

Now, in the life insurance business, you know, even Charlie and I figured out that the older you get, the more likely you are to die in a given year.

Now that’s not the only factor, but everybody understands that. That the older you are, the mortality risks go up. And they’ve learned a few other things. They’ve learned that females live longer than males.

Now that doesn’t get into a judgment as to why or anything else. You just know it. So, you build that in if you’re pricing the product. And then you know a whole bunch of other things.

You may even know that cholesterol’s bad — you know, that makes a difference in terms of predicting mortality.

But in the auto insurance business, there are lots of variables that correlate with the frequency with which a person will have an accident per mile driven.

And the more experience you have with a large body of people whom you’ve asked a lot of questions about and can draw conclusions there from, the better off you are.

State Farm has got a wonderful body of information. I mean, their actuarial judgments should be better than anybody else’s, because they’ve got more experience with more cars and drivers.

But our experience with close to five million policy holders enables us, I think, to underwrite quite intelligently. But every day, you know, we’re looking for some variable that will tell us more.

People with a good credit history are better drivers by a significant margin than people with a lousy credit history.

Why? We don’t care too much why, because it wouldn’t help. What we really need to know is that the two factors correlate. And we’re looking for correlations all the time, and we’re trying to avoid spurious correlations, which you can have.

And it’s, you know, it’s a moving target. You keep working on it all the time. But we’re better at it than we were five years ago and we’ll be better at it five years from now than we are now.

When we go into a new state, we will have a very small body of policy holders. And some of the factors, obviously, prevail over all states, but there’s certain things that you learn, actually, only if you’re in a given state for a while.

You know, you’re more likely to have an accident if you’re a — everything else being equal — if you’re an urban driver — city driver in a big city — than if you’re driving in an area that’s very rural where the density of other cars is very low.

If you’re the only guy in the county with a car, you know, you’re not going to have a lot of two-car accidents.

So, the underwriting question is all important. And fast, fair settlement of claims is very important, because people who really weren’t injured start feeling worse and worse as they talk to more and more lawyers.

So, you know, the claims delivery is a vital part of running a good property-casualty operation. And all I can tell you is, at GEICO, that we think very hard about those things, but we’ll be thinking about them tomorrow as well as today.

Charlie?

CHARLIE MUNGER: Well, vis-à-vis the fractional jet ownership program, which has been announced for United Airlines, I find that very interesting.

A senior United Airlines pilot now makes about $300,000 a year plus fancy fringes, including pension. And what he does is work a very limited hour — number of hours a month. And about half of that he spends sleeping in a comfortable bunk on long ocean flights.

That is not a culture that will work well in fractional jet ownership. Maybe they think they’ll get some advantage in recruiting new pilots or something. I don’t know why they’re doing it. I would not have done it.

WARREN BUFFETT: Well, they haven’t done it yet, either, but the — many of the airlines have organized second companies to take care of commuter flights and all of that.

And, you know, that does produce problems when the pilots of the subsidiaries start comparing their benefits to the pilots, you know, of the parent, and all that. I mean, they try to get lower cost structures by doing that.

But I would guess that if you were wanting to set up a fractional ownership company, that — and you were — you would probably not think about trying to align yourself with somebody that has extremely high costs in other areas.

And the advertising campaign will be kind of interesting, too. You know, “Give up first class travel. Start traveling right,” you know, or something. It’ll be interesting.

But I would tell you that we have competitors in the fractional ownership business, the two largest being companies that are part of plane manufacturers. And you can understand why they went into it, but it is not an easy business. And we’ve got the best hand, frankly.