2001: What is Berkshire's asbestos risk?

WARREN BUFFETT: Zone 3, please.

AUDIENCE MEMBER: Hi. My name is Steve Rosenberg (PH). I’m from Ann Arbor, Michigan.

First, I just want to thank both of you for being two phenomenal role models. I’ve really looked up to you both for a long time.

My first question is about reinsurance. I believe that you’re willing to write larger policies in reinsurance than anyone else, but that you still insist on the amount of your liability being capped.

I’m wondering, with your investments in companies with — that have exposure to asbestos, have you somehow capped that? Or is that unlimited, especially given joint and several liability?

My second question involves auto insurance. And I was wondering, does State Farm’s structure as a mutual insurance company compensate it — or help it compensate — for having a higher cost structure because, over the long term, it need only remain solvent and not provide an adequate return on capital to its investors?

WARREN BUFFETT: The first question, on asbestos. We have not put any significant money, to our knowledge, in any company that has any asbestos exposure now.

You know, we have a small amount of money in USG, where the subsidiary, United States Gypsum, has a major asbestos exposure. But that’s a very, very minor investment. The — and that would be the only one that I can think of.

We’ve walked away from several deals that were quite attractive in every respect except asbestos. But that’s like saying to a 120-year-old, you know, “You’re in good health except for the fact that you’re dead.” (Laughter)

So we don’t go near asbestos.

Now, in terms of our retroactive insurance policies, we are taking over the liabilities of companies that have lots of asbestos exposure. And in that case, we assume that those exposure — that those contracts — will be paid in full.

I mean, we make no assumption of any reduction in asbestos costs, but we do cap them.

There’s a couple things you can’t cap in insurance. You can’t cap workers’ compensation losses. I mean, they —you can as a reinsurer, but I mean, the primary insurer can’t do that.

I believe in auto, for example, in the U.K., that it’s uncapped. And I think that nobody thought that was very serious until they had a recent accident that caused — I think it involved a car doing something that — an auto doing something to a train that was unbelievable.

So they — there are a few areas where insurance is written on an uncapped basis. And in our case, we write some auto insurance in the U.K. and we write some workers’ compensation, primarily in California.

But generally, in the reinsurance business, you are capping the liabilities you take on.

I mean, obviously, when we bought General Re, they had asbestos liabilities from reinsurance contracts they had written. But the reinsurance companies are pretty careful about writing unlimited policies.

We write huge limits. We’re the biggest — you know, if somebody wants to write a huge limit, or an unusual limit, they should call us. Because there’s no one else in the world that will act as big or as promptly as we will. But we don’t write things that are unlimited.

Now, the interesting thing is that the biggest exposures, in our view, are the people that write a lot of primary business and don’t have the catastrophe cover they need.

I mean, if you write 10 percent of all the business in homeowners on — or 15 percent — on Long Island or in Florida, I mean, you are writing a catastrophe cover that would blow your mind.

If you’re Freddie Mac or Fannie Mae and you’re guaranteeing mortgages, you know, for millions of people in areas like that, and they don’t have insurance — earthquake in California or property insurance in Florida — they’d be less likely to have earthquakes someplace — you are taking on enormous risks.

I mean, huge risks, far beyond what we would ever take on. They just — but you don’t get paid for them, unfortunately.

I mean, just take the New Madrid section of Missouri, down in the corner. That was the area of three of the greatest quakes, that are sort of related in time, in the — certainly in the recorded history, they were the three greatest quakes in the United States.

You know, how much homeowners’ business, how much commercial property business, does somebody have in that huge territory, which you know, supposedly caused church bells to ring in Boston when it happened back in whenever it was — 1807, or ’9, or something like that?

So, there are all kinds of risks that can aggregate in huge ways that companies are not thinking about at all.

I mean, I don’t know whether Freddie Mac or Fannie Mae, for example, is demanding that all of the homes they insure in the, you know, 300-miles radius of New Madrid, have earthquake insurance.

But, you know, it — that sort of thing never comes to mind until the unthinkable happens. But in insurance, the unthinkable always happens.