2007: How has the state of Florida intervened in the homeowner insurance market?
AUDIENCE MEMBER: Peter Vanden Broeck (PH), Cleveland, Ohio. Mr. Buffett and Mr. Munger, thank you for so eloquently answering some of these tough questions. I know of no other public company that would allow a forum such as this. You’re doing a great job. (Applause)
WARREN BUFFETT: Thank you.
AUDIENCE MEMBER: My question is a follow-up question to the Katrina aftermath situation regarding policyholders with insurance companies and the tussle between coverage and what’s the proper remedy for those that suffered after such a storm. Part of that tussle, or one of the results of that tussle, was some legislation that was passed in the state of Florida. Could you please explain that legislation, as you understand it, to shareholders? And what effect, if any, does that have on Berkshire’s insurance subsidiaries? Thank you.
WARREN BUFFETT: Yeah. I can’t tell you with precision what the Florida — I don’t know whether Joe Brandon, or Ajit [Jain], or Tad Montross — if they’re in the managers’ group, if somebody could pass the microphone over to them. Essentially — I should let them explain it — but the state of Florida has gotten more into the business of insuring the citizens by a considerable margin than it did before, but there are some significant limitations on that. And I think, if we’ve got a microphone with one of the three of them, they could answer that question better than I.
Do we have somebody over there? Are they all out writing insurance, or — (Laughter)
CHARLIE MUNGER: More likely buying jewelry. (Laughter)
VOICE: Check, one, two.
WARREN BUFFETT: Who do we have? It’s impossible for me to see over there with the lights.
VOICE: I’m getting a mic.
WARREN BUFFETT: What are they yelling?
CHARLIE MUNGER: Seven.
JOE BRANDON: Hello.
WARREN BUFFETT: Ah.
JOE BRANDON: Warren, it’s Joe.
WARREN BUFFETT: OK.
JOE BRANDON: Took me a little time to get here.
WARREN BUFFETT: OK. Fine.
JOE BRANDON: I was looking for Ajit. What was the specific question?
WARREN BUFFETT: I think the questioner wanted to know what has really happened in Florida in the last three or four months, in terms of the state getting involved in the homeowner’s insurance business.
JOE BRANDON: Well, back in mid-January, the Florida legislature met in a special session and passed legislation, at the urging of the governor, that expanded the reinsurance fund and ultimately is moving a lot of risk, both personal lines and commercial lines, from the private market to the public market. You know, this is going to, and has manifested itself, in lower prices for wind risks in Florida and has freed up capacity that was dedicated to Florida for other markets. So ultimately it’s going to have a depressing effect on the insurance industry.
Longer term, you know, there is no free lunch, and the state and the citizens of Florida are taking a tremendous amount of risk. And it will all work out if the wind doesn’t blow, but the odds are eventually it will, and Florida is going to have a large public policy issue to deal with.
WARREN BUFFETT: Are they — Joe, are they explicitly taking on about 30 billion and then sort of leaving it in the laps of the gods above that? I’m not sure myself, but —
JOE BRANDON: Yeah. I believe they take out about 30 billion. It’s about — the increase was 12 to 16 billion. So they previously had taken about 18 billion out, and they took an additional 12 to 16.
WARREN BUFFETT: Yeah. The real problem will be if there turns out to be a $100 billion insured loss. And then the — you know, the state may decide to issue 60 or 70 billion of bonds. They may decide to go to the federal government and say, “This really isn’t our fault, and therefore the entire country should pay, in some form.”
Who knows what will happen? And the truth is, you know, it’s very unlikely that a $100 billion storm occurs. The biggest one was Hurricane Andrew, which trended, through inflation to present day, probably wouldn’t quite hit 30 billion. But if that same storm came through as a Category 5 about 20 miles north of where it hit — you would have — or you could easily have something like a $100 billion storm.
So, you know, you’re going to have to stay tuned on that. And if they don’t have any hurricanes in the next couple of years, the whole matter will die down — big hurricanes. And if they have a $100 billion storm, they will probably go to Washington, and we will find out whether the whole country has been insuring hurricanes in Florida or whether the federal government will throw it back to the State of Florida, and the State of Florida will, presumably, issue a lot of bonds, and taxes would go up.
And, in effect, you would distribute insurance — insured losses — in relation to the proportion people pay of the general tax revenues of a state like Florida. It’s tough to be where the wind blows a lot, but it’s also a very nice place to live, apparently. So we will find out how it plays out.