2010: Could a few events cause significant loss for the insurance businesses?

AUDIENCE MEMBER: Hello, my name is Ashish Texali (PH). I am from New Delhi, India.

First of all, I would like to thank Kelly Bruce (PH) and Carol from American Express to the help they’ve extended to make this event possible.

The question regarding General Re and reinsurance business.

As the insurance business uses complex models, how is Berkshire more comfortable that insurance business models are not exposing you to significant risks like the models did for Wall Street?

Also, if it is not confidential, is there concentration of risk? That is, what are those few events which can cause significant loss for insurance businesses?

WARREN BUFFETT: I’m not sure I got all of that, but we run significant risks from earthquakes. We had, in the Chilean quake — I don’t know how much would have been in the first quarter. When you read our 10-Q there will be a number in there. But we insure 20 percent of Swiss Re. We will take 20 percent of their loss from that.

We have various other exposures in something like that. We included our best estimate in those figures I put up earlier.

Our peak risks now, in terms of earthquakes or hurricanes — which are the two biggest natural catastrophes, in terms of frequency and severity — are probably down quite considerably from a few years ago, not because of any diminished appetite for risk. But we just haven’t felt that the rates were that attractive in those areas.

But if we thought the rates were attractive, we’re perfectly willing to take on a group of risks where, if something very close to worst case happened, you know, we would lose $5 billion or something like that.

We lost 3 billion-plus in Katrina. We lost well over 2 billion, I think quite a bit more than that actually, on 9/11.

There will be things come along like that. Nothing that ever remotely comes close to making us uncomfortable, though, in terms of the level. I don’t know whether I got his full question there or not, Charlie, but you —

CHARLIE MUNGER: Well, pretty close. I would say that the main difference between our practice and that of most other people is that we are deliberately seeking a method of operation which will give us occasional big losses in a single year, big overall losses.

And everybody else is trying to avoid that. And we just want to be rich enough so a big loss in a single year is a blip.

And that’s a competitive advantage, that willingness to endure fluctuating annual results. Big advantage, wouldn’t you say?

WARREN BUFFETT: It’s a huge advantage. It’s a huge advantage. And it’s one that no one else is going to pick up on. I mean, they know what we do, they just don’t want to do it, or they’re unable to do it, in terms of financial resources.

So, I would say that comes very close to a permanent and substantial advantage at Berkshire.

I don’t — forget about — you shouldn’t forget about it, but forget about the human suffering and all that. Just the financial consequences of a Katrina, you know, when we lose 3 billion in that, I don’t feel any different the next day than I felt the day before, financially. I mean, it just doesn’t make any difference, because we are in that particular game.

And as long as we make the right decisions over time, in terms of the premiums we get, and as long as we never expose ourselves to a loss that would really shake up our capital structure or anything, you know, that is a game in which we have a huge competitive edge. And it gets wider every year.

So, you know, risk — we are in the business — in insurance, we are in the business of taking the other guys’ desire to smooth their earnings, and, in exchange, get what we think are larger, lumpy earnings over time. We like the business.

Carol? Oh, go ahead, Charlie.

CHARLIE MUNGER: I was going to say Warren has a different position than a lot of other people in the insurance business. After a year in which Berkshire has a big loss, he can look into his shaving mirror and say, “Your shareholder still loves you.” (Laughter)

WARREN BUFFETT: That’s right.

CHARLIE MUNGER: Other people are not in that position.

WARREN BUFFETT: Charlie and I knew a guy from Omaha who, 40 or 50 years ago, was one of the richest guys in the United States, named Howard Ahmanson. And Howard had a fetish about owning 100 percent of everything that he came in contact with.

And so he said, when asked why, he said, “I like to look in the mirror and say, ‘All my shareholders love me.’” (Laughter)

And I’m not quite that extreme, but I like to look in the mirror and say, “Enough of my shareholders love me.” (Laughter)