2012: How do increasingly frequent catastrophes affect Berkshire’s reinsurance business?
CLIFF GALLANT: Over the past two years, the world has witnessed a number of surprisingly large financial losses from major catastrophes, including earthquakes in Chile, and Japan, New Zealand, as well as floods in Thailand.
Near term, what do you expect the impact on reinsurance pricing will be for catastrophe risk? And longer term, does this trend of increased frequency of major catastrophes affect Berkshire’s view on the global reinsurance business?
WARREN BUFFETT: It’s very hard, because of the random nature of quakes and hurricanes and that sort of thing, very hard to know when you really have had a trend.
We’ve had that situation with global warming. I mean, it has been ungodly warm here in the last few months. A few years ago, it was extremely cold.
Anything that moves as slowly as the things affecting our globe, separating out the random from new trends is really — is not easy to do.
We tend to sort of assume the worst. I mean, if we see more earthquakes in New Zealand than have existed, you know, in the last few years than existed over the last 100 years, we don’t say that we’ll extrapolate the last couple of years and say that’s going to be the case, this huge explosion of quakes. But we also don’t take the 100-year figure anymore.
We have written — in the last few months — we have written far more business in Asia, and by that I mean New Zealand, Australia, Japan, and Thailand.
We’ve written quite a bit more — a lot more business — than we wrote a year ago, or two years ago, or three years ago, because they’ve had some huge losses, and they have found that the rates they had been using were really inadequate. And they are looking for large amounts of capacity in some cases, and we are there to do that if we think the rate is right.
But nobody knows for sure what the right rate is.
I mean, we can tell you how many 6.0 or greater quakes have happened in California in the last hundred years and how many Category 3 hurricanes have hit, you know, both sides of Florida, whatever.
There’s all kinds of data available on that, but the question is, how much does it tell you about the next 50 years?
And so we — if we think we’re getting a rate that — if a fairly negative hypothesis would indicate — then we move ahead, and we’ve done that in the Pacific.
I don’t know whether you know it, but if you — last year, we had two or three quakes in Christchurch, New Zealand, but I believe it was — the second one caused, like, $12 billion of insured damage.
And if you think of that in relationship of a country of 4 or 5 million and you compare that to the kind of cats we’ve had in the United States, that’s ten Katrinas. You know, there’s been some really severe —
And Thailand was the same way with the floods.
It was — the losses were just huge in respect to the entire premium volume in the country.
So when that happens, everybody reevaluates the situation, and we are perfectly willing to take on very big limits if we think we’re getting the right price.
We have propositions out for as much as 10 billion of coverage, you know. Now, we don’t want that 10 billion to correlate with anything else, and we want to be sure we get the right price. But — and we may write some at some point.
It’s certainly — the market for cat business in some parts of the world is significantly better from our standpoint than it was a year or two ago, but that’s not true every place.