2021: Will Berkshire continue writing long-tail insurance after Ajit Jain retires?

BECKY QUICK: This question is for Warren and Ajit. It comes from Fernando Lewis, a long-time Berkshire shareholder from Panama, who says, “As a shareholder that intends to remain so for many decades, my biggest concern is around possible losses arising from higher-than-expected insurance losses.

“We’ve seen this in other great companies where underwriting mistakes end up crippling businesses previously considered exemplar.

“While I understand that Berkshire’s culture is unique and the insurance division is full of talented individuals, this is a risk that concerns me.

“Many of us shareholders feel comfortable now, given the privilege of having Mr. Buffett, Mr. Munger, and Mr. Jain looking at these deals. However, there will be a day when this is no longer the case. Is it reasonable to think that over the long term, Berkshire should focus on plain, vanilla short-tail insurance businesses like GEICO and reduce the size of some long-tail risk?

“I want to clarify that I have the most respect and gratitude for all of Berkshire employees that have built the best insurance group in the world. I’m confident we have this talent to remain leaders in this field for decades to come. This is focused on the inherent opaqueness and risk of some insurance lines.”

WARREN BUFFETT: Ajit, do you want to lead off, or —?

AJIT JAIN: I mean, clearly contract certainty is an issue for us in the insurance industry. It is an issue that cuts across not only the long-tail line that you mentioned, but even short-tail property focus lines.

The most recent example is business interruption, which is an integral part of any property insurance policy that is bought and sold by corporations.

It is a risk every time we issue a contract that, either because of sloppiness in terms of how that contract is written, or because of the regulatory environment we all have to live in, that the words in the contract may be tortured. And normally when they are tortured, they end up going against the insurance industry, not in their favor.

So, it is a risk. It’s an unknown risk, in terms of how bad it can be. I hope we price for it when we price for the product. We throw something for the unknown unknowns, if you will.

And we try and aggregate our exposures by major risk categories. Hopefully, that’ll give us some comfort, in terms of having some boundaries on what the exposure really can be.

But there’s no question the regulators play a very important role, in terms of the economics of the business, especially in the U.S., where the 50 state regulators who we have to deal with, in terms of pricing, in terms of contracts, in terms of —

WARREN BUFFETT: Most of those surprises in insurance, practically all of them, are unpleasant.

I mean, (laughs), you get the premium up front. That’s pleasant. And then from there on, you get some very imaginative losses that come through. And you get some that you’ve taken on.

We are willing to lose, in terms of, sort of, the outside limit, we think, well, we’re willing to lose $10 billion in a single event. And we want to get paid very appropriately for that. But we’ve got the resources to do it. And if —

But we don’t want to lose 10 billion in something where we only thought we could (laughs) lose 50 million or something like that.

And, you know, the current situation, for example, with The Boy Scouts of America, you know, they — I think there were 11-hundred claims, or something like that, that have been filed and now, there’s 17,000 just in —

AJIT JAIN: No, no. They’re close to a hundred thousand now.

WARREN BUFFETT: You know, and —

AJIT JAIN: Up by 50 times.

WARREN BUFFETT: And these go back to 1950 or 1960. And you’ve got people advertising for claims. And so, all of a sudden, you get a lot of claims.

I’m sure a lot of the claims are valid. I’m sure a lot of them are invalid. And —

AJIT JAIN: Well —

WARREN BUFFETT: — and how in the world do you pick out the difference? (Laughs)

AJIT JAIN: Yeah, and it goes back to the issue that you just raised.

The reason why this number of claims have skyrocketed from less than 2,000 to close to a hundred thousand is because the statute of limitations had expired, but in several states, if not in most states, they have unilaterally extended the deadline by when you can make claims, and expanded it by a few years.

As a result of which, a lot more claims have appeared, funded by plaintiff lawyers who are now very well-funded. And that results in claims just skyrocketing.

WARREN BUFFETT: Yeah. You get a lot of unpleasant surprises in insurance. But we’ve got a very — I’m very biased on this. But I wouldn’t — (laughs) — I think we’ve got the best insurance operation in the world. And Ajit is the guy that created it. And the people at GEICO — we bought that — and they did wonderful things over time to contribute their part of it, too, and other people have.

But Ajit is the symphony conductor of it. (Laughs)