top of page

Collection: Warren Buffett - #175 'Impossible To Avoid Surprises In Insurance Business'



Good morning.


Good morning.


My name is Hugh Stevenson (PH). I’m a shareholder from Atlanta. My question involves the company’s activities before and shortly after the Gen Re acquisition.

I remember you saying once that, in insurance, virtually all surprises are negative ones. And I’m wondering, given the company’s operating experience in insurance over long period of time, could you tell us what happened in the Unicover situation?

How come in Gen — with Gen Re’s experience and the company’s experience, that it happened, they didn’t foresee it, we didn’t foresee it? What has the company done? I know they’ve taken a large reserve for the situation.

And how do they plan to operate in the future to prevent these things, find them out, and strengthen the company from these kind of situations in the future?


Yeah, the Unicover situation was discovered in about, I don’t know, February of last year, or thereabouts. And it was a mistake, I mean, it should not have been made. A lot of other people made the same mistake, but that still didn’t mean that we should have made that mistake.

We set up a reserve of $275 million when the mistake was discovered, and that reserve looks like it’s about right still. There have been quite a few developments at Unicover that have defined the limits of it better and resulted in the resolutions of many of the issues attached to it. Still looks like about a $275 million mistake.

Now, that’s a big mistake, but we’ve made bigger ones. We had one in the mid-’70s that probably cost Berkshire, measuring opportunity cost and everything, because we didn’t know how bad it was going to be —

I would say that Berkshire would now be worth at least 10 percent more if that mistake hadn’t occurred. Wouldn’t you say so, Charlie? The Omni situation?




Yeah, so we had a mistake whose present value would be 8 or $9 billion. It cost us at least that.


Yeah, it cost us less than 4 million at the time.


Yeah. Though, it — but we didn’t know it for sure it was 4 million, so it tied our hands in other respects, too.

In insurance you will get surprises. Now, the test of good management is how many surprises you get. But there’s no way you’ll get no surprises.

And if you look at our history, you will see some years when our float cost us a lot of money. You will also see a history where over 33 or so years that it’s been a very, very attractive business.

But we have had cases, I mean, our name causes problems. I think National Indemnity — we had a fraud, as I remember, down in Texas where an agent was using our paper, which incidentally was the same problem we had, the one that cost us so much.

And some guy is out there writing bonds on — surety bonds — on construction of schools. And he says he represents National Indemnity and the contract proceeds, and of course, we’ve never heard of the guy.

But if you get a school district in Texas with a half-finished school, and the choice is whether the taxpayers ante up more or whether you find that this guy had apparent authority as an agent, and so on, and therefore we should pay on a policy we never heard of, written by a guy we never heard of, you know, on a school we never heard of. You know, we’ll end up paying.

So the surprises are unpleasant nine times out of 10. We’ll have more. We had another one last year that shouldn’t have happened. But they do happen.

And General Re has a terrific record over time.

We knew last year would not be a good business in the reinsurance business. It was worse than we thought it would be. But that had nothing to do — if you told me the figures that General Re would have at the end of the year, we would have made the same deal in a moment.

And, you know, we didn’t do so well with Coke and Gillette ourselves. So that the ratio of mistakes was probably fairly equal between the two organizations with me contributing our — my share.

I think insurance, which will continue to have surprises in it, will turn out to be a very, very good business for Berkshire over time. It’s the best one I know about that we can do in increasing scale over time.

As a matter of fact, some of you may not have noticed but we announced another small insurance acquisition just last week.

It’s a tough field. The average company is going to do poorly. We think we have some very special companies, and we really do think, over time, we will acquire and utilize float at a cost that’s very, very attractive.

It won’t be zero like it’s been in the past. I mean, we are in some lines of business where intentionally — I mean, we would be crazy to try to hold it to zero, because it’s way better to have twice as much money at one or two percent as have half as much money at 0 percent.

But we will fully acknowledge that — I mean, Unicover was a surprise. But I don’t know how many surprises I’ve had in insurance over the 33 years or so we’ve been in it.

One of the surprises, incidentally, you know, worked to our incredible benefit.

GEICO has been a great, great company since I first went down to Washington, and even before that, and met Lorimer Davidson almost 50 years ago. But they made a mistake in the early ’70s that really did bankrupt the company.

But fortunately, there was an insurance commissioner named Max Wallach in the District of Columbia, who saw that it could be resuscitated, and that mistake enabled us to make many, many billions of dollars. So mistakes can be useful on occasion, too.



All that said, it is perhaps the most irritating way to lose money there is, is to be taken by a sort of obvious lie. And — but it happens.

I don’t think it’s likely to happen again on that scale.


Well, I wouldn’t say that. (Laughs)

I would say that it’s unlikely that — in any 20 year period, or anything like that, we will get a big surprise. And it will come about, very often, through one form or another of three or four methods of obvious fraud that we’ve observed in the past.

But they spring up again. And there are plenty of people that are, I’d have to say, “crooked,” in insurance because it’s a product where you deliver a piece of paper and somebody hands you money.

And that intrigues people. You know, you don’t even hand them a Dilly bar, you know, or — (laughter) — or anything in exchange. They hand you a lot of money and you give them a little piece of paper.

And of course, when you get into reinsurance and all that, then you hand that little piece of paper to somebody else and try and get them to hand you money.

And all the way along the line you have brokers who are getting big chunks of money for sort of papering over some of the weaknesses in the project, and sometimes they may even be in on it.

So it’s a field that attracts chicanery. And often they — the same people — come back again and again. It’s amazing to me.

So, I would say that we will get a surprise or two over any 10-year period in insurance. It’s almost impossible to avoid.

We should try to minimize it. We do try to minimize it, but I would not want to bet my life that we’ve seen the last of a Unicover-type situation.

They’re always just a little bit different enough so that it doesn’t get spotted, or somebody down the line doesn’t get the message, but —

I don’t know. Don’t you think, Charlie, we’ll see another one? (Laughs)


Well, perhaps so, but it was a long time from one to the other, and maybe I’ll be able to get through without another. (Laughter)

One of these fraud artists, Warren caused me to meet years ago, and his proposition was that he had this perfectly marvelous business.

He says, “I — we only write fire insurance on concrete bridges that are under water.” He says, — (laughter) — “It’s like taking candy from babies.” And —


We were the babies. (Laughter)


I looked in his eye. I thought he was kidding or something. He wasn’t kidding. I mean, these people believe this kind of stuff.


The truth is Charlie — if Charlie and I could see everybody we dealt with, we would screen out some perfectly honest people, too. I think we could probably screen out the crooked propositions. I mean, they do have similar characteristics to them.

And what happens is you get somebody out in the field who is eager to write business or is being wooed by producers, and the intermediaries get very good at it. It’s the same way lousy stocks get sold.

I mean, you’ll get people who are getting paid very well to part, you know, separate you from your money. And that’s worked over the years. The good salesmen find out they can make more money, you know, selling phony products with big tickets attached to them than they can selling lollipops.

Number 7.


~ Please visit the site above for full video of Berkshire Hathaway Annual Meeting.


[YAPSS Takeaway]

If negative surprises are impossible to avoid, the best thing you can do is to minimize it from happening.

bottom of page