Video Link: https://youtu.be/pENs69MoHZw
In this episode, Warren Buffett was asked what are GEICO’s sustainable competitive advantages? And what are the implications of the internet on pricing for the auto insurance industry?
In this episode, you’ll learn:
GEICO's sustainable competitive advantages.
Competitive advantage examples; low cost and skill.
How will the internet help GEICO in the auto insurance industry?
To check out all Collection: Warren Buffett <click here>
~ Please visit the site above for full video of Berkshire Hathaway Annual Meeting.
AUDIENCE MEMBER 00:08
Hi, Mr. Buffett and Mr. Munger. My name is Will Obendorf (PH). I’m from San Francisco, California, and I’m 11 years old. I have been a shareholder for six years at Berkshire Hathaway.
My questions are, what are GEICO’s sustainable competitive advantages? And my other one is, what are the implications of the internet on pricing for the auto insurance industry?
WARREN BUFFETT 00:42
Well, we — we’re going to get your name and send it to human relations or whatever they call those departments. We want to hire you. (Laughter)
The sustainable competitive advantage at GEICO is to be the low-cost producer providing very good service.
And there will be a number of companies that provide good services. So that does not distinguish us from a great many competitors.
Having the low cost is crucial. There are companies that specialize in given groups of policyholders, but smaller groups, such as USAA, that have very good costs. So they are very, very competitive with us in their chosen area.
There’s another company in Los Angeles that, geographically, called 21st Century Insurance, that has costs like ours. And so they are extremely competitive within that geographic area.
I don’t think anybody is any better than us who operates nationwide. We don’t operate in Massachusetts or New Jersey. But in the other 48 states, we will have a quote for about anyone.
So, in terms of a broad-based insurance — auto insurance competitor — our competitive advantage has to be low cost over time.
Now, we also have to be as good at distinguishing among the risks posed by different kinds of drivers as other people. In other words, we have to be able to select people who are going to be better-than-average drivers. And we have to be able to understand who is likely to be a poorer-than-average driver.
But — and the ability to do that, to distinguish those people, would be a competitive advantage. I think that many companies tend to be fairly equal on that point. So it’s really at this cost level.
And we care very much about cost, the same way that Charlie mentioned a company called Costco does, you know, in terms of retailing. They figure their expense ratios out to hundredths of a percent. And that is important.
So that is the competitive advantage. Now when you get — and we have to sustain and widen that, if possible.
The question of the internet, it’s going to be very important. It already is important to GEICO. It will be more and more important. It will be important to the insurance industry.
Because when you have the internet, you have a situation where somebody thinking about insuring a car can click to one place, find out what that rate will be. They can click to someplace else and find out what that rate will be.
So, in effect, they can shop all around without going from place to place to place and driving all over town or calling lots of agencies. They can just do it right there in their den. And that makes it very important, again, that we be the low-cost company.
I think it’s going to be an advantage for us, over time. For one thing, I think it makes brand very important. Because we want people to be thinking of GEICO as one of the possibilities to call.
And if you’ve got the XYZ Company that nobody’s ever heard of, nobody’s going to think about clicking on them.
And GEICO’s brand is becoming extremely familiar to people throughout the country, and we’re spending a lot of money to make it even more familiar.
So you’ve asked two very good questions. And I think we’re in pretty good shape on both of them. Thank you.
Charlie? Number 3.