Warren Buffett urges more insurance underwriting discipline…
Wednesday, 9 March, 2011 17 Comments
Is this just another opportunity for UK insurers to determine that such warnings, obviously, DON’T apply to them!?
“At bottom, a sound insurance operation requires four disciplines:
(1) An understanding of all exposures that might cause a policy to incur losses
(2) A conservative evaluation of the likelihood of any exposure actually causing a loss and the probable cost if it does
(3) The setting of a premium that will deliver a profit, on average, after both prospective loss costs and operating expenses are covered
(4) The willingness to walk away if the appropriate premium can’t be obtained,”
the letter states. “Many insurers pass the first three tests and flunk the fourth. The urgings of Wall Street, pressures from the agency force and brokers, or simply a refusal by a testosterone-driven CEO to accept shrinking volumes has led too many insurers to write business at inadequate prices. ‘The other guy is doing it so we must as well’ spells trouble in any business, but none more so than insurance.”
This is a much bigger issue than even WB appreciates
When “the Oracle” speaks he tends to worth listening to and this pearl is no different. However, the dire warnings of, such as PwC and Citi have previously been ignored and there is little evidence to suggest that this is about to change! Have insurers (and the wider industry) failed to learn anything from their (rightly) vilified “cousins” in banking?
Do they not realise that, whilst Banking institutions were deemed TBTF (see below), insurers most certainly are not.
I wrote, recently, about the differing views of insurance and systemic risk on the two sides of the Atlantic. For my money the UK view is dangerously naive and has little basis in evidence. The precarious state of global FS and the, tightly-coupled, national economies that rely upon them, are such that the failure of an insurer or, for example, a major consolidator in the broking sector, could trigger a new financial collapse.
As we know from recent economic history, systemic risk in FS moves at lightning pace. BUT, when (not if) the impact of a new and avoidable crisis cascades into social and cultural domains – adding to the existing financial burden WE are having to live – this could prove to be the “death knell” for FS greed-mongers and inept Political Klepocrats.
This is not a new phenomenon: Welcome to Art class: The “art” may be survival
Whilst no-one relishes the idea of more financial uncertainty should events unfold in such a manner it may serve as the necessary “release”, that was forestalled by bailouts and enable us to create a more resilient – less complex – post-critical society. So, before anyone asks: YES, I do believe that this is how dangerous a game Financial and Political elites are playing. It may yet prove to be final and most noble act, in which the tables are finally turned and they become the victims of the win/lose contracts that, for so long, have underpinned their power and wealth.
It wasn’t Warren Buffett but another wise man who spoke, some time ago, about the meek inheriting the earth…perhaps the meek, having seen the corrosive power of greed, ego and fear, are the only means by which an environmental inheritance can be ensured!?