Why Berkshire Hathaway isn't jumping on cyber just yet

Why Berkshire Hathaway isn’t jumping on cyber just yet | Insurance Business America

Cyber

Why Berkshire Hathaway isn’t jumping on cyber just yet

Aggregation of risk could be worse than a natural disaster, CEO says

During the annual shareholder meeting of Berkshire Hathaway, vice chairman Ajit Jain expressed caution about diving into the cyber insurance market without substantial data to support risk calculations.

Jain, who oversees insurance operations, emphasized the complexity of evaluating potential losses from cyber events, advising that even with high premiums, the true cost might not be covered.

Warren Buffett, chairman and CEO, also highlighted the inherent risks of cyber insurance, comparing them to the unpredictable nature of earthquakes.

“When you write insurance, you have to think about how much you can lose,” Buffett said in a report, pointing out the potential for significant risk aggregation that could surpass typical natural disasters.

Buffett also praised Jain’s critical role in shaping the company’s insurance strategy, noting, “we won’t find another Ajit.” He described the insurance operation crafted under Jain’s leadership as nearly impossible for competitors to replicate.

Financially, Berkshire Hathaway reported a substantial increase in insurance underwriting income, which more than doubled to $2.6 billion in the first quarter, up from $911 million the previous year. Specifically, GEICO, a Berkshire subsidiary, saw its pretax underwriting earnings more than double to $1.93 billion from $703 million.

Buffett attributed these gains to strategic advancements made since Jain joined the company in 1986.

“We have institutionalized some of our advantages,” Buffett said, in what he considers Berkshire’s most crucial business segment.

Jain, meanwhile, acknowledged that GEICO has had to play catch-up with competitors that better utilize data analytics for pricing and risk assessment. He mentioned the company is addressing its technological shortcomings by hiring professionals aimed at enhancing their capabilities in pricing and claims, with the goal of matching the industry’s top carriers by the end of 2025.

Discussing the broader market, Buffett recognized that competitors like Progressive have recently outperformed in certain areas, though he maintained that GEICO’s low operational costs and market strategy remain solid.

“We would rather have X percent of a market than half of X percent… We would like to be growing with something that is the best model around in the insurance business,” he explained.

On the topic of climate change, both executives acknowledged its impact on the insurance industry. Buffett noted that risk, including that from climate change, essentially fuels the insurance business.

Jain, on the other hand, highlighted the ongoing adjustments in pricing due to regulatory and environmental changes, particularly emphasizing challenges in Florida due to legal and corruption issues, alongside the increasing frequency and severity of storms.

Despite these challenges, Jain remains optimistic about the state’s market potential, citing legislative efforts to curb insurance fraud and a prevailing free-market approach. He also noted the cyclical nature of the property insurance segment, which, despite the challenges posed by climate change, is seeing a return to profitability.

In closing, Buffett expressed his utmost confidence in Jain’s expertise over broader industry practices.

“I’d rather have Ajit assessing this than any 1,000 insurance adjusters,” Buffett said.

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