Berkshire Hathaway Inc. collects more than $40 billion in insurance premiums each year, much of it to cover property damage.
Yet Berkshire’s losses from recent hurricanes may total only about $500 million, mostly for flooded cars in Houston that are insured by Berkshire’s Geico division.
Other insurance companies may pay as much as $60 billion for insured damage, out of the $150 billion total damage from Hurricanes Harvey and Irma, according to estimates by CoreLogic and Risk Management Services. Insured damage in Puerto Rico from Hurricane Maria has yet to be counted, and the death toll from this year’s storms is not yet complete.
Berkshire’s property insurance divisions — General Reinsurance, Berkshire Hathaway Reinsurance and Geico, plus several smaller companies — mostly avoided big claims not because of a lucky guess, a nefarious plot or a reliable weatherman’s forecast.
Rather, a combination of circumstances and decisions let the Omaha-based conglomerate escape the billions in claims facing other insurance companies.
Escape No. 1: Quitting a risky business.
Several years ago, natural disasters declined in most parts of the world where insurance is popular. Insurance companies began vying for the business by cutting their prices.
Instead of competing, Berkshire’s divisions let the business go.
“Our underwriters are instructed to reject inadequately priced risks,” Berkshire said in 2015, noting that prices “in our view, have been generally inadequate.” The risks of damage from natural disasters didn’t decline, they reasoned at the time; only the price to insure against them had dropped.
Berkshire Chairman and CEO Warren Buffett praised his insurance divisions’ show of “discipline.”
Another reason prices declined, according to Steven Weisbart, chief economist for the Insurance Information Institute: New competitors with lots of money entered the property insurance market, essentially increasing the supply of insurance while the demand remained steady.
“Warren decided that he didn’t want to play in that sandbox,” Weisbart said.
Otherwise, Berkshire might be looking at billions of dollars on hurricane damage claims.
“If Berkshire were still a major writer of super-cat wind storm coverage, we would expect more significant exposure” from the latest storms, said analyst Jay Gelb of Barclays PLC, which does business with Berkshire.
Barclays estimates Geico’s loss at about $525 million, less than 10 percent of Berkshire’s quarterly pre-tax earnings.
“Berkshire has always been among the most disciplined insurers, and it doesn’t focus on volume targets,” Gelb said. “It focuses on profitability and returns, and when the returns aren’t there, you should write less business, which is exactly what they’ve done.”
Weisbart, the insurance economist, said prices for property insurance might go up in the geographic areas directly affected by the storms, but not everywhere. That’s because storm insurance rates are based, in part, on the likelihood of storms occurring in a certain area.
Rates also might increase if some of the late-comers to the property insurance business are scared away by this summer’s hurricane experience, he said.
Whether rates rise enough for Berkshire or any other company to begin selling more super-cat coverage is up to those businesses, Weisbart said.
Escape No. 2: Let the government do it.
Flooding was the primary cause of damage from Harvey in Texas and contributed to the damage in Florida, Georgia, Puerto Rico and elsewhere.
But Berkshire and other property insurers aren’t big in the business of insuring homes for flood damage.
Buffett recently explained the reason: The only people who buy flood insurance are those who will probably have claims. Selling flood insurance is like selling health insurance to people entering a surgery center. You’re likely to get a claim, eating up the premium dollars you collect.
That’s why most U.S. flood insurance is government-subsidized, Buffett said. Better to have people pay part of the cost of their flood coverage and receive some insurance payments than to leave them unassisted, depending on government help after a disaster.
Escape No. 3: Global warning?
Buffett said in 2015 that he isn’t worried that climate change will hurt Berkshire financially.
That’s because such damage increases would be gradual and sporadic, he said, allowing Berkshire and other insurance companies to adjust prices they charge for property insurance.
“As a citizen, you may understandably find climate change keeping you up nights,” Buffett wrote to shareholders in 2016. “As a homeowner in a low-lying area, you may wish to consider moving. But when you are thinking only as a shareholder of a major insurer, climate change should not be on your list of worries.”
Berkshire may have less financial risk from natural disasters but the insurance business always has risks, said Cathy Seifert, an analyst with CFRA Research in New York.
Seifert said insurance companies can cope with long-term changes in risk, such as differences in climate. But other risks are changing, too, such as the increased risk of damage from cyberattacks on businesses.
Berkshire’s insurance risks include coverage of asbestos health claims, a “long-tail” risk, which can mean paying medical bills for years for people who say their conditions were caused or worsened by exposure to asbestos.
As for natural disasters, figures from Munich Re show that the number of weather-related “loss events” has increased since 1980. The German company sells reinsurance to cover loss risks that primary insurers don’t want.
The number of such events made 2016 the costliest 12 months in four years, with $50 billion in insured losses, Munich Re said. That number is likely to rise sharply for 2017.
The 2016 figures for natural disasters is “back in the midrange, where they expected to be,” said Munich Re manager Torsten Jeworrek earlier this year.
Hurricane Matthew was the most expensive disaster last year, with $10.2 billion in damage, and the storm killed about 550 people in Haiti. Combined damage from Harvey, Irma and Maria may be 10 times bigger.
As for this year’s hurricane claims, the insurance industry has the money to pay, said Weisbart.
“This is what the insurance industry lives for,” he said. “As a result, the industry is quite well-capitalized.”
The Omaha World-Herald is owned by Berkshire Hathaway Inc.