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‘The Mindset Should Be You’re Not Making Money’

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While describing cyber insurance as a “fashionable” and profitable business, Berkshire Hathaway’s head of insurance operations said aggregation and loss costs have kept the company away from the risk for the most part.

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Yes, profitability has been “fairly high” for cyber insurers, but Berkshire Hathaway has been “very, very careful when it comes to taking on cyber insurance liabilities,” because “there’s not enough data to be able to hang your hat on and say what your true loss cost is,” said Ajit Jain at the conglomerate’s annual shareholder meeting over the weekend in Omaha, Nebraska.

Related: Berkshire’s ‘Most Important’ Biz Drives Q1 Results; GEICO Still Behind on Tech

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Jain said he has discouraged leaders within the company’s insurance operations from writing cyber insurance except as they need to “satisfy certain client needs.”

“…there’s not enough data to be able to hang your hat on…” – Ajit Jain

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“I have told them, no matter how much you charge, you should tell yourself that each time you write a cyber insurance policy, you’re losing money,” Jain said. “The mindset should be you’re not making money on it.”

Ajit Jain
Berkshire Hathaway
(AP Photo/Nati Harnik)

The cyber insurance market, which Jain projects is at least $10 billion, may be projected to become a huge business but it also “might be associated with huge losses,” he added. “Our approach is to sort of stay away from it right now until we can have access to some meaningful data and hang our hat on data.”

The comments were backed up by CEO Warren Buffett, who said Jain’s statements illustrated why he is “invaluable” to the company. Aggregation is no more an issue than in cyber, Buffett said.

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“If you think about it, let’s say you’re writing $10 million of limit per risk…if you lose $10 million for some event, you can take it,” Buffett explained. “But the problem is, if that one event turns out to affect 1000 policies and somehow they’re all linked together in some way—and the courts decide that way—you’ve written something that in no way we’re getting the proper price for, and could break the company.”

“Most people want to be in anything that’s fashionable when they write insurance. And cyber’s an easy issue. You can write a lot of it. The agents like it,” Buffett continued.

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“They’re getting the commission on every policy they write. Human nature is such that most insurance companies will get very excited and their agents will get very excited, and it’s very fashionable and it’s kind of interesting—and as Charlie [Munger, former vice chairman] would say, it may be rat poison.”

Jain on Climate

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Jain acknowledged that climate change has readily become more of a focus. Although the one-year nature of insurance contracts allows Berkshire Hathaway to increase prices or exit some areas, Jain said “prices need to go up.”

“It is difficult to be very scientific about how much the prices need to go up,” he said. “They need to go up a lot. And we keep increasing prices and hope we stay ahead of the curve. But that doesn’t happen in all cases.”

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He said regulators at times have made it difficult for the company to increase prices dramatically or withdraw from territories, “tying our feet to the ground,” but they are “waking up to the fact that the insurance carriers need to make some kind of a return—a decent return for us to keep deploying our capital.”

Insurers right now may be reporting record profits, but it will not last. Climate change, Jain said, “in the end makes our business bigger over time” but if the risk is mispriced “we’ll also go broke.”

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Photo: AP Photo/Nati Harnik

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