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Legendary investor Warren Buffett has a way of explaining big ideas in simple terms. And when it comes to insurance, he makes it sound almost too easy.
At last year’s Berkshire Hathaway (NYSE:BRK, BRK.B)) shareholders’ annual meeting, Buffett called insurance a “very tempting” business. “It’s so much fun because you get the money at the start and then you find out whether you’ve done something stupid later on,” he joked.
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But behind the humor is a serious point. Insurance companies collect premiums upfront and may not pay claims until much later. This time gap creates what’s called a “float”—a pool of money that insurers can invest in the meantime. Buffett loves float because it gives Berkshire Hathaway a cheap and steady source of capital.
“Insurance is the most important business at Berkshire,” Buffett said in the meeting, and in the 2016 annual letter, he credited it as “the engine that has propelled our expansion since 1967.”
In 1970, Berkshire’s float stood at just $39 million. By 2023, it had grown to $167.8 billion. That money helped Buffett build Berkshire into the giant it is today by funding investments and acquisitions.
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Buffett noted the industry’s deceptive simplicity: “Insurance always looks easier than it is.” This simplicity arises from the basic premise where “somebody hands you money, and you hand them a little piece of paper.” Still, the real challenge lies in accurately assessing risks and pricing policies. Float only works if insurers price their policies right.
Berkshire Hathaway Vice Chair of Insurance Operations Ajit Jain explained in last year’s meeting how new technology is reshaping the industry. Even if autonomous vehicles reduce accidents, he said, “The repair cost of each of these accidents has skyrocketed.” In other words, fewer accidents don’t always mean cheaper insurance.
Buffett echoed this, noting that Tesla (NASDAQ:TSLA) and others haven’t had much success running their own insurance operations. “Time will tell,” he said, adding that automation may just shift expenses from drivers to manufacturers.