38 THE WARREN BUFFETT WAY
Insurance companies sell a product that is indistinguishable from
those of competitors. Policies are standardized and can be copied by any-
one. There are no trademarks, no patents, no advantages in location or
raw materials. It is easy to get licensed and insurance rates are an open
book. Insurance, in other words, is a commodity product.
In a commodity business, a common way to gain market share is to
cut prices. In periods of intense competition, other companies were will-
ing to sell insurance policies below the cost of doing business rather than
risk losing market share. Buffett held f irm: Berkshire’s insurance opera-
tions would not move into unprof itable territory. Only once—at General
Re—did this happen, and it caught Buffett unaware.
Unwilling to compete on price, Buffett instead seeks to distinguish
Berkshire’s insurance companies in two other ways. First, by f inancial
strength. Today, in annual revenue and prof it, Berkshire’s insurance
group ranks second, only to AIG, in the property casualty industry. Ad-
ditionally, the ratio of Berkshire’s investment portfolio ($35.2 billion) to
its premium volume ($8.1 billion) is signif icantly higher than the indus-
try average.
The second method of differentiation involves Buffett’s underwrit-
ing philosophy. His goal is simple: to always write large volumes of
insurance but only at prices that make sense. If prices are low, he is con-
tent to do very little business. This philosophy was instilled at National
Indemnity by its founder, Jack Ringwalt. Since that time, says Buffett,
Berkshire has never knowingly wavered from this underwriting disci-
pline. The only exception is General Re, and its underpricing had a
You can always write dumb insurance policies. There is an un-
limited market for dumb insurance policies. And they’re very
troubling because the f irst day the premium comes in, that’s the
last time you see any new money. From then on, it ’s all going
out. And that’s not our aim in life.^12
WARRENBUFFETT, 2001