On Fri, 23 Nov 2001, Steve Schear told us that Warren Buffett wrote:
A good recent example is Warren Buffett calling for an FDIC-style government insurance against terrorism. In the sweet name of self-interest he proposes that the government increase existing insurance moral hazards by forcing all citizens to underwrite those who have chosen to live or work in higher risk areas.
http://www0.mercurycenter.com/premium/opinion/columns/terror20.htm I'M in the insurance business -- an expensive place to be in the past couple of months. It was made costly for Berkshire Hathaway, the company I run, because I did something very dumb: allowed Berkshire to provide insurance coverage for a huge catastrophe loss without its getting a premium for doing so. The risk we unthinkingly assumed was a loss from terrorism.
And, as you say, it was an unthinking act - for which ONLY you (as a company) should be responsible.
Given the degree of my error, I was lucky: We estimate our Sept. 11 loss at Berkshire to have been ``only'' about $2.3 billion. That's more, by far, than we've ever lost from a single catastrophe, but the toll could have been far larger. Indeed, had a nuclear device been available to Osama bin Laden, the loss could have bankrupted most of the insurance industry.
I'll cry for them - not. The insurance industry has it pretty sweet. They are specifically exempted from anti-trust laws, and are pretty much free to do as they please. I seriously doubt there is a person on this list who has not been screwed at least once by the insurance industry.
A potential loss of almost infinite magnitude can be assumed only by an entity of almost-infinite resources. That entity doesn't exist in the private sector. Only the U.S. government fits the bill.
Then the industry should cease to write these policies.
Washington has accepted this proposition to a point. Congress is now agonizingly trying to create some sort of industry-government coalition that would insure losses from terrorism.
Like I said, the insurance industry has a pretty sweet deal...
Some proposals limit the government's liability but leave the risk for the industry open-ended. These proposals won't work: If unlimited liability is left with insurers, they will necessarily refuse to renew policies they see potentially leading them to bankruptcy.
As it should be.
Equally bad, all the proposals now being considered will engender pricing based upon risk exposure:
Um, pardon me, but isn't the assesment of risk what the industry does for a living? Or are they hereby admitting that they in fact operate on some other basis?
If a business is located in a high-risk spot, it will be asked to pay a staggering price for insurance.
Again, as it should be.
Risk-based pricing is normally equitable and desirable.
Of course: the insurance industry is merely a form of gambling, and as such, needs to "balance their book", i.e., charge based on likely risk of loss.
In this case, though, it would have anti-social consequences.
You mean it would have *anti insurance industry* consequences. At least be honest here.
For example, the terrorism risk per dollar of insured value may be 10 or more times for iconic or critical properties in New York City what it is for properties in less-populated areas.
Which of course will have to be factored into the rents/leases/development plans/etc. One of the many reasons people move away from cities is the very significant drop in insurance rates (based on risk of loss in the flight areas of course. My rates dropped by almost 2/3rd when I left the city).
But great cities are central to our society. We don't want them to wither under the burden of hugely disadvantageous insurance costs.
Then the industry will have to either adjust their rates to distribute the risk across their entire subscriber group, or charge what they need to, and let the cities worry about themselves.
Their citizens almost certainly bear above-normal physical risks in the terrorist war being waged upon us;
agreed: by both the terrorists from abroad and the terrorists from within (USG/State Gov, Local Gov/asstd corrupt LEO orgs).
we shouldn't impose crippling economic costs on them as well.
Too late. These costs are already levied on those who live in cities. If they don't like it, they can (and will) move to a place where conditions are more amenable to their lifestyle and financial situation. Why should I subsidize someone elses risk so they can live in a [high crime / highly attractive terrorist target]. These are life choices made by people who choose to live in these places - it is not my job to pay their way disproportionally.
We should adopt the Federal Deposit Insurance Corp. as a model for where we want to head in the insurance industry.
Yeah, right. This is the outfit that allowed the S&L debacle of the 80's to thrive. I am not keen to using a model of modern corruption as a model for anything else that I have to [also] pay for.
The rationale for the FDIC, formed 68 years ago, was clear-cut: The United States sorely needed to eliminate bank runs and the financial panics they caused. Before the FDIC, the risk from bank failures resided with depositors, who had no way to shed it.
Again, as it should be. Now of course, the FDIC and it's ilk have created a situation where "banks" can bilk billions of dollars from those who don't even do business with them (through the forced application of force to collect the "taxes" which pay for the likes of the FDIC. If bankers were responsible for their own fuck ups, we'd have a much better banking system.
Neither they nor their banks could lay that risk off on private insurers for two reasons. First, the dollar amounts involved were simply too large; second, losses were correlated, in the sense that the failure of a few banks frequently caused a chain reaction, toppling good banks with bad, leaving a mountain of economic damage.
This is simple bullshit. If the insurance industry wants to provide insurance with collosal risk, they can simply charge collosal premiums.
Fortunately, these punishing disruptions to our economy were ended by the advent of FDIC insurance.
And then reintroduced by the FDIC encouraged "bailout".
Now, millions of business owners, individuals, landlords and lenders bear the economic risk of terrorist attacks.
So? The assumption of risk is a business decision, like all others. It must balance many different things, including the risk of terrorists, police officer payouts, consumer confidence/spending, and a myriad of other things. If the risk of financial loss is greater than the risk of financial gain, then you do the business. Otherwise, you don't - unless this logical balance is disturbed by the kind of drivel we are seeing here (the requiring of those [relatively] not in risk to assume the risk of the person who is *supposed* to be balancing these diverse risks him/herself.
Insurers won't assume the risk -- we were previously dumb, but we've learned.
Dumb? No. The actuaries merely underestimated the actual level of risk, and as a result the industry had to payout. Thats what it is all about.
It isn't right, though, that these risk-laden millions should have to shoulder this burden themselves.
Why not? Be precise: what's "not right" about making a person assume the risks of their own actions?
If we were to adopt an FDIC model for handling terrorism, the insurance industry would not be permitted to earn a dime from the coverage. Instead, a premium tax, payable to the U.S. Treasury, would be levied on all insurance. This would have the equitable effect of spreading the terrorism-related cost to the country in general, just as we spread defense expenditures.
Or, as I pointed out above, the industry can do this for themselves. It is not governments place to be acting as an insurance business: this is forcing those of us who do not believe the assumption of the insurance risk is a wise move to participate in it anyway, usually to the detriment of those who [as business persons as well as individuals] would NEVER consider underwriting these risks. This is theft, pure and simple.
Were such a proposal enacted, it should sharply limit private lawsuits seeking to place blame on some party involved -- an airline, say. We should want the Treasury to make payments to victims solely to compensate them for loss of property, life or direct earnings, without worrying about fault.
Yeah, right: look at what "no fault insurance" did to places like New York...
The law also should cover war losses.
Huh? Oh yeah, I get it. If the USG "covers" war losses, there will likely be less concern and flack from Joe Six.
Some people will argue that an FDIC model for insurance would be a socialistic intrusion into the private sector, yet that institution is today generally regarded as having been enormously beneficial.
By whom?
Once, the problem was bank runs and economic panics; we found an innovative solution.
Theft under threat of violence is hardly an "innovative solution".
Today, the problem is terrorism
Agreed. When governments stop practicing terrorism, it will no longer be a problem which can claim a moral high ground, and the incidenc will likely decline. Until then, if the insurance industry wishes the public to underwrite their losses, then they had better be prepared to also hand over any profits.
and its capricious effects on insurance costs; we need a solution of comparable efficacy.
Actuaries. Cost == risk.
Warren Buffett is chairman of the board of Berkshire Hathaway Inc., a diversified company with insurance operations, and a director of the Washington Post Co., which has an investment in Berkshire Hathaway. This was written for the Post.
Bullshit. This was written for the insurance industry. -- Yours, J.A. Terranson sysadmin@mfn.org If Governments really want us to behave like civilized human beings, they should give serious consideration towards setting a better example: Ruling by force, rather than consensus; the unrestrained application of unjust laws (which the victim-populations were never allowed input on in the first place); the State policy of justice only for the rich and elected; the intentional abuse and occassionally destruction of entire populations merely to distract an already apathetic and numb electorate... This type of demogoguery must surely wipe out the fascist United States as surely as it wiped out the fascist Union of Soviet Socialist Republics. The views expressed here are mine, and NOT those of my employers, associates, or others. Besides, if it *were* the opinion of all of those people, I doubt there would be a problem to bitch about in the first place... --------------------------------------------------------------------