1995: What is Berkshire's relationship with Lloyd's of London?

AUDIENCE MEMBER: Yes. Miss Wasserman (PH) from Chicago.

In order to understand the reinsurance business a little better, can you explain your relationship with Lloyd’s of London in the marketplace, how you — which is probably the leader in the field?

How often do you compete directly, or if you’ve ever done reinsurance business for them, since they’ve had losses in recent years, and how you see the industry changing as their economics changes?

WARREN BUFFETT: Well, Lloyd’s, which is not an insurance company, as you know, but a — well, originally it was a place — it was a coffee house, but people think what — it’s a place where a large number of syndicates operate and congregate in a given physical location. And it’s had a history for larger, more exotic risks over time.

Lloyd’s has lost its relative position to a fairly significant degree in the last 10 or so years, partly because — well, in significant part, because of bad results, which had the other effects of causing capital to withdraw and people who backed the syndicates to become unhappy.

So, Lloyd’s is still an important competitive factor in the reinsurance business and in certain specialized kinds of primary insurance. It’s a very — you know, it’s very important factor.

But it’s not the factor it was 10 or 15 years ago. And I’m not sure how Berkshire’s capital compares with the capital of all those syndicates at Lloyd’s, but it’s certainly changed in its relative importance in the last five or 10 years.

And the ability of Lloyd’s to attract capital with the problems they had has been diminished, although they’re working on that problem.

But we regard Lloyd’s as a competitor just like we would regard any one of a number of reinsurance companies as competitor.

But we also do business with a number of syndicates at Lloyd’s, and we’ll probably do a lot of business over the next 10 years with various syndicates.

Charlie?

CHARLIE MUNGER: Yeah, Lloyd’s is a very interesting institution because it had this reputation for integrity, what they paid off in — what, the San Francisco fire, and so on, and so on.

But I would argue that 10 or 15 years ago, a lot of slop and folly got into Lloyd’s, in certain syndicates particularly.

And too many commissions coming off the top as the same risks circulated around the system. Too much fine tailoring and three-hour lunches with fine wines. And it wasn’t right, and they got in a lot of trouble.

WARREN BUFFETT: Actually, in the history of Berkshire, the most significant insurance problem we ever had was in connection with Lloyd’s almost — or certain syndicates of Lloyds — almost 20 years ago.

And as Charlie said, they had this terrific reputation — behavioral reputation — over centuries. And I think that they coasted for a while on that. And we had a behavioral problem with — in one situation. And it was very expensive to us. So, we may have gotten an early lesson in what was coming.

There are a lot of different syndicates at Lloyd’s, and there are different people running them, and they have had different standards of behavior, to some extent. And people who assumed that, because they were dealing with Lloyd’s, that they would have no problems of any kind have found out otherwise.

But they will continue to be a major force in insurance, and they will get by their present troubles, and they’ll probably come out of it better structured than they went in.