2021: What can we learn from COVID 19 about systemic and correlated risk?

Becky Quick: This next question is for Ajit comes from Professor Don at the Missouri University of Science and Technology, who says, “Mr. Jain, what has COVID 19 taught us about systemic and correlated risk? And there, is there anything that we will do differently from now on?”

Ajit Jain: Yeah. In the insurance business, we often think about pandemic risk as one of the risk factors that we need to cope with in our business. Having said that, I think the big lesson for us having gone through what we’ve gone through recently is that while we were aware of the fact that pandemic risk is a risk factor, if it’s totally, totally under-priced by all of us in the industry. Several of us thought it’s an event that will happen at most, once in a hundred years, and even then those odds are pretty high. So I think the big lesson for us is to recalibrate and rethink about what the return time is for something like a pandemic risk and separately, we haven’t yet done a good enough job as an industry, I’m saying in terms of correlating the risk and aggregating the risk and making sure we can deal with the aggregate numbers.

For example, pandemic risk has obviously taken people’s lives, but then separately, a bunch of us used to write something called event cancellation or contingency policies, and in terms of pricing for the contingency policies, like the Olympics being canceled, NBC would buy insurance for their rights, which might suddenly be not worth much. And when pricing something like that, we would think in terms of earthquake and risk and more recently terrorism, but we would never factor something like what portion of the price should come from the pandemic exposure. So I think the industry will become a lot more sophisticated in terms of thinking through what is the impact of pandemic risks across the entire portfolio, as opposed to it just being localized to one or two areas.

Becky Quick: And I’m sorry, Don asked if anyone else on the stage wanted to comment after Ajit on that same topic?

Charlie Munger: I missed that.

Becky Quick: He was just looking if anyone else on the stage wanted to comment on that.

Warren Buffett: Well, as Ajit mentioned, people were throwing in, well, an event cancellation. I mean, lots of people buy insurance against the Olympics being canceled or the United States not participating. I mean, they try to think of all kinds of risks because they have ad campaigns based upon all. So there’s a lot of event cancellation insurance, and it was probably under-priced the implicit part of that premium that was attributable to a pandemic risk. I mean, Bill Gates gave a terrific talk at TEDX five or six years ago and people ignored it. And it’s very interesting because this isn’t a worst case, what we’ve seen. And, and yet it’s staggering in terms of what has happened and people that wrote insurance that they may have found out sometimes that they were covering things they didn’t want, it didn’t even intend to cover. And maybe the insurance, they didn’t think they were buying, but nevertheless, after the event occurs that they get very inventive in coming after them. There are certain risks too, that are just too big. The nuclear risk, for example, I mean the federal government is very early on, they recognized that the private insurance industry, they can’t handle the risk involved in the financial risk that would be involved in terms of a massive nuclear strike or something like that.

So it’s the pandemics, the wording will be much more careful and in future policies on trying to divine it very precisely. And incidentally, I mean, in the way the cases have come so far in the United Kingdom, I mean, I think there was one particular insurer. I mean, the cases are coming down much tougher on insurers. The United States, I mean, the policies were just written differently. You don’t get insurance against something you don’t buy against it for. And generally the court decisions have, have come down favorable to insurers and at Berkshire, it just so happens, we are not a big, big player, but that’s in commercial moldable peril, which might be where… It is not a huge factor for Berkshire.