Playing the Float and the Wisdom of Warren Buffett
I have often said that insurance companies have an economic incentive to hold claim money as long as possible, play this "float," and profit from it. Skeptics and attorneys who represent insurance companies always ask for me to provide proof of this allegation. While there are numerous examples, the quote from Warren Buffett in his 2009 annual letter proves the point:
"As predicted in last year’s report, the exceptional underwriting profits that our insurance businesses realized in 2007 were not repeated in 2008. Nevertheless, the insurance group delivered an underwriting gain for the sixth consecutive year. This means that our $58.5 billion of insurance “float” – money that doesn’t belong to us but that we hold and invest for our own benefit – cost us less than zero. In fact, we were paid $2.8 billion to hold our float during 2008. Charlie and I find this enjoyable.
Over time, most insurers experience a substantial underwriting loss, which makes their economics far different from ours. Of course, we too will experience underwriting losses in some years. But we have the best group of managers in the insurance business, and in most cases they oversee entrenched and valuable franchises. Considering these strengths, I believe that we will earn an underwriting profit over the years and that our float will therefore cost us nothing. Our insurance operation, the core business of Berkshire, is an economic powerhouse."
In the insurance business, it is economically efficient to cheat or underpay claims----if the insurer does not get caught or never has to pay for such sin. Honest insurers that provide first class treatment, rather than merely talk of first class treatment, are at an economic disadvantage. Most people buy insurance based on price, not recognizing that the low cost insurer may offer an inferior product in the small type or in the actual claims performance.
Fair claims practice lawsuits are important because they represent the few public presentations of how bad the insurance industry is at claims performance. Unfortunately, because there are so few of these suits and the "market conduct studies" run by the departments of insurance are significantly flawed, there is little chance that insurance cultures of paying too little or paying far too late will be stopped. The result is that companies that engage in such behavior have an economic advantage over honest insurers because they can maintain profit margins at lower rates. Being able to charge less is key to economic success in the insurance business. This point was also made by Buffet:
"GEICO grows because it saves money for motorists. No one likes to buy auto insurance. But virtually everyone likes to drive. So, sensibly, drivers look for the lowest-cost insurance consistent with first-class service. Efficiency is the key to low cost, and efficiency is Tony’s specialty. Five years ago the number of policies per employee was 299. In 2008, the number was 439, a huge increase in productivity."
I am not saying that GEICO is engaging in bad behavior. I have far too few cases against this company to make that judgment. But, it is very easy to claim that a company gives first class service rather than actually give it. How do executives and claims management even track it? Virtually every tracking mechanism of claims service is designed to drive down claims payments. Allstate is the champion of that type of claims management in the automobile claims business---the Florida Office of Insurance Regulation made Allstate put part of that proof on the internet last year.
I strongly suggest that you read Buffett's letter. It has much wisdom and discussion of where our economy has been and may be heading. I optimistically agree with this observation:
“Whatever the downsides may be, strong and immediate action by government was essential last year if the financial system was to avoid a total breakdown. Had that occurred, the consequences for every area of our economy would have been cataclysmic. Like it or not, the inhabitants of Wall Street, Main Street and the various Side Streets of America were all in the same boat.
Amid this bad news, however, never forget that our country has faced far worse travails in the past. In the 20th Century alone, we dealt with two great wars (one of which we initially appeared to be losing); a dozen or so panics and recessions; virulent inflation that led to a 211/2% prime rate in 1980; and the Great Depression of the 1930s, when unemployment ranged between 15% and 25% for many years. America has had no shortage of challenges.
Without fail, however, we’ve overcome them. In the face of those obstacles – and many others – the real standard of living for Americans improved nearly seven-fold during the 1900s, while the Dow Jones Industrials rose from 66 to 11,497. Compare the record of this period with the dozens of centuries during which humans secured only tiny gains, if any, in how they lived. Though the path has not been smooth, our economic system has worked extraordinarily well over time. It has unleashed human potential as no other system has, and it will continue to do so. America’s best days lie ahead."
Chip: I only began reading your blog 2 weeks ago when you invited me to write a "guest blog" on insurance fraud. Most days since then I have read your comments with mild amusement, realizing your blog is a forum for you to espouse your anti-insurance viewpoints. Even when you make sweeping generalizations about the entire insurance industry and cast them all in the same light as the forces of evil, I try to accept it as just your opinion, which you are entitled to express whether I think you are right or wrong. But there has to be some limit on how far you can go in twisting the truth to justify your opinions and you have truly tested that limit with your comments on Warren Buffet's speech. You interpret his remarks to be an admission of wrongful withholding of claim payments by "the float" and then extrapolate that "admission" to the entire industry as an institutional policy of misconduct. In a word, Chip: Get real. Warren Buffet was not talking about a "float" by delaying claim payments and we all know that, much as you might wish he was saying it so you could point to that to validate your views on all insurance companies. He was talking about the "float" when premiums are paid and the money is invested until a claim must be paid out--you know, the basic premise of how the insurance business works! The same premise the federal government uses with your Social Security contributions as they "float" the money until the time you retire. The same premise the IRS uses when they take out taxes from your paycheck every week and hold the money interest-free all year. The same premise the banks use with your deposits made after 2 pm. The same premise a landlord uses with your security deposit that may be held 5 years before you get it back. Characterizing Warren Buffet's remarks about the premium float as an admission of wrongfully delaying claim payments is more than just taking his comments out of context, it borders on a deliberate mischaracterization intended to allow you to use those words (as you did) to launch another salvo at the insurance industry as a whole.
Chip, I know you don't want to ever utter a kind word about anybody connected with the insurance industry because it undermines your agenda. You don't want anybody to think an insurance company ever does the right thing or heaven forbid, does something extraordinary to help an insured in a time of need. You don't want those stories to ever get told because you want to spread the word all insurance companies are evil and want everybody to think that. But is this really what your blog is all about, Chip? I've seen more objectivity in the NRA's position on gun control.
Sandy,
Do you not understand economics?
The point was----insurance companies make money by holding claims monies. And, that is "float." There is nothing wrong with it until insurance companies hold it too long. That is called "claim delay."
Cheating insurance companies hold the "float" longer than they should thus adding extra profit from this wrongful practice. An honest carrier that pays on time does not get this extra wrongful profit. To me, and probably everybody else other than you that read the post, that does not sound fair to the honest carrier nor to the policyholders that have to wait for their money.
I never said that what Geico did was wrong. I do not know. All I said was that insurance companies have an inherent incentive to hold the "float" as long as possible. Indeed, if you go back and read what I wrote, I think you will find that I indicated Warren Buffet has "wisdom" which is not exactly a defaming statement.
I love insurance. I think it is a remarkable and supreme financial invention for a number of reasons. If you would have taken the time to read more posts earlier than the last two weeks, you would know that what you wrote is wrong. You should stop being presumptious about my agenda because unlike the President, you do not "get it."
What I detest are claims practices which are unfair to policyholders. Slow paying, underpaying, excuse giving, and uncaring insurance company practices and adjusters destroy the intent of this very important social product.
If you want to support those type of practices which many others think are wrongful, write your own Blog telling why those actions and attitudes are justified.
And, I will even let you make comments, like you have, without edit because I am not afraid to admit when I am wrong. Sometimes, I make overbroad and sweeping generalities--one point for you.
Regarding insurance companies that really act with "Good Hands," I just do not have many examples of the insurance company deeds of merit. If you have some, I will be happy to share any that can be verified. It is funny you mentioned this topic because our firm was even thinking of sponsoring a contest for the insurance industry where a prize would be given for the best example of good faith claims adjustment.
I can understand you being upset with my Blog. I make no apologies to those that try to give excuses and cover-up disgraceful claims service. Those in the industry need to do a much better job of changing what is going on in the field.
I am fiercely committed to improve claims handling in the insurance industry while maintaining positive networking environments.
I do not allow any negative posts or adjusting firm or carrier specific "blasting" among our members. I promote the discussion of claim handling in general but regularly post links to great blogs and articles found on the internet.
It has been 3 years of extremely hard work since I cannot post carrier information or ask adjusters to upload file samples so they don't violate carrier code of conduct requirements. So, my sole source of info is through training info I find on the web.
The info found on the majority is worthless except in generic format, but it means much more when they learn from reality based information like you blog about.
My, struck a nerve, did I? If you want to start by insulting me, have at it. To answer your opening questions: I did study economics under Paul Samuelson, the Nobel Prize-winning economist, while a student at Vanderbilt. Doesn't make me a Nobel Prize winner myself, but I have had some pretty good lessons in economic theory. So how about you? What is your background in economics, Chip? Must be even more impressive, so please share it with us.
Now, talk about some fancy footwork! You wrote your blog flat-out accusing Warren Buffet of using the "float" of improperly withholding claim payments. Why would you even try to deny that after you put it in writing? Let's look at your opening words: "I have often said that insurance companies have an economic incentive to hold claim money as long as possible, play this 'float,' and profit from it. Skeptics and attorneys who represent insurance companies always ask for me to provide proof of this allegation. While there are numerous examples, the quote from Warren Buffett in his 2009 annual letter proves the point". Tell me how else to read those words, Chip. If you weren't referring to the IMPROPER withholding of claim payments, why would you say his remarks "prove the point"? Why would you even find his remarks worthy of commentary? If you agree investing premium dollars and using that "float" until claims are made is perfectly okay, why would you comment on his remarks and then use them to lead into a discussion of bad faith practices if you weren't talking about an IMPROPER "float?" Who are we kidding? It's obvious what you were talking about and it's just a little disingenuous to now try to back off what you said and the context of your remarks. (And by the way, it just happened to be totally untrue and out of context to suggest he had said such a thing. But don't let the facts get in the way of making your point.) Using that as a vehicle to voice your contempt for the insurance industry was wrong, plain and simple. Maybe none of the members of your "fan club" who populate this blog will tell you that, but I sure will. If you want to just throw dirt at the industry, knock yourself out. It's your blog, after all. But using a "gotcha" headline to suggest Warren Buffet had just confessed to wrongfully withholding claim payments and had "proved" your point about how bad insurance companies handle claims, is something which would get any newspaper writer fired and his/her paper sued--and rightfully so. Even the National Enquirer has limits, you know. You were wrong to do so; you know it and I know it. You used his remarks about an unrelated issue, misconstrued them, and took them out of context to take a shot at the insurance industry and suggest something sinister had just been "admitted", all of which was completely untrue. When you do that and you get called on it, at least be man enough to admit you were wrong, Chip. You've made your name on accusations of lies, misconduct, misstatements and deception by insurance companies. Before you climb on your high horse, you might want to make sure your own house is in order.
Sandy,
Sorry to imply you were asleep during your economics classes.
Sorry I did not write more precisely about the point I was making about "the float." I hope you do agree that insurance companies have an incentive to profit from the float by holding it too long? Seems simple enough. I think most readers that did not go to such a prestigous University as you did probably agree with that premise. Maybe you can teach those of us why if this is not so.
We'll strongly disagree on whether insurance companies delay too long when paying claims. The vast majority of my experince is that claims delay is a primary problem of claims management. Do you disagree?
Two economic incentives can cause insurance companies to delay claims and not take institutional steps to stop it: 1. Extra Profit from float. 2. "Breakage"---people give up or simply fail to follow back up because they are tired of the hassle. Many adjusters tell me that they see this in unclaimed replacement cost claims after payments for actual cash value are made.
Claim delay and "breakage" following the 2004 and 2005 hurricanes were two primary reasons the Florida legislature passed interest penalties for delayed payment and requirements for immediate replacement cost payments. So, why you may not think this is a problem in the insurance industry, many of your leaders think so and have done something about it.
You seem to rant about my views. As I indicate, I can appreciate that view since you are part of, and are protecting, the insurance industry and companies which I am criticizing. I can understand why you are not part of a "fan club" that is critical of poor insurance claims handling. Those managers are your clients.
Perhaps if you were at one of the Citizens Mission Review Task Force meetings or attended the Citizens Claims Review Task Force meetings and listened to me, and really read what I have written, you would think a little differently about "my agenda."
The CEO of Citizens thanked me for publicly explaining how much Citizens had changed from an earlier era. And, while there is some question about whether it is currently sliding back into some bad habits, Citizens is one of a few insurers that has a claims counsel devoted to claims ethics that calls and promises to follow up with what we are hearing is happening in the field.
Another example of me applauding paying claims promptly and fully was the work of adjusters for National Flood following the 2004 storms and Katrina. Possibly you missed reading those posts. I referred to those adjusters as the ones in the bright red coats and long white beards. They gave the policyholders the benefit of the doubt and got them money pretty quickly. Too bad I do not see more examples of that.
However, I just do not have too many good examples of your clients being "good neighbors." I have thousands of examples of the opposite which is why my "fan club" is pretty big, and yours is not.
Maybe you can work with us to change that? What would be wrong with that?
And finally, go back and read my post one more time about Buffett. I think I quoted him at length at the end of my post for some pretty insightful wisdom.
Peace. Better times are in front of us.