A Lesson in Adjusting Insurance Claims Courtesy of Warren Buffett
There are, undoubtedly and for whatever silly reason, some of you who dont like Warren Buffett, a/k/a The Oracle of Omaha. There are some of you who dont know how he became so wealthy, or what he and his partner Charlie Munger do at Berkshire Hathaway (BH), or that the foregoing corporation even exists.
Berkshire is an investment company that involves itself with timeless brands such as Coca-Cola, American Express, Wells-Fargo, and so on. Berkshire also owns some (or all) of the most respected names in re-insurance and consumer insurance, such as GEICO, General RE, BH Reinsurance, along with property and casualty markets such as BH Homestate Insurance, Applied Underwriters, U.S. Liability Insurance, Central States Indemnity, and the list goes on. The company has a collective $225 billion equity base and manages this with a whopping 24 (yes, twenty four) employees in their single floor office.
I personally tend to drool over the Berkshire Annual Earnings & Shareholder report, but do not own not a single share of the company. A single share of Berkshire Class A stock is valued at over $242,000.00 and is slightly out of my price range.
From the perspective of a shareholder connected with the insurance claims business, however, I do absolutely consider the intelligence and savvy of the Berkshire group as second to none. It doesn’t really matter whether you like Berkshire or Buffett, because the business minds of this group are, at the very least, highly successful. If you want to be successful in any business you have to learn to put your emotions aside, which is exactly what Mr. Buffets group has done for many decades. I admit this is a contrast from own occasional opinion on the insurance claims business itself.
I was enjoying my morning coffee and reading the annual Berkshire shareholder letter today when something very profound and directly related to the insurance business was discussed by Mr. Buffett while describing the business of General Re, and its manager, Tad Montross. In fact, I stopped reading dead in my tracks and started writing this article.
The Four Principles of a Sound Insurance Operation (as stated by Warren Buffett):
A sound insurance operation needs to adhere to four disciples. It must:
1. Understand all exposures that might cause a policy to incur losses;
2. Conservatively asses the likelihood of any exposure actually causing a loss and the probable cost if it does;
3. Set a premium that, on average, will deliver a profit after both prospective loss costs and operating expenses are covered; and
4. Be willing to walk away if the appropriate premium cant be obtained.
The letter goes on to state that many insurers pass the first three tests, but flunk the fourth because they cant turn their back on business that is being written by the competition. Mr. Buffet says That old line, The other guy is doing it, so we must as well, spells trouble in any business and none more so than insurance. He couldn’t be any more accurate.
The Application to Insurance Claims.
Since the business of insurance and insurance claims go hand in hand, we can easily parallel these principles back to our own business. Of course, any good adjuster must understand all the exposures to the policy at hand.
As a insurance surveyor, adjuster, investigator, etc., you must conservatively assess the likelihood of a loss. A lot of folks miss that cue in the claims business by failing to address things that underwriting may have not been clearly advised of when the policy was invoked. Its true that most insurers do their best to identify the potential of loss before it happens, but the key here for the adjusting community is to make sure your client is aware when they are exposed to something they didnt anticipate. Today, youll find the majority of insurers require an brief underwriting inquiry form to be submitted with your claim report, but not all insurers have these kinds of programs in place. Its your job as the adjuster in the field to keep an open eye for unusual risks. A good example might be noting a cracked or broken support beam on a pole barn in the agri-business sector, even though you were there to observe a casualty loss for cattle. Another might be noting a structurally unsafe garage on a residential policy, even though you were there for a claim involving a slip and fall at the front door.
The third part, setting a premium that will deliver profit, can be translated into providing a valuable service that delivery profit to your adjusting company. It also means not infringing on the profit of your client. Your service should be competitive but not overly burdensome over time.
The fourth lesson applies to the negotiation table. Be willing to walk from a contractor or situation where you’re not getting the appropriate result. That doesn’t mean abandoning your client or the insured, so much as putting down a firm foot where its necessary. Engaging in situations to obtain an agreed figure where the appropriate figure cant be obtained does nothing but enable a poor situation to become worse.
Applying these principles should result in long term profitability and positive business that will benefit you and your clients for years to come.