Warren Buffett, owner of Geico Insurance and major reinsurance companies, has begun to sound the alarms that I’m thinking will soon become an industrywide call for insurance rate hikes.
"The party is over," Buffett said in his annual letter to
shareholders. "It is a certainty that insurance industry profit
margins, including ours, will fall significantly in 2008. Prices
Fourth-quarter underwriting profit from Berkshire’s
insurance business dropped 46 percent to $465 million led by
declines at auto insurer Geico and reinsurance units.
Just in case that key data point was missed: their insurance
profits were $465 million during three months. As Bloomberg reports,
Buffett is okay with that.
"He’s willing to take a hit to sign up new customers now
because ultimately the margins are great," said Tom Russo, who
helps manage $3 billion, including shares of Berkshire at
Gardner Russo & Gardner in Lancaster, Pennsylvania. "It’s a
perfect example of choosing wealth over reported profits."
But, then the story turns: Buffett and other insurers are restricting coverage and increasing rates. After a few years of massive profits, the companies face an impending disaster (remember the mere $465 million in 3 months).
excuse: an alleged sudden increase in auto insurance claims. How does
that happen? Everybody gets an iPhone, and we start driving into each
other? An upsurge of wrong-way drivers still in shock from the
Patriots devastating loss in the SUper Bowl?
It couldn’t be
that the crumbling economy and declining interest rates is leading to
weakening investment opportunities for insurers, could it? Insurers
make money by investing premium dollars. So when the investrments dry
up, they start raising prices to protect from the brutality of a $465
million quarterly pittance. But the vox populi is not particularly
keen on the idea that when the economy goes south, insurers get greedy,
so they create other reasons. Buffett is giving a nod to the "y’all
forgot how to drive, suddenly" explanation. Soon we’ll be hearing
about a rise in lawsuits and then, who knows, maybe a mold epidemic,
Whatever the reason, it’ll cost you.