I am quoted in an Omaha World-Herald article on the increasing frequency and severity of automobile insurance claims and the resulting rise in premiums at Berkshire Hathaway’s Geico:
All told, both the severity and frequency of claims have been on the rise at Geico, said David Kass, a business professor at the University of Maryland and a Berkshire Hathaway shareholder.
“This resulted from lower prices for gasoline and an improving economy, which led to more miles being driven by policyholders,” Kass said. “These increases in costs to auto insurers reduces their profitability in the short run until appropriate premium increases can be implemented.”
“This float is a major source of funds for Berkshire to invest both inside the company as well as outside the company through acquisitions and investments in publicly traded companies,” Kass said. “The insurance businesses in Berkshire are the engine that drives the company. The float provides the fuel.”
But without an underwriting profit, insurance float gets eaten up, with paid-in premiums going out as fast as they come in, depriving the company of their use in the meantime. So preserving underwriting profit via rate increases is axiomatic, Kass said. Ratepayers are going to absorb it; blame the hospitals and lawyers, perhaps, but it will be absorbed one way or another.
“The premium increases are being introduced with a lag of six months, the length of an auto policy,” Kass said. “But they will be set at sufficient levels to cover the higher costs.”