While Berkshire Hathaway made money on its personal auto insurance business GEICO, and even on a big bet it placed on property-catastrophe reinsurance in Florida last year, one place where the leaders are less inclined to deploy capital is in the cyber insurance line.

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Asked about the challenge and potential associated with cyber insurance underwriting during the company’s annual meeting over the weekend, Vice Chair Ajit Jain explained that while cyber has “become a very fashionable product,” which represents “at least a $10 billion market” today, and while it’s also put “at least 20 percent of the total premium…in the pockets of the insurers” as underwriting profit, uncertainty about losses prompts him to advise the people in his insurance operations to avoid writing it when they can.

Ajit Jain, Vice Chairman of Insurance Operations for Berkshire Hathaway, May 6, 2018. (AP Photo/Nati Harnik)

“It’s very difficult to know what is the quantum of losses that can be subject to a single occurrence, and the aggregation potential of cyber losses, especially if some cloud operation comes to a standstill—that aggregation potential can be huge. Not being able to have a worst case cap on it is what scares us,” he said.

So far, he admitted, losses have been “fairly well contained. Out of 100 cents on the dollar of premium, losses over the last four or five years…have not been beyond 40 cents on the dollar leaving a decent profit margin. But having said that, there’s not enough data to be able to hang your hat on and say what your true loss cost is.”

Advising the people running Berkshire’s insurance operations, he said that while he discourages them from writing cyber insurance at all, “to the extent they need to write it so as to satisfy certain client needs, I have told them no matter how much you charge you should tell yourself that each time you write a cyber insurance policy you’re losing money. We can argue about how much money you’re losing, but the mindset should be you’re not making money on it…”

He continued, “My guess is at some point it might become a huge business but it might be associated with huge losses. Our approach is to stay away from it right now until we can have access to some meaningful data and can hang our hat on data.”

Berkshire Hathaway’s Chairman Warren Buffett interjected. “You have just heard why Ajit is invaluable—because when you insure something you really want to think of how much can you lose.” (Related article: “Jain Successor Is Recurring Berkshire Board Topic; Leadership Lessons from Warren Buffett“)

Drawing an analogy between riot insurance losses in the wake of assassinations of political figures in the 1960s, Buffett explained that having a policy limit was slim protection for carriers. “If somebody is assassinated in some town, and that causes losses of thousands of businesses all over the country, if you’ve written all those thousands of policies, do you have one event or do you have 1,000 events?”

“There’s no place where that kind of a dilemma enters into more than cyber,” he said.

A carrier may feel comfortable writing $10 million dollars of limit per risk, but “if that one event turns out to effect a thousand policies, and somehow they’re all linked together in some way, and the courts decide that way, [then] you have written something that there’s no way [you’re] getting the proper price for—and it could break the company,” he said.

“People want to be in anything that’s fashionable when they write insurance. And cyber is an easy [issuance.] Agents like it. They’re getting a commission on every policy they write,” Buffett said.

“You’ve got to have somebody in charge of things that understands that you may get an aggregation of risk that you never dreamed of [that] may be worse than some earthquake happening someplace.”

“Human nature is such that most insurance companies will get very excited—and their agents will get very excited. And it’s very fashionable. And as Charlie [Munger] would say, it may be rat poison,” Buffett said, eluding to the frank statements that Berkshire Hathaway’s former vice chairman has made about similar ideas. (Editor’s Note: Munger died earlier this year at the age of 99.)

AI Scamming: The Next Growth Industry

During the annual meeting, Buffett was asked several times to share thoughts the impacts of artificial intelligence on business and society. With Munger-like directness, Buffett admitted he didn’t have a good understanding of AI but drew analogies to the handling of nuclear weapons in describing the potential risks.

An AI-generated image of Warren Buffett

At one point, he said had recently seen an AI version of himself that he felt was realistic enough to scam anyone who knew him.

“Scamming has always been part of the American scene but this would make me –if I was interested in investing in scamming, it’s going be the growth industry of all time…”

“Obviously AI has potential for good things too but….based on the one I saw recently, I practically would send money to myself over in some crazy country,” he said.

“I don’t have any advice on how the world handles it because I don’t think we know how to handle what we did with the nuclear genie. But I do think as someone who doesn’t understand a damn thing about it that it has enormous potential for good and enormous potential for harm. I just don’t know how that plays out,” he said.

Related articles:What Warren Buffett Said About AI” (2017); “Berkshire Hathaway’s Buffett Talks Nuclear Risk and Tribalism” (2022)