Why Buffett Thinks Risk Management Should Be a Disciplined Affair

Berkshire Hathaway (BRK.A) operates in many industries compared to several other large business groups. Each of the company’s businesses has its own problems and opportunities.

As a result, risk management becomes critical to Berkshire Hathaway (BRK.B). Berkshire’s focus on risk can be gauged from Warren Buffett’s statement, “Berkshire is far more conservative in avoiding risk than most large insurers.”

Berkshire Hathaway has reported an underwriting profit for 13 consecutive years, showing a pre-tax gain of $26.2 billion for the period. Buffett states that this was due to Berkshire’s insurance (IAK) manager’s daily focus on disciplined risk evaluation.

Insurance managers are aware that while the float is valuable, its benefits can be negated by poor underwriting results. Buffett states that other insurance companies ignore this message but for Berkshire, it is a religion.

Buffett explains that the major shortcoming of most insurance companies is that they are not willing to withdraw from the business even if they are not able to charge appropriate premiums to cover their risk.

Buffett added, “‘The other guy is doing it, so we must as well,’ spells trouble in any business, but none more so than insurance.”

Buffett recognizes that some events like a cyber, biological, nuclear, or chemical attack on the United States (IWD) (IJH) would cause major problems for everybody, including Berkshire. However, he believes that the probability of such a mass attack is minimal.

Buffett added, “Nevertheless, what’s a small probability in a short period approaches certainty in the longer run. The added bad news is that there will forever be people and organizations and perhaps even nations that would like to inflict maximum damage on our country. Their means of doing so have increased exponentially during my lifetime.”