Increasing Costs And Premiums At Berkshire Hathaway’s Geico

Increasing Costs And Premiums At Berkshire Hathaway’s Geico by Dr. David Kass

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.

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“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.”

Also:

“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.”

Berkshire Hathaway’s Geico

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David I Kass Clinical Associate Professor, Department of Finance Ph.D., Harvard University Robert H. Smith School of Business 4412 Van Munching Hall University of Maryland College Park, MD 20742-1815 Phone: 301-405-9683 Email: [email protected] (link sends e-mail) Dr. David Kass has published articles in corporate finance, industrial organization, and health economics. He currently teaches Advanced Financial Management and Business Finance, and is the Faculty Champion for the Accelerated Finance Fellows. Prior to joining the faculty of the Smith School in 2004, he held senior positions with the Federal Government (Federal Trade Commission, General Accounting Office, Department of Defense, and the Bureau of Economic Analysis). Dr. Kass has recently appeared on Bloomberg TV, CNBC, PBS Nightly Business Report, Maryland Public Television, Business News Network TV (Canada), Fox TV, American Public Media's Marketplace Radio, and WYPR Radio (Baltimore), and has been quoted on numerous occasions by Bloomberg News and The Wall Street Journal, where he has primarily discussed Warren Buffett and Berkshire Hathaway. He has also launched a Smith School “Warren Buffett” blog. Dr. Kass has accompanied MBA students on trips to Omaha for private meetings with Warren Buffett, and Finance Fellows to Berkshire Hathaway’s annual meetings. He is an officer of the Harvard Business School Club of Washington, DC, and is a member of the investment and budget committees of a local nonprofit organization. Dr. Kass received a Smith School “Top 15% Teaching Award” for the 2009-2010 academic year.