Buffett Creating New Business Model In Reinsurance Sector?

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Warren Buffett may be 85 years old, but he understand the importance of changing with the times. That’s why it’s not too surprising to learn that Buffett is in the vanguard of a new, more cost-effective business model that is sweeping the reinsurance sector.

Of note, a good chunk of Buffett’s fortune was built on his perspicacious investments in the reinsurance industry over the last four decades, and until quite recently his firm Berkshire Hathaway still held major stakes in several reinsurers.

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The real story behind Buffett selling off Berkshire's reinsurance holdings

Much of the mainstream financial media has covered the fact that Buffett's Berkshire Hathaway has been reducing its holdings in the reinsurance industry over the last few quarters, and what that means for reinsurance underwriting returns in the future. It turns out, however, that there's really a lot more to this story.

Although Buffett continues to boost investments in his primary insurance businesses, it is clear he is slashing his underwriting property catastrophe risks and reducing his exposure to reinsurance pricing across the board.

Buffett reduced his total stake in reinsurer Munich Re (held by his firms Berkshire Hathaway Inc. and National Indemnity Company) from 12% to close to 9.7% a couple of months ago. In the last few days, media sources including Reuters are reporting that Buffett has dropped his total stake in Munich Re down to around 4.6%.

That said, no matter how much Buffett reduces his direct investments in reinsurance, Berkshire Hathaway is still supplying notable amounts of reinsurance capital both through the syndicated market and through private investments in reinsurers across the globe.

Breaking down the reinsurance value chain

As Artemis.bm notes, Buffett and Berkshire are also "breaking down the risk -> insurance -> reinsurance value chain, through initiatives such as the such as the recently AA+ rated Berkshire Hathaway Direct Insurance Co., which will sell commercial policies, such as workers compensation and business owners’ package covers, online directly to buyers."

A number of insurance industry analysts have pointed out that this direct online commercial platform could very well sell commercial property in future, which would certainly  be be disruptive to the sectors of the insurance market which are more standardized and can be completed online.

Keep in mind that, given its scale, Berkshire Hathaway does not actually need to give up much of the risk it writes back to reinsurers, so so by writing commercial business direct and retaining the majority of the risk, the firm cuts all the costs related to sourcing risk through the traditional syndicated and broker-led reinsurance marketplace.

When you dig into things a little closer, it actually seems the appetite for assuming risk has not really disappeared at Berkshire Hathaway. Taking a look at the bigger picture, you can see the risk appetite in the growth of the specialty business, the regular launches of new teams, lines of business and offices, to see an expansive approach to acquiring risk.

Taken as a whole, it's clear that Warren Buffett has not lost his interest in risk, he's just looking to minimize his exposure the traditional syndicated, renewal driven reinsurance market as he can underwrite the risk more cost-effectively himself in most cases.

Insurance industry analysts point out that (as usual) Buffett is leading the way as a trend-setter in the reinsurance industry, but other major players have also starting to adopt similar strategies.

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