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Why Warren Buffett’s insurance firm won’t be bitten by Harvey claims

Why Warren Buffett’s insurance firm won’t be bitten by Harvey claims

Texas and Louisiana are slowly edging towards calm after Hurricane Harvey battered the Gulf Coast, leaving devastation in its wake. As the states prepare for recovery, the insurance and reinsurance industries have kicked into overdrive.

Insurers likely to feel the harshest sting are those that offer super-cat, a specialised type of insurance that covers property damage from natural catastrophe.

Berkshire Hathaway Inc., an Omaha-based firm headed by Warren Buffett, used to specialise in super-cat. The company dealt with claims totaling $1.1 billion for Hurricane Sandy and $3.4 billion for Katrina.

But Berkshire won’t be weighed-down by billions of dollars in insurance claims due to Harvey, according to the Omaha World Herald.

In fact, Berkshire’s property insurance companies have almost entirely vacated the super-cat market. Buffet explained this was due to less damage from hurricanes in recent years, which caused a dip in premiums paid for super-cat coverage, meaning premiums didn’t offset the risk of super-cat claims.

The exact losses caused by Harvey will not be known for some time. The National Hurricane Centre has estimated property damage from Harvey at US$58 billion, currently less than Sandy’s US$71.4 billion in 2012 and Katrina’s US$108 billion in 2005.

Speaking to CNBC and Fox News, Buffett said that Berkshireand other insurance companies will not have to pay for Harvey’s flooding of homes and businesses because of the state of flood insurance in the US.

“People who live in flood plains are the only ones who want to buy flood insurance,” he said. “People who live on higher ground don’t buy flood insurance and therefore don’t share the risk or make claims.” Buffett said premiums wouldn’t cover the risk of damage, which is why flood insurance is a tax-subsidised government program.

Rather than dealing with super-cat claims, Berkshire’s claims will be for motor vehicles, through its Geico division. Geico covers about 50,000 vehicles in the Houston area, according to Buffett, which could total around US$500 million if each claim comes in at around US$10,000.