"If you are willing to do dumb things in insurance, the world will find you" · Transcript · BuffettMungerGPT

CharlieCould you comment on insurance companies taking on credit risk through the sale of credit derivatives? The question about credit insurance or credit guarantees of one sort or another, and that's become very popular, and it's become actually popular with sort of the standard insurance property casualty insurance companies in recent years. And I would say that in many cases the people participating in that business don't, really know what they're doing. It's so easy in insurance business. It's the curse of the insurance business. It's also one of the benefits of it, is that people hand you a lot of money for writing out a little piece of paper. And what you put on that piece of paper is enormously important. But the money that's coming in and seems so easy can tempt you into doing very, very foolish things. If you are willing to do dumb things in insurance, the world will find you. I mean, you do not, you can be in a rowboat in the middle of the Atlantic and just whisper out, I'm willing to write this and then name a dumb price, and you will have brokers swimming to you, you know, with their fins showing, incidentally. It's, it is brutal. I mean, if you are willing to do dumb things, there are people out there, and it's understandable, but they will find you. And you will get the cash up front. You will see a lot of cash, and you won't see any losses, and you'll keep doing it because you won't see any losses for a little while, so you'll keep taking on more and more of this, you know, and then the roof will fall in. You will make a few cents on the dollar when you're right, and you will lose incredible sums when you're wrong. And in credit insurance, when you go around guarantee, a lot of people went around guaranteeing credits based on ratings, and they said, well, we'll guarantee a whole bunch of single-age. ratings or will create these structured arrangements that involve A-rated credits. And they would use a lot of studies that would show that X percent of A-rated credits defaulted per year and you go back to the 30s, and all these back-tested arrangements. But the problem with that is that what the questioner mentioned is correlation. And when things go bad, all kinds of things correlate that no one ever dreamed correlated.