Berkshire Hathaway Risk Appetite
“we are far more conservative in avoiding risk than most large insurers. For example, if the insurance industry should experience a $250 billion loss from some mega-catastrophe – a loss about triple anything it has ever experienced – Berkshire as a whole would likely record a significant profit for the year because of its many streams of earnings. We would also remain awash in cash and be looking for large opportunities in a market that might well have gone into shock. Meanwhile, other major insurers and reinsurers would be far in the red, if not facing insolvency.”
Risk tolerance and limit framework
Swiss Re’s risk tolerance is an expression of the extent to which the Board of Directors has authorised the Group and Business Units’ executive management to assume risk. It represents the maximum amount of risk that Swiss Re is willing to accept within the constraints imposed by its capital and liquidity resources, its strategy, its risk appetite, and the regulatory and rating agency environment within which it operates. Risk tolerance criteria are specified for the Group and Business Units, as well as for the major legal entities.
A key responsibility of Risk Management is to ensure that Swiss Re’s risk tolerance is applied throughout the business. As part of this responsibility, Risk Management ensures that our risk tolerance targets are a key basis for our business planning processes. Furthermore, both our risk tolerance and risk appetite – the types and level of risk we seek to take within our risk tolerance – are clearly reflected in a limit framework across all risk categories. The limit framework is approved at the Group EC level through the Group Risk and Capital Committee. The individual limits are established through an iterative process to ensure that the overall framework complies with our Group-wide policies on capital adequacy and risk accumulation.
So they have a number but they are not saying what it is. But they are telling us what they do with that number.
Now here is the Risk Limit Framework from the 2013 Partner Re annual report.
They have a number and here it is. But look at how much more Buffet has disclosed. He told that for Berkshire, an event that is three times the largest event experienced by the insurance industry, the loss would be significantly less than the earnings from the investments of Berkshire’s insurance and reinsurance companies plus the earnings of its non-insurance businesses.
Partner Re, whose disclosure is light years more specific than almost any other (re)insurer, is not quite so helpful. It is good to know that they have the disclosed limits, but they have not provided any information to tell us how much that this adds up to in their mind. If RISKVIEWS adds them up, these limits come to $21.5B. Adding like that is the same as assuming that they all happen at once. If we make the opposie assumption, that they are totally independent, we get a little more than $10B. Partner Re’s capital is $7.5B. So when they accept these risks, they must not think that it is likely to pay out their full limit, even on a fully diversified independent risk scenario.
So even with more specific disclosure than almost any other insurer, Partner Re has not revealed how they think of their risk appetite.
On the other hand, while Berkshire has given a better sense of their risk appetite, Buffett hasn’t revealed any number.
But this seems to RISKVIEWS to be real progress. Perhaps some combination of these three disclosures would be the whole story of risk appetite at a (re) insurer.
We shall wait and see if somehow this evolution continues until investors and policyholders can get the information to understand how well prepared a (re) insurer is to pay its claims and remain in business in a extreme situation.