53 Trial Lawyer • Spring 2023 ers uncompromised lucrative profits. But here, Buffet described the uncompromising profit of float with near spiritual reverence. However, for many insurers the float is not enough, and the highest achievement of insurance profit is when float profit and underwriting profit combine to create the “happy result” that the insurer is paid billions by the insureds to make billions off of the insured’s money. That is the insurer gets to have its cake and eat it too. Buffet explains further: [O]ur [insurance] companies have . . . now operated at an underwriting profit for 14 consecutive years, our pre-tax gain for the period having totaled $28 billion. That record is no accident: Disciplined risk evaluation is the daily focus of all of our insurance managers, who know that while float is valuable, its benefits can be drowned by poor underwriting results. All insurers give that message lip service. At Berkshire, it is a religion, Old Testament style. In other words, by aggressively pursuing an underwriting profit, Buffet’s insurance companies are paid $2 billion annually by their insureds for the pleasure of investing and earning interest on over $100 billion of the insureds’ money. This is a lucrative venture unlike any other position in the financial marketplace. For example, compare the insurers to that of private equity firms and hedge funds. Those firms use leverage from their market position to obtain high yield loans to secure capital to make investments. But because they must borrow the money, those firms and hedge funds pay substantial interest to the lenders from their returns. No such costs for insurance companies. Quite to the contrary, the persons who “lend” the money to the insurance companies pay the insurance companies billions of dollars for the pleasure of lending the money to the company. Bad faith Understanding the above core profit models of insurance companies to protect underwriting profit and maximize the float provides a spotlight to perceive the bad behavior value to insurance companies. All insurers wish to maximize the size of float from which to collect interest. To grow float, the insurers need to maximize revenue from premiums, which may put pressure on their ability to realize underwriting profit. For example, some insurers try to grow float by attracting as many customers as possible with the lure of low-cost premiums. These insurers focus on low- and middle-income consumers who primarily seek insurance not because of a personal coverage concern but because the law, a home lender, a car lender or some other entity requires the coverage. Examples of discount insurers in this market include GEICO and Progressive. In those insurers’ ads, they are brazenly silent about the quality or scope of coverage they provide and instead focus solely on the discount nature of their premiums. It is almost as if the product they offer is a “cheap premium” as opposed to any coverage from a loss. Insurers serving this market may drive premiums so low in their efforts to draw customers to grow their float that they risk operating at an underwriting loss. Some discount insurers even accept that loss as a small price to pay for the float profit gained. However, other discount insurers, like GEICO, demand that they still generate an underwriting profit despite the reduced premiums. For them, it is, as Buffet says, “a religion, Old Testament style” to guarantee underwriting profit. However cheap premiums are counterproductive to creating underwriting profit, so the discount insurers who wish to still operate at an underwriting profit must find ways to reduce the amounts they will pay on the losses that were supposed to be insured. As trial lawyers we are on the front line of this activity. Such insurers are the most aggressive with lowball offers on good claims. They try to force low value settlements contrary to the extent of the loss, by taking advantage of numerous factors unrelated to the loss, such as the high costs of trial to the claimant and the risk that even a successful verdict will be subsumed by trial costs. As if in a war of attrition, they will overtry small claims and employ an army of cottage industry charlatan “experts” to disprove valid small claims in order to drive down settlement costs of future cases. They will reduce claim payments based on their anticipation that they could confuse the jury about the medicine or based on the track record of the claimant’s attorney or other matters irrelevant to the actual losses suffered by a person and that were supposed to be paid under the coverage. By doing so, these aggressive insurers squeeze their underwriting profit out of the claims at the cost of the people who have suffered the losses. Float profit and bad behavior Again, float profit is created by the insurer investing the consumers’ premiums for as long as possible before using those premiums to pay for losses. To maximize profit from float, insurers are motivated to delay payment on expected losses for as long as possible. For example, if an insurer has $1 billion in expected loss payments in a given year, consider See Corporate Greed p 54 Again, float profit is created by the insurer investing the consumers’ premiums for as long as possible before using those premiums to pay for losses.
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