Analysis: Warren Buffett Champions an Inferior Product in THREE Policy

Warren Buffett, often ahead of the curve, sounded like a disrupter in a 2004 shareholder letter. Fifteen years ago, Buffett wrote, “Insurers have generally earned poor returns for a single reason: They sell a commodity-like product. Policy forms are standard, and the product is available from many suppliers, some of whom are mutual companies (‘owned’ by their policyholders rather than stockholders) with profit goals that are limited. Moreover, most insureds don’t care from whom they buy. Customers by the millions say, ‘I need some Gillette blades’ or ‘I’ll have a Coke,’ but we wait in vain for ‘I’d like a National Indemnity policy, please.’ Consequently, price competition in insurance is usually fierce.”

Although his statements contain fundamental flaws, Buffett thinks he has found the answer to the perceived problem and has joined the “Disrupter League” (yes, this is a made-up term). Berkshire Hathaway recently announced the launch of THREE, a dangerous attempt to simplify multiple insurance contracts for small business owners.

Buffett introduced THREE stating, “Insurance is important protection for any business, but few small businesses have the time to actually read through the policy forms that are supposed to protect them. With THREE a small business can be confident in the protection it is getting, because the whole policy can be read in a few moments. Every day, America’s small businesses prove that great things come in small packages. Now they can get insurance on the same basis.”

Chris Boggs

THREE, as its name foreshadows, is a three-page small-business policy Berkshire Hathaway insists is easy to read, understand and apply. Buffett’s intent is to replace multiple policies and endorsements with one, three-page policy. The seven coverages included in this policy are:

THREE’s “easy-to-read” policy language can be found here for your review. Let’s see if Buffett’s team met the insured’s needs.

Gaps and Problems

Combining and condensing functionally and factually dissimilar coverages inevitably leads to gaps and other unanswered problems. THREE proves this. This is a policy with holes and problems. How bad is it? Let’s take a look at a few of the key issues.

Property coverage holes, gaps and issues:

Liability Gaps

Liability coverages included in this form are general, professional liability and directors and officers liability. Buffett has created a few gaps in his attempt to disrupt and/or simplify these “standard” forms:

Auto Coverage

At least 27 holes, gaps and issues are present in just these two coverage grants; but we aren’t done analyzing the policy just yet. Let’s turn now to the auto coverage.

Like the liability section, the business auto cover is also subject to problems or questions surrounding defense coverage, deductibles, and the lack of medical payments coverage. Generally, auto liability coverage is NOT subject to a deductible, but that does not appear to be the case in this policy. Likewise, medical payments, a staple of business auto policies, is not covered in this section.

Workers’ Compensation

THREE’s workers’ compensation protection is quite fascinating. What NCCI takes six pages to expound upon, THREE covers in one paragraph. Do you think it’s possible something might get missed – by THREE? Let’s explore.

In a strange twist of fate, THREE’s policy may be the best option for the workers’ compensation exposure – if allowed in a state. But even with these potentially beneficial features, there are many “employment” relationships that may or may not be adequately addressed by this policy such as subcontracted labor, a PEO arrangement, employees hired from a temp agency, de facto employees or borrowed servants. Workers’ compensation is far more complicated than is expressed by this one paragraph.

Final Considerations

Granted, as mentioned previously, Buffett’s form does offer three rarely packaged coverages (cyber coverage, errors and omissions, and directors and officers), but even these coverage grants lack specificity. A lack of specificity generally results in court dates to decide how the coverage responds. There isn’t even enough in these policies to be considered ambiguous.

Beyond the issues laid out in this expose, there are many “little” problems not addressed. These “little” issues combine with the bigger issues already explored to ultimately result in major problems. Synergistically, this is a dangerous product.

Beyond the overt issues and gaps addressed, the greatest “unseen” problem with this policy is the inability to customize it to meet the insured’s needs.

All insurance policies, including this one, are written for the “average” insured; the problem is, there is no such thing as an average insured. Endorsements exist to allow the insured to customize a policy to meet its unique exposures. Without the ability to customize, the insured is stuck with an inadequate option – especially if this policy is the chosen option.

One last consideration. “Standard” insurance policies, those intended to be replaced by this three-page wonder policy, contain many definitions, limitations and exclusions not listed in this policy (coverage territory, coinsurance requirements, flood and earthquake exclusions, a liquor liability exclusion, an “other insurance” clause, etc.). The question is, do the actuaries really understand what they have? If or since there is no apparent sense of reality, the actuaries have likely underpriced this protection. If, however, they do know what they have given the world and have adequately priced for it, the premiums would be so high no one would purchase it.

The only explanation for giving away exceptionally broader coverage, risking the court costs associated with ambiguities surrounding exclusions, or not address key issues is the apparent lack of concern over the ultimate costs. With large amounts of capital, sound underwriting, reasonable coverage grants and actuarially sound pricing are unnecessary. But Buffett has amazing amounts of money to invest in new offerings and absorb unexpected losses. According to a recent Reuter’s report, Berkshire Hathaway has nearly $104 billion in cash and is in the process of negotiating the sell of Applied Underwriters (which will give them more cash).

Unmistakable Conclusions

For someone who believes insurance is nothing but a commodity and that the insurance industry is full of “also rans,” Buffett is pushing a “commodity” that doesn’t even live up to industry standards. THREE’s policy does not even qualify as an “also ran.” Buffett’s team has failed to produce a product that provides the “confidence” small business owners need. Further, the E&O nightmare agents could face from offering such a policy is unimaginable. Simpler does not mean better for any party involved in this policy.

Undoubtedly, some will take the bait and will not find the hooks in this policy until it’s too late. Shiny objects wrapped in technology, especially one cast into the waters by a respected name, will ultimately harm a lot of unsuspecting insureds. My hope is Buffett doesn’t personally know what is lacking in this attempt.

As I completed this piece, a conspiracy theory filled my mind. Maybe Buffett is waiting for the industry to respond and point out all the problems so they can be fixed (using the industry’s collective knowledge). But I don’t know, that’s sort of like believing Coke launched New Coke to increase demand for Classic Coke so they could ultimately win the “Cola Wars.” Coke execs always said they were neither that smart nor that stupid.