Buffett, State Farm Bicker Over Insurance Pricing
It’s unusual for a chief executive like Edward Rust Jr. of State Farm Mutual Automobile Insurance Co., the No. 1 U.S. auto and home insurer, to get into a public squabble with another corporate chieftain.
When the other CEO is Warren Buffett, chairman and chief executive of Berkshire Hathaway Inc., the argument becomes something special.
Buffett started the dispute with a complaint in his annual letter to Berkshire shareholders that price cuts at State Farm were unfair to Geico Corp., a Berkshire holding, and other insurers.
Rust said that although he admires Buffett, the Geico boss ought to stop complaining. State Farm won more customers last year by delivering better service, he said in an interview.
The dispute underscores the pressures facing insurers to win new business--and keep claims down--while the stock market slumps. Property and casualty insurers have relied on investment returns in recent years to offset losses from underwriting.
Buffett said State Farm is swallowing losses to gain clients. State Farm’s underwriting loss from auto insurance grew to $3.6 billion in 2000 from $2.1 billion in 1999. Geico, sixth-ranked in auto insurance premiums collected, reported an underwriting loss of $224 million in 2000 versus a gain of $24 million in 1999.
“State Farm has been very slow to raise prices,” said Buffett in his letter. “The willingness of the largest player in the industry to tolerate such a cost makes the economics difficult for other participants.”
Rust’s response: “I, like everybody else, have great respect for Warren’s perspective, but I disagree with him a bit on the issue of auto insurance as a commodity.”
Geico’s new auto policies fell to 1.47 million in 2000 from 1.65 million in 1999. Over the same period, State Farm added 875,000 auto insurance customers.
Rust said he believes that auto insurance buyers don’t make decisions about which insurance product to buy just on price but also on service.
“You might make the argument that people do price-shop, but that’s only one aspect of the product. There’s also the service you provide at a time of crisis for your customer.”
State Farm, based in Bloomington, Ill., has a reason to focus on service.
Last summer, the insurer was hit with a $1.2-billion jury award in a case involving its policy of requiring the use of generic auto parts in all car repairs. State Farm is appealing the decision and maintains that the use of generic parts doesn’t make the repaired cars unsafe and helps the company reduce expenses.
