Buffett Blasts Life Insurers for Taking on Crazy Risks with Variable Annuity Guarantees

Credit risk and the general health of life insurance companies that provide variable annuities were topics of conversation during the recent Berkshire Hathaway annual shareholders meeting.

Warren Buffett was critical of the life insurance companies that have provided what are in his opinion unrealistic guarantees over the past several years.  Buffett is likely referring to the guaranteed living benefits or living benefits that have accompanied most variable annuity sales in recent years.

Buffett’s view is that many companies—enticed by the prospect of additional revenue—provided living benefit guarantees that are underpriced and will continue to be problematic for the companies that provided them. 

In Buffett’s own words, “I always thought they were crazy when they were doing it.”

Buffett’s holding company, Berkshire Hathaway, has significant insurance operations.  However, Berkshire’s role in the life and annuity part of the insurance industry is relatively minor.

Buffett and Berkshire have had the opportunity to participate in variable annuity-related business through the company’s reinsurance operations, but they have declined these opportunities in light of their view that much of the business consists of large obligations that have been under-priced.

Buffett also indicated that riskier investments such as asset backed securities linked to commercial mortgages will prove to be an additional burden for those life insurers that chose to invest in such instruments.  His view is that the federal government will have to provide assistance if there are major life insurers who are on the verge of insolvency.

Source: Reuters

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