Warren Buffett is worried about potential for ‘huge losses’ in booming, but still tiny insurance market
One of the messages that Warren Buffett and Berkshire Hathaway’s top insurance executive, Ajit Jain, sent to investors during the company’s annual shareholder meeting in Omaha last month was that cyber insurance, while currently profitable, still has too many unknowns and risks for Berkshire, a huge player in the insurance market, to be fully comfortable underwriting.
Cyber insurance has become “a very fashionable product,” Jain said at the annual meeting. And it’s been a money maker for insurers, at least to date. He described current profitability as “fairly high” — at least 20% of the total premium ending up in the pockets of insurers. But at Berkshire, the message being sent to agents is one of caution. A primary reason is the difficulty in assessing how losses from a single occurrence don’t spiral into an aggregation of potential cyber losses. Jain gave the hypothetical example of when a major cloud provider’s platform “comes to a standstill.”
“That aggregation potential can be huge, and not being able to have a worst-case gap on it is what scares us,” he said.
“There’s no place where that kind of a dilemma enters into more than cyber,” Buffett said. “You may get an aggregation of risks that you never dreamt of, and maybe worse than some earthquake happening someplace.”
Berkshire is in the cyber insurance business
Industry analysts generally say while some of Berkshire’s caution is warranted, the general state of the cybersecurity insurance marketplace is stabilizing as it becomes profitable. And Gerald Glombicki, a senior director in Fitch Rating’s U.S. insurance group, points out that Berkshire Hathaway is issuing cybersecurity policies despite Buffett’s caution. According to Fitch’s analysis, Berkshire Hathaway is the sixth-largest issuer of such policies. Chubb, which Berkshire recently revealed a big investment in, and AIG are the largest.
“Right now [cybersecurity insurance] is still a viable business model for many insurers,” Glombicki said. It is still a tiny market, representing only one percent of all policies issued, according to Glombicki. Because the cybersecurity business is so small, it gives insurance companies latitude to implement various policies to see what is working, and what isn’t, without a tremendous amount of exposure.
Berkshire, as well as Chubb and AIG, declined to comment.
“There is an element of unpredictability that is very unsettling, and I understand where [Buffett] is coming from, but I think it is really hard to avoid cyber risk entirely,” Glombicki said. He added though that there has still been no significant litigation that assigns culpability or tests the boundaries of the policies, and until the courts hear some culpability cases, some insurers may proceed more cautiously.
‘Could break the company’ Buffett says
Top Berkshire executives Warren Buffett (L), Greg Abel (C) and Ajit Jain (R) during the Berkshire Hathaway Annual Shareholders Meeting in Omaha, Nebraska on May 4, 2024.
CNBC
The problem with writing many policies, even with a $1 million limit per policy, is if a “single event” turns out to affect 1,000 policies. “You’ve written something that in no way we’re getting the proper price for, and could break the company,” Buffett said.
While some notable leaders, like former Homeland Security chief Michael Chertoff — who now runs a global security risk management firm — have called for a government cybersecurity backstop of some sort, most experts don’t believe that is needed right now. Glombicki says that while the feds are looking at what role they can play, intervention likely won’t happen until an incident prompts it.
Any government involvement “will probably happen after a big, expensive cyber-incident,” he said. “After September 11, the government put together a terrorist risk program. In cyber, we have not yet seen an attack of that scale. We are still in the stage of thinking about possible approaches.”
Cyber insurance data shows growth and market confidence
While the number of cybersecurity policies being written is small now, analysts don’t expect it to stay that way.
“Rates are declining, which shows stability in the market,” said Mark Friedlander, a spokesman for the Insurance Information Institute. According to its data, cyber premiums are estimated to double over the next decade. In 2022, premiums totaled $11.9 billion. By 2025, Friedlander says, they are expected to double to $22.5 billion and increase to $33.3 billion by 2027.
“This is clearly one of the fastest-growing segments of insurance. More companies are writing cybersecurity policies than ever before,” Friedlander said, attributing confidence among insurers to more sophisticated underwriting and stabilizing rates. He cited a 6% decline in cybersecurity insurance rates in the first quarter of 2024, following a 3% decline in 2024, as a clear signal that insurers feel more confident about jumping into the business.
“Most commercial insurance like auto, home, and life insurance have all been increasing, so the decline is significant. It is a sign of stability and a decline in claims severity,” Friedlander said.
And more insurers are entering the market because they have the tools and data to price the risk. “If you can do it at sound rates, you will write that coverage,” Friedlander said.
‘You’re losing money’
Buffett and his top insurance lieutenant don’t agree. It’s the insurance “loss cost” — what the cost of goods sold could potentially be — that has Berkshire on the fence with a bigger move into cyber insurance. Jain said losses have been “fairly well contained” to date — not exceeding 40 cents on the policy dollar over the past four to five years — but he added, “there’s not enough data to be able to hang your hat on and say what your true loss cost is.”
Jain said that in most cases agents are Berkshire are discouraged from writing cyber insurance, unless they need to write it to satisfy specific client needs. And even if they do, Jain leaves them with this message: “No matter how much you charge, you should tell yourself that each time you write a cyber insurance policy, you’re losing money. We can argue about how much money you’re losing, but the mindset should be you’re not making money on it. … And then we should go from there.”
Google Cloud says the risks are being overstated
There is a perception that cyber risk is rapidly changing and, therefore, too unpredictable to underwrite in a systematic way, says Monica Shokrai, head of business risk and insurance at Google Cloud. But she added that the perception doesn’t match reality, and that the risk can largely be managed.
“We don’t hold the same view as Warren Buffet on the topic,” she said. In Google’s view, the majority of cyber losses can be prevented or mitigated through basic cyber hygiene.
“By understanding security, you can get to a place where your controls are in a much better place, where the risk is more manageable,” Shokrai said. Devastating attacks from nation-states, meanwhile, are in a separate category and have been rare. Insurers are already inoculating themselves from potential risk by making exclusions for certain catastrophic events. Many cybersecurity policies have coverage exemptions for nation-state attacks.
“What they are trying to do is remain resilient and solvent in the event of a widespread event; what they have done to manage that is put in exclusions,” Shokrai said, and those include critical infrastructure, cyber war, and other widespread disruptive events.
Ambiguities and subjectivities remain. What if someone is the victim of a cyberattack from a foreign-based gang that isn’t officially tied to a nation-state but may have received some ancillary logistical support? Can an insurance company invoke a nation-state exclusion? Shokrai says categorizing how to attribute an event is the topic of much debate between insurance companies. “That is a big debate between insurance companies; it is an important distinction that needs clarity,” Shokrai said.
Some experts say it is the ambiguity surrounding the industry’s margins that has investors like Buffett and insurance players like Berkshire spooked. But so far, the business has proven to be sound overall. “It is still a viable business model for many insurers,” said Josephine Wolff, an associate professor of cybersecurity policy at The Fletcher School at Tufts University, who has been studying the evolving market for the past several years. But she added that a belief that the business is viable doesn’t mean things are not constantly changing, pointing to the recent ransomware surge over the past couple of years that saw large payouts by insurance companies — though notably still not enough to make the business unprofitable for most issuers.
Cyber insurance helps make the entire ecosystem safer, according to Steve Griffin, co-founder of L3 Networks, a California-based managed services provider that specializes in cybersecurity. Policies require companies to adhere to certain cyber standards to attain coverage, and the more businesses that sign up for coverage, the safer the entire system becomes. And if a business knows they’ll be denied a claim if they don’t have some basic cybersecurity safeguards in place, that acts as an incentive to put them in place.
Berkshire does believe the business will grow, it just isn’t sure at what cost. “My guess is at some point it might become a huge business, but it might be associated with huge losses,” Jain said.
“I will tell you that most people want to be in anything that’s fashionable when they write insurance. And cyber’s an easy issue,” Buffett said. “You can write a lot of it. The agents like it. They’re getting the commission on every policy they write. … I would say that human nature is such that most insurance companies will get very excited and their agents will get very excited, and it’s very fashionable and it’s kind of interesting, and as Charlie [Munger] would say, it may be rat poison.”
While Griffin understands Buffett’s caution, he sees a generational divide over the risk outlook, and is optimistic about the cybersecurity insurance sector.
“Probably Warren Buffet would have called cybersecurity insurance an opportunity when he was younger,” he said.
Microsoft CEO Satya Nadella speaks during the Microsoft Build conference at Microsoft headquarters in Redmond, Washington, on May 21, 2024.
Jason Redmond | AFP | Getty Images
A half-century ago, childhood friends Bill Gates and Paul Allen started Microsoft from a strip mall in Albuquerque, New Mexico. Five decades and almost $3 trillion later, the company celebrates its 50th birthday on Friday from its sprawling campus in Redmond, Washington.
Now the second most valuable publicly traded company in the world, Microsoft has only had three CEOs in its history, and all of them are in attendance for the monumental event. One is current CEO Satya Nadella. The other two are Gates and Steve Ballmer, both among the 11 richest people in the world due to their Microsoft fortunes.
While Microsoft has mostly been on the ascent of late, with Nadella turning the company into a major power player in cloud computing and artificial intelligence, the birthday party lands at an awkward moment.
The company’s stock price has dropped for four consecutive months for the first time since 2009 and just suffered its steepest quarterly drop in three years. That was all before President Donald Trump’s announcement this week of sweeping tariffs, which sent the Nasdaq tumbling on Thursday and Microsoft down another 2.4%.
Cloud computing has been Microsoft’s main source of new revenue since Nadella took over from Ballmer as CEO in 2014. But the Azure cloud reported disappointing revenue in the latest quarter, a miss that finance chief Amy Hood attributed in January to power and space shortages and a sales posture that focused too much on AI. Hood said revenue growth in the current quarter will fall to 10% from 17% a year earlier
Nadella said management is refining sales incentives to maximize revenue from traditional workloads, while positioning the company to benefit from the ongoing AI boom.
“You would rather win the new than just protect the past,” Nadella told analysts on a conference call.
The past remains healthy. Microsoft still generates around one-fifth of its roughly $262 billion in annual revenue from productivity software, mostly from commercial clients. Windows makes up around 10% of sales.
Meanwhile, the company has used its massive cash pile to orchestrate its three largest acquisitions on record in a little over eight years, snapping up LinkedIn in late 2016, Nuance Communications in 2022 and Activision Blizzard in 2023, for a combined $121 billion.
“Microsoft has figured out how to stay ahead of the curve, and 50 years later, this is a company that can still be on the forefront of technology innovation,” said Soma Somasegar, a former Microsoft executive who now invests in startups at venture firm Madrona. “That’s a commendable place for the company to be in.”
When Somasegar gave up his corporate vice president position at Microsoft in 2015, the company was fresh off a $7.6 billion write-down from Ballmer’s ill-timed purchase of Nokia’s devices and services business.
Microsoft is now in a historic phase of investment. The company has built a $13.8 billion stake in OpenAI and last year spent almost $76 billion on capital expenditures and finance leases, up 83% from a year prior, partly to enable the use of AI models in the Azure cloud. In January, Nadella said Microsoft has $13 billion in annualized AI revenue, more even than OpenAI, which just closed a financing round valuing the company at $300 billion.
Microsoft’s spending spree has constrained free cash flow growth. Guggenheim analysts wrote in a note after the company’s earnings report in January, “You just have to believe in the future.”
Of the 35 Microsoft analysts tracked by FactSet, 32 recommend buying the stock, which has appreciated tenfold since Nadella became CEO. Azure has become a fearsome threat to Amazon Web Services, which pioneered the cloud market in the 2000s, and startups as well as enterprises are flocking to its cloud technology.
Winston Weinberg, CEO of legal AI startup Harvey, uses OpenAI models through Azure. Weinberg lauded Nadella’s focus on customers of all sizes.
“Satya has literally responded to emails within 15 minutes of us having a technical problem, and he’ll route it to the right person,” Weinberg said.
Still, technology is moving at an increasingly rapid pace and Microsoft’s ability to stay on top is far from guaranteed. Industry experts highlighted four key issues the company has to address as it pushes into its next half-century.
Microsoft didn’t respond to a request for comment.
Regulation
There’s some optimism that the Trump administration and a new head of the Federal Trade Commission will open up the door to the kinds of deal-making that proved very challenging during Joe Biden’s presidency, when Lina Khan headed the FTC.
But regulatory uncertainty remains.
It’s not a new risk for Microsoft. In 1995, the company paid a $46 million breakup fee to tax software maker Intuit after the Justice Department filed suit to block the proposed deal. Years later, the DOJ got Microsoft to revamp some of its practices after a landmark antitrust case.
Microsoft pushed through its largest acquisition ever, the $75 billion purchase of video game publisher Activision, during Biden’s term. But only after a protracted legal battle with the FTC.
At the very end of Biden’s time in office, the FTC opened an antitrust investigation on Microsoft. That probe is ongoing, Bloomberg reported in March.
Nadella has cultivated a relationship with Trump. In January, the two reportedly met for lunch at Trump’s Mar-a-Lago resort in Florida, alongside Tesla CEO Elon Musk.
President Donald Trump shakes hands with Microsoft CEO Satya Nadella during an American Technology Council roundtable at the White House in Washington on June 19, 2017.
Nicholas Kamm | AFP | Getty Images
The U.S. isn’t the only concern. The U.K.’s Competition and Markets Authority said in January that an independent inquiry found that “Microsoft is using its strong position in software to make it harder for AWS and Google to compete effectively for cloud customers that wish to use Microsoft software on the cloud.”
Microsoft last year committed to unbundling Teams from Microsoft 365 productivity software subscriptions globally to address concerns from the European Union’s executive arm, the European Commission.
Noncore markets
Fairly early in Microsoft’s history the company became the world’s largest software maker. And in cloud, Microsoft is the biggest challenger to AWS. Most of the company’s revenue comes from corporations, schools and governments.
But Microsoft is in other markets where its position is weaker. Those include video games, laptops and search advertising.
Mary Jo Foley, editor in chief at advisory group Directions on Microsoft, said the company may be better off focusing on what it does best, rather than continuing to offer Xbox consoles and Surface tablets.
“Microsoft is not good at anything in the consumer space (with the possible exception of gaming),” wrote Foley, who has covered the company on and off since 1984. “You’re wasting time and money on trying to figure it out. Microsoft is an enterprise company — and that is more than OK.”
It’s unlikely Microsoft will back away from games, particularly after the Activision deal. Nearly $12 billion of Microsoft’s $69.6 billion in fourth-quarter revenue came from gaming, search and news advertising, and consumer subscriptions to the Microsoft 365 productivity bundle. That doesn’t include sales of devices, Windows licenses or advertising on LinkedIn.
“As a company, Microsoft’s all-in on gaming,” Nadella said in 2021 in an appearance alongside gaming unit head Phil Spencer. “We believe we can play a leading role in democratizing gaming and defining that future of interactive entertainment, quite frankly, at scale.”
AI pressure
Microsoft has an unquestionably strong position in AI today, thanks in no small part to its early alliance with OpenAI. Microsoft has added the startup’s AI models to Windows, Excel, Bing and other products.
The breakout has been GitHub Copilot, which generates source code and answers developers’ questions. GitHub reached $2 billion in annualized revenue last year, with Copilot accounting for more than 40% of sales growth for the business. Microsoft bought GitHub in 2018 for $7.5 billion.
Microsoft CEO Satya Nadella, right, speaks as OpenAI CEO Sam Altman looks on during the OpenAI DevDay event in San Francisco on Nov. 6, 2023.
Justin Sullivan | Getty Images
But speedy deployment in AI can be worrisome.
The company is “not providing the underpinnings needed to deploy AI properly, in terms of security and governance — all because they care more about being ‘first,'” Foley wrote. Microsoft also hasn’t been great at helping customers understand the return on investment, she wrote.
AI-ready Copilot+ PCs, which Microsoft introduced last year, aren’t gaining much traction. The company had to delay the release of the Recall search feature to prevent data breaches. And the Copilot assistant subscription, at $30 a month for customers of the Microsoft 365 productivity suite, hasn’t become pervasive in the business world.
“Copilot was really their chance to take the lead,” said Jason Wong, an analyst at technology industry researcher Gartner. “But increasingly, what it’s seeming like is Copilot is just an add-on and not like a net-new thing to drive AI.”
Innovation
At 50, the biggest question facing Microsoft is whether it can still build impressive technology on its own. Products like the Surface and HoloLens augmented reality headset generated buzz, but they hit the market years ago.
Teams was a novel addition to its software bundle, though the app’s success came during the Covid pandemic after the explosive growth in products like Zoom and Slack, which Salesforce acquired. And Microsoft is still researching quantum computing.
In AI, Microsoft’s best bet so far was its investment in OpenAI. Somasegar said Microsoft is in prime position to be a big player in the market.
“To me, it’s been 2½ years since ChatGPT showed up, and we are not even at the Uber and Airbnb moment,” Somasegar said. “There is a tremendous amount of value creation that needs to happen in AI. Microsoft as much as everybody else is thinking, ‘What does that mean? How do we get there?'”
Technology
Nvidia positioned to weather Trump tariffs, chip demand ‘off the charts,’ says Altimeter’s Gerstner
Altimeter Capital CEO Brad Gerstner said Thursday that he’s moving out of the “bomb shelter” with Nvidia and into a position of safety, expecting that the chipmaker is positioned to withstand President Donald Trump’s widespread tariffs.
“The growth and the demand for GPUs is off the charts,” he told CNBC’s “Fast Money Halftime Report,” referring to Nvidia’s graphics processing units that are powering the artificial intelligence boom. He said investors just need to listen to commentary from OpenAI, Google and Elon Musk.
President Trump announced an expansive and aggressive “reciprocal tariff” policy in a ceremony at the White House on Wednesday. The plan established a 10% baseline tariff, though many countries like China, Vietnam and Taiwan are subject to steeper rates. The announcement sent stocks tumbling on Thursday, with the tech-heavy Nasdaq down more than 5%, headed for its worst day since 2022.
The big reason Nvidia may be better positioned to withstand Trump’s tariff hikes is because semiconductors are on the list of exceptions, which Gerstner called a “wise exception” due to the importance of AI.
Nvidia’s business has exploded since the release of OpenAI’s ChatGPT in 2022, and annual revenue has more than doubled in each of the past two fiscal years. After a massive rally, Nvidia’s stock price has dropped by more than 20% this year and was down almost 7% on Thursday.
Gerstner is concerned about the potential of a recession due to the tariffs, but is relatively bullish on Nvidia, and said the “negative impact from tariffs will be much less than in other areas.”
He said it’s key for the U.S. to stay competitive in AI. And while the company’s chips are designed domestically, they’re manufactured in Taiwan “because they can’t be fabricated in the U.S.” Higher tariffs would punish companies like Meta and Microsoft, he said.
“We’re in a global race in AI,” Gerstner said. “We can’t hamper our ability to win that race.”
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