Warren Buffet, talked about Geico in his book, the snowball effect.

Car insurer Geico Corp. has long been one of the jewels in Warren Buffett’s crown, minting billions for his Berkshire Hathaway Inc. in the nearly two decades since Berkshire bought the entire company in 1996.

The primary take away from Warren Buffet’s book, the Snowball Effect, in Buffets Origin Story, Buffet talks about, going to collage, and trying to be a wannabe stock broker. ultimately, he turned to his wealthy aunt, and traded stocks with her money, as her “broker”.

This lead buffet to seek good trades. He came across geico, and wrote the CEO, saying he was a collage student and wanted to learn more about Geico’s business, as a school assignment. surprisingly, geico agreed, and told him everything.

In Buffets words in “the snowball effect”, “Imagine a business, were your customer gives you their hard earned money, and you give your customer nothing in return. thats the kind of business I want to be in.”

Essentially, by only insuring government employees, hence the name, Government Employee Insurance COmpany, geico. This allowed the insurance company to legally profile, and discriminate against Americans(highly illegal, except for when the government does it), skewing the actuaries(mathematicians voodoo) in geico favor. For instance, as part of the terms of government employment, the government prohibits risky behaviors of its employees, such as substance abuse, or criminal activities, or poor credit, and excessive debt(because if your a prison guard, or a politician your prone to bribery, if you are hurting for money), plus the government guarantees decent salaries, vacations, pensions, holidays ext, to reduce risky behaviors on behalf of their employee.

Government Employees are subject to random & scheduled drug screenings, and annual background checks as a condition of continued employment, and are subject to termination if these behaviors are found at any time. Because by definition, the government employees, are forced to maintain good behavior, therefore, as a subcatagory of the total us population, government employees technically are low risk, which allows geico to offer cheaper premiums threw collective bargaining.

Once an employee is terminated for any reason, geico, simply refuses to insurance that person. Thereby, allowing geico to keep the profits from that employee, before he F#@! up and costs the insurance company money.

In Buffets words, “Imagine a business, were your customer gives you their hard earned money, and you give your customer nothing in return.”, this is by design, this is why Buffets portfolio company Berkshire Hathaway, bought geico in the 1960’s

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.