Recently, the Bank of England has questioned the US Treasury in regards to the lack of enthusiasm of putting Berkshire Hathaway, the company controlled by investing billionaire Warren Buffett, into the stricter scrutiny category of being too big to fail.
According to Stephen Foley, Tom Braithwaite and Alistair Gray of The Financial Times, the US Treasury was sent a letter by the Bank of England and they asked why the Berkshire Hathaway reinsurance division was not on the provisional list of institutions that are too big to fail by the Financial Stability Board a.k.a. the FSB.
Presently, regulators recently implemented an initiative across the world to protect the financial system. On a global scale, nine major insurance companies were identified and include MetLife, Prudential Financial Inc., American International Group and Allianz AG, and designated each of them as a systemically important financial institution (SIFI). This designation means that each one of these companies could potentially trigger a financial crisis if they were to fail and each of these insurance companies are required to have more capital in order to cover losses that could take place unexpectedly.
In an effort to be excluded from this list, MetLife filed a lawsuit against the US government to remove the SIFI designation.
Too Big to Fail Reinsurer Identification Postponed by the FSB
It was expected that the FSB would disclose a list of reinsurers that are looked upon as too big to fail. The regulator has postponed releasing this list after consulting with national authorities in November because of “pending further development of the methodology.”
Insurance companies were rightfully upset due to the regulator failure to designate reinsurers, which are considered an even more important part of the financial system.
In October of last year, the Bank of England made a request from the US government in regards to the absence of Berkshire Hathaway being on the provisional list of too big to fail financial institutions.
The Bank of England even confirms the existence of a letter in response to the request of risk.net as part of the UK Freedom of Information. The central bank chose not to reveal the contents of the letter.
Insurance Is a Significant Part of Berkshire Hathaway
There’s no denying that the insurance industry is very significant to Berkshire Hathaway. Underwriting and investment profits make up 27% of Berkshire Hathaway’s net earnings in 2014.
Berkshire Hathaway is the owner of Geico, one of the leading insurance companies. Berkshire Hathaway Reinsurance and General Re are the main companies in the reinsurance division.
In the prior year, Berkshire Hathaway made approximately $195 billion worth of revenue, and $41.3 billion of that was part of earned insurance premiums. Throughout the world, Berkshire Hathaway reinsurance is the sixth largest reinsurer as far as gross premiums written in 2013, according to the rating agency AM Best.
In the latest Berkshire Hathaway letter to shareholders written by Warren Buffett, the Oracle of Omaha says that the insurance industry has “been the engine that has propelled our expansion since 1967.”
Recently, Berkshire Hathaway has pulled back from underwriting reinsurance risk because they are concerns that the premiums are just too low.
Berkshire Hathaway does meet the designated threshold of a company that is too big to fail under the United States process. This is especially true because of the fact that they have more than $50 billion in assets and more than $3.5 billion derivative liabilities.
The Financial Times also took note that regulators in the US have not chosen to subject Berkshire Hathaway to more oversight. Some executives in the insurance industry are complaining about the increased regulatory scrutiny that the industry is experiencing.