Tag Archives: trademark

Dinner With Warren Buffett (Part 3)

This is the third article in this series. You can read the other two parts here: Part 1 and Part 2.

In reading Warren Buffett’s letters to shareholders, we found many gems that inform our opinions and beliefs about how to be successful in the insurance industry. We wanted to share these five pieces that we found key:

1. Be great in your niche rather than a generalist

“[A great insurance manager] follows the policy of sticking with business that he understands and wants, without giving consideration to the impact on volume,” Buffett wrote.

Developing an area of expertise and choosing target markets the company understands in-depth is essential to the success of a carrier or of an agency. This is particularly relevant today as new risks are emerging quickly. Attempting to cover a risk you don’t fully understand is a fool’s game.


2. Underwriting discipline is key for long-term success

“We hear a great many insurance managers talk about being willing to reduce volume in order to underwrite profitably, but we find that very few actually do so,” Buffett wrote.

While it is common to talk about writing business only with strict underwriting criteria, it is hard to avoid the siren song of growth, especially for publicly traded carriers that have to worry about investors who only care about next quarter. Though it is challenging, a good underwriter must practice discipline in choosing the risks that it insures. Profitable companies will understand that this may mean growing more slowly or less than the year before but will ensure profitability.

3. Never downsize your underwriters during slowdowns

“We don’t engage in layoffs when we experience a cyclical slowdown at one of our generally profitable insurance operations. This no-layoff practice is in our self-interest. Employees who fear that large layoffs will accompany sizable reductions in premium volume will understandably produce scads of business through thick and thin (mostly thin),” Buffett wrote.

In his own companies, Buffett professes to never downsize underwriters because of slowdowns in the market Rather, he prefers to keep the extra capacity to be ready to pounce once the market comes around and the business can be written at proper pricing with expected underwriting profitability. If a company wants to commit to profitability, employees must understand that their first priority is profitability. The best way to do this is to make it clear that employees will be rewarded when this profitability is achieved. Assuring employees that they are not in danger of being laid off because of slow growth is an effective signal. In addition, it will be important to manage hiring practices during periods of growth, so that the company is not overstaffed. The company must strive for efficiency during all cycles.


4. Understand the challenges of commoditization and regulation

“Insurance companies offer standardized policies which can be copied by anyone. Their only products are promises. It is not difficult to be licensed, and the rates are an open book. There are no important advantages from trademarks, patents, location, corporate longevity, raw material sources, etc., and very little consumer differentiation to produce insulation from competition. It is commonplace, in corporate annual reports, to stress the difference the people make. Sometimes this is true and sometimes it isn’t. But there is no question that the nature of the insurance business magnifies the effect which individual managers have on company performance,” Buffett wrote.

The fact that the industry is so stringently regulated is a challenge for insurers. It is important, therefore, to hire people who are committed to professional development and growth. If the people in your company are going to be the difference, they must believe in the industry and strive every day to do the best work they can. Supporting your employees’ development efforts will inspire a strong culture of growth and achievement.

5. Reserve conservatively

“We are making every effort to get our reserving right. If we fail at that, we can’t know our true costs. And any insurer that has no idea what its costs are is heading for big trouble. […] The natural tendency of most casualty-insurance managers is to underreserve, and they must have a particular mindset – which, it may surprise you, has nothing to do with actuarial expertise – if they are to overcome this devastating bias. Additionally, a reinsurer faces far more difficulties in reserving properly than does a primary insurer,” Buffett wrote.

Companies must recognize and support the need to have an accurate picture of their costs. To this end, a company should encourage its claims departments to strive for accuracy and report potential losses fairly. If a company does not know what it faces, it cannot set goals that will lead to success. Insurance is an unusual business in that we do not know our cost of goods sold until long after the pricing has been set and the policy has been sold; thus, proper reserving is of do-or-die importance.

Much of Buffett’s advice in these five statements centers on the importance of well-educated and knowledgeable employees, which is one of the key things we push for at InsNerds.

Should You Insure Your Intellectual Property?

While industrial companies always insure their physical plants, they rarely insure their intellectual property even though it is often the most valuable thing the company owns.

Core IP, which defines and individualizes the company, is most often the company’s inventions — patented machinery, devices and technology. But it could be something as seemingly simple as the copyrighted graphics and designs on a wildly popular designer handbag or a top-selling toy. Trademarks can be invaluable IP — for instance, Coca-Cola’s trademark is recognized worldwide.

Because IP is intangible, it can be easily stolen — though the proper term, “infringement,” sounds more polite, theft is often what it is. An engineer can walk out the door with knowledge about your patented technology and trade secrets. A counterfeiter can copy your designs and trademarks as fast as a computer or photocopier works. The Web, of course, is paradise for infringers.

On the other hand, your company can stand accused of infringing someone else’s intellectual property. Let’s say it’s a series of patents on complex machinery. You’re convinced the suit is groundless, but you still have to hire an expensive law firm and bring in expert witnesses. In the end, you win. Congratulations. You’re still out a few million dollars in legal fees.

Your general liability policy gives you very limited coverage for your liability for your alleged infringements against others. (It’s generally restricted to infringing copyrighted advertising materials.) And it gives you no coverage to sue infringers. If you want significant coverage, you have to get a special policy. 

Given the amount of litigation — for example, 2,830 patent cases in 2006 — IP insurance is well worth considering.

Because there are two potential money pits — someone ripping off your IP and someone accusing you of ripping off theirs — there are two distinct types of IP insurance.

Defensive IP policies take effect when someone sues you for infringing their intellectual property. Even if your company is scrupulous, inadvertent infringement can happen. These policies are also sometimes called “IP infringement defense insurance” or “IP liability insurance.” They cover both your legal costs and the cost of the judgment if you lose. Judgments can run into the millions, and, besides paying out damages, you’ll be forced to stop making the infringing product.

A defensive policy kicks in when another party demands either money from your company or non-monetary relief, such as an injunction. Only a handful of insurers offer these policies. Depending on the carriers, you can buy coverage limits of anywhere from $5 million to $15 million. Minimum deductibles vary, and some insurers also insist on coinsurance, meaning you would pay larger out-of-pocket expenses.

Offensive IP policies are effective when someone else infringes your intellectual property. That is, the policy will provide money so your company can hire a law firm to sue the company that infringed your patent, trademark or copyright or stole your trade secrets. You will have to get permission from the insurer to hire a law firm and start litigation.

Why would you need an offensive policy? Unlike personal liability lawyers, who get paid by taking a percentage of the settlement if they win, IP law firms generally demand cash on the barrelhead for their services. If your company is a startup or a small organization without a lot of money in the bank, you might not be able to afford to hire a topnotch IP litigator to go after the bad guys. If you have a trademark or copyright case, the legal fees might be manageable, but going after a patent infringer takes millions. Your IP could be stolen by a bigger company, and there’d be little you could do about it. If the infringed patents are your competitive advantage, your company might even be forced out of business eventually. There’s only one known insurer that underwrites offensive IP insurance.

Do you need IP insurance and, if so, how much of what kind? There are no cut-and-dried answers. If your company manufactures generic goods like plywood, you may not need it, unless your manufacturing process is a trade secret. But if your company’s inventions, designs and trademarks are crucial to your company’s success, you may. Start by assessing how important your company’s IP is, and how vulnerable it is to being infringed by someone else or having someone claim that you’re the infringer. Once you have a clearer idea of the risks and potential consequences, you can start to investigate IP insurance systematically and determine if it’s worth it.

Ultimately, you may decide you don’t need IP insurance. But the time to investigate is now. Once you have been sued or your IP has been infringed, it will be too late.