Ajit Jain: Warren Buffett's Prince of Risk

Editor丨Li Jian

Berkshire Hathaway's shareholder meeting will take place on May 4, and as in previous years, Buffett will be in attendance with two executives to answer questions from global investors.

Ajit Jain, CEO of Berkshire Reinsurance, is at the helm of the business empire's foundational business. But he himself doesn't talk much, and he rarely appears in public, and only at the shareholders' meeting, when he talks about the insurance business, he will take the microphone handed by Buffett.

As the head of Berkshire's important insurance business, Buffett will praise Jain at the annual shareholder meeting whenever the succession issue is involved. In the "post-Buffett" era, Jain's importance is growing by the day.

In 2011, he gave a very rare interview to India's NDTV television station with the title "Warren Buffett's Prince of Risk". Jain and journalist Anjana Menon discuss topics such as the insurance business, Berkshire's culture, the perception of risk and philanthropy. From the interview, we can see his relationship with Warren Buffett, as well as his style of acting. This magazine excerpts the highlights to share with readers.

Here's a summary of the highlights:

Warren was able to distinguish between results and decisions before they happened

Jana Menon: Warren has complimented you many times before, is it easy to get used to that compliment?

Ajit Jain: As I've said in the past, if I think I deserve it, I'll get used to it. He has always been generous in his praises. It's a great honor to work for Berkshire Hathaway and for Warren. I love my job.

Jana Menon: But does that also bring with it a constant pressure that Warren has set a very high bar that you have to perform well?

Ajit Jain: Yes and no. Yes, it's because you always want to live up to people's expectations of you. The reason why it didn't was because Warren was very rational about expectations. And, rather than rational, I think he's one of the few bosses I can think of who can tell the difference between outcomes and decisions before they happen.

The way the world works is to look at the outcome, and you may have made a good decision, but in the end it led to a bad outcome – everyone would have fallen on you like a ton of bricks. In the same way, on the other hand, you may have made a bad decision and ended up with a good result, and you will get all the glory under the sun.

Warren does an excellent job of separating the two – before you know the results, he evaluates your work based on the quality of the decisions you make.

In a sense, it makes rational work easy, you know very well what's important, Warren has very clear guidelines on expectations, ethics, and how to do business. And, within these broad scopes, he lets you manage the business in the way you think is best.

Jana Menon: A lot of your success comes from making high-risk decisions like the reinsurance of the Sears Tower, the 2002 Winter Olympics in Salt Lake City, and PepsiCo's $1 billion raffle. Warren, on the other hand, always says that you are very rigorous. How do these cases match up with "very rigorous"?

Ajit Jain: First of all, when you think about investment and insurance, you think about risk. In a sense, risk is synonymous with gambling. Unfortunately, gambling has bad connotations. I like to call it prudent risk-taking.

The essential ingredient of risk-taking is that you must be able to assess how likely something bad is to happen to you – no matter how subjective the process may be. It's a fairly simple formula – you don't need high school math to handle it well. Then, make sure that you're getting paid something higher than your perceived odds and the expected value of your loss.

We are in the business of taking risks. There are a lot of factors that come into play when it comes to taking risks, and one of them is risk pricing. People are adventurous, so I think discipline is to say "no" – if you feel like you're taking a risk that doesn't get the right price, "no".

Berkshire's strength is that nothing can force us to take a risk if we feel that the risk is not priced properly. We can take a rational approach to taking risks, without having to think about reaching a certain grand goal or conquering the world, or gaining market share.

We are single-mindedly focused on making sure that our assessment of risk is correct – and if we can't, we say "no". If we can assess, we still need to get a reasonable price in order to adequately compensate for our capital risk.

Jana Menon: A few years ago, Warren Buffett mentioned that he wanted his son, Howard, to become Berkshire's non-executive vice chairman in order to maintain the company culture. What does he mean by culture?

Ajit Jain: First of all, Howard will be the non-executive chairman. Berkshire has its own unique culture that is very different from some other companies. GE's culture is very successful, but very different from ours.

I think the main thing about our culture is that the operating departments tend to be independent individuals and there are no synergies between departments. There is no bureaucracy. Executives running their respective businesses are able to feel like true owners without being tied down by the culture of a large company and are able to develop a business strategy that is optimal for long-term growth.

Jana Menon: What do you wish you were left behind in Berkshire?

Ajit Jain: I love what I do and I hope I can do it for a long time!

I don't think about inheritance. I'm so focused on the next few months and a few deals in the future, and honestly, I just wish I wasn't doing anything stupid. I've enjoyed and enjoyed doing what I've done for the last 25-26 years, and I just hope I can keep doing it.

JN: Warren says people should learn to "give." As far as philanthropy is concerned, do you personally follow this directive?

Ajit Jain: It's a difficult question to answer, and it's a very personal one. My views have also changed a bit over time. We have a son who has been diagnosed with a serious illness. Before he was diagnosed, my thoughts were very similar to those of Warren Buffett. I always feel like, "I've got these fames, I've got these riches, I don't deserve them, they don't belong to me."

But after my son got sick, things changed. I don't think I deserve my son's illness, he doesn't deserve it.

So, in terms of giving, I have two things that have changed: One, we have focused on a foundation that is trying to find a cure for my son's illness. The second is that I feel guilty because in the early stages of his life, when he was healthy, I didn't let him spend money and have a good time. So I made a big turn in this area, and I spent a lot more money more freely than before.

Major catastrophe reinsurance is interesting but extremely volatile

Jana Menon: A lot of people call you a pioneer of limited reinsurance, but because of the abuse of some people, limited reinsurance has gone through a lot of controversy. Do you think the era of limited reinsurance is over?

Ajit Jain: When you say that the era of limited reinsurance is over, what is limited reinsurance and what is risk transfer...... I mean, the concept of limited reinsurance isn't really being used. Regulators and accountants have a clearer definition of risk transfer.

As a result, there are a number of transactions that are subject to restrictions and are carried out within acceptable limits to the extent that these are considered appropriate risk transfers.

The words limited reinsurance, limited insurance, are misleading in many ways because all insurance is limited in some way. The question is how much do you want to draw a line on the loss? It's not very well defined -- and as a result, you know, some people push it all the way down without permission.

This issue has recently been clarified and a clear line has been drawn in terms of what constitutes an acceptable transfer of risk. Within that, we now want to make sure that our trades have what is considered to be sufficient risk transfer – but there are still gaps to ensure that our losses don't go all over the place.

Jana Menon: Have you ever regretted that you started a concept and it was misused by someone else?

Ajit Jain: First of all, I think it's a bit of an overstatement to say that I pioneered a concept. This concept existed long before I joined the insurance industry.

It's also a fairly active type of business for us – but, no, I don't have any regrets about being committed to this business. Again, there are some things I might have taken a different approach, but overall, it has stood the test of time. Even by today's standards, I think all of our trades meet the requirements for risk transfer.

Jana Menon: What would you do differently if you did it again?

Ajit Jain: Our clients do their books one way and we do it the other, and we're both fully informed and approved by regulators and auditors. In some cases, the auditor of both parties is the same person. Legally, mirror accounting is not a requirement even today.

But, despite this, we are sensitive to such issues due to the fact that mirror accounting tends to have a bad reputation in the media.

Jana Menon: What's the next big threat to the reinsurance business? A lot of people are saying that climate change is going to change the way we do business, and the uncertainty is too high.

Ajit Jain: I think it does in the long run, but don't forget that most reinsurance treaties have a time span of 12 months. So trying to think about climate change over the next 12 months, I think it's a risk appropriate. But at the end of the day, pricing is more of a practical function of capital supply and demand. The availability of excess capital has a greater impact on pricing than long-term factors such as climate change.

Jana Menon: Where is the next big opportunity for reinsurance?

Ajit Jain: Obviously, if the catastrophe reinsurance market is hit by $50 billion, then its price is going to skyrocket. That being said, you have to take a step back and ask yourself: Since the Chile earthquake, we have experienced four major events in the last 13 months, will this lead to higher insurance prices? Are these four major events that we have experienced random events or are they telling us something? Are the chances of the next earthquake much higher than they were two years ago?

Therefore, the price increase may be because people are more nervous about the soaring cost of risk.

But catastrophic business is an interesting industry. It's a very volatile business. It is a capital-intensive business. As a result, the demand for returns is much higher. Because it's a very volatile type of business, having a couple of years of data looks pretty good, but it's not a very good business if you look at it from any meaningful length of time.

(The article only represents the author's point of view and does not represent the position of this journal.) ）