Pricing Power

Looks like Buffet invested in Verisk Analytics, which is an organization that I am familiar with. Here is the real point:

Verisk is an American company that was founded in the 1970s by the major US property and casualty insurance companies. These companies collectively provided Verisk with their claims data in order to create a centralized database that would allow the industry to analyze risk better.

The analyst gets the point right but the names wrong. The Insurance Services Office (ISO) was created as an information mutual for the industry. It’s now a subsidiary of Verisk.

There’s no doubt Buffet’s onto something, though. This is a company with a gigantic ‘moat’, as he likes to call it.

ISO pulls off the confidence trick that I’ve seen before. They poll member companies for data, aggregate it and then sell it back to them. For quite a price, I’m told.

ISO data gives every insurance company a benchmark for claims costs and trends in various lines of business. It is literally the only way people have of guessing whether they can make a profit in a particular line of business if they aren’t currently in it.

Imagine a mining company that pulls zinc out of the ground and is mulling over the possibility of opening up a copper mine next door. How would this company make this decision? Well, they’d probably check the pricing history for copper and see whether they think they can make money on it. They know their costs of production, but they don’t know the price.

Insurance companies don’t have this information. They literally do not know how much their policies cost up front, which means that they need intimate knowledge of a market before they can decide whether investing in new products is a good idea or not. ISO is the only way they can get this data out of their competitors’ hands.

I’ve often toyed with the idea of what it would take to start a company that would compete with ISO. The problem is that ISO benefits from gigantic network effects. Without any scale you’re just one insurance company’s data. And I know that the biggest insurance companies (like AIG) guard their data jealously, so you HAVE to rely on the little guys banding together.

What I’d need to identify is a blind spot for ISO. A line of business that they don’t serve very well and probably won’t start serving soon. I’m sure it exists. The other thing I’ve heard about ISO is that it’s an antiquated, backwards organization. Doesn’t surprise me. They’re practically the insurance government. What incentive do they have of serving someone well?

None.

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