Nonstandard Insured

Nonstandard Insured refers to the segment of the insurance market covering high-risk, specialized, or unconventional liabilities that standard carriers reject. It is the historical core of National Indemnity Company's underwriting model.

📍 Origin

The concept dates back to the founding of National Indemnity Company by Jack Ringwalt in 1940. When Berkshire acquired NICO in 1967, it inherited a business built entirely on writing nonstandard auto and general liability policies. In the 1971 Letter, Buffett formally explained this business model to shareholders, describing how NICO capitalized on the industry-wide underwriting cycle by acting as a shock absorber for the standard insurance market.

🧠 The Core Argument

• The Premise: Standard insurance carriers rely on high volume, standardized data, and automated underwriting to price policies. They reject any risk that does not fit their narrow, conventional templates.
• The Mechanism: A specialized carrier like National Indemnity evaluates these rejected risks individually. Because there is no standard market price, the underwriter has the power to set rates that reflect the true risk, often building in a significant Margin of Safety.
• The Conclusion: When standard insurers experience losses and tighten their criteria, volume flows to the nonstandard market, allowing the specialist to write large amounts of highly profitable business. When standard markets loosen and compete for these risks, the specialist must contract volume rather than match inadequate prices.

📅 Chronological Evolution

• 1971 Letter: Buffett explains NICO's reliance on nonstandard risks, noting that when standard underwriters cut rates and compete for these policies, Berkshire will withdraw: "We continue to have underwriting profitability as our primary goal and this may well mean a substantial decrease in National Indemnity’s direct volume."
• 1972 Letter: Competition heats up. Buffett predicts declining volume for several years but expresses total faith in Ringwalt and Liesche's willingness to accept negative volume comparisons rather than write business at a loss.
• 1973 Letter: Succeeded by Phil Liesche as President, National Indemnity maintains its discipline, passing up the chance to match competitor price cuts. Volume declines as expected.
• 1974 Letter: Industry pricing collapses, leading to a 4% underwriting loss at NICO. Buffett defends the team, noting that they are highly profit-oriented and will wait for competitors to "have their fill of red ink."
• 1976 Letter: The market turns. Standard competitors retrench, and NICO's volume grows rapidly as standard rates become compensatory.

🗣️ Primary Source Quotes

"Our traditional business—and still our largest segment—is in the specialized policy or nonstandard insured. When standard markets become tight because of unprofitable industry underwriting, we experience substantial volume increases as producers look to us." — Warren Buffett, 1971 Letter

"Our seasoned management, headed by Jack Ringwalt and Phil Liesche, will continue to underwrite to produce a profit... and base our rates on long-term expectations rather than short-term hopes. Although this approach has meant dips in volume from time to time in the past, it has produced excellent long-term results." — Warren Buffett, 1972 Letter

🔗 Connections

• Related Concepts: Insurance Float, Insurance Underwriting, Underwriting Cycle
• Related Entities: National Indemnity Company, Jack Ringwalt, Phil Liesche
• Key Sources: 1971 Letter, 1972 Letter, 1973 Letter, 1974 Letter, 1976 Letter
• Index: index