Sunday, January 26, 2014

WaPo Attempts to Guess at What Warren Buffett Got Paid to Insure the Billion Dollar March Madness Basketball Bracket Bet

Last week when Warren Buffett announced, jointly with Quicken Loans,  a $1 billion prize for completing the perfect bracket in this March's men's college basketball championship tournament. (See: Warren Buffett Makes Huge Billion Dollar Bet on March Madness Basketball)

I wrote
:While the news focus has been on the payout, it is important to note that this really is a billion dollar bet by Buffett. Quicken Loans is surely paying him a significant fee to back the bet, though no news accounts report what the payment amount is.
There are very, very long odds that anyone will actually pick the entire correct bracket, but Buffett loses big if there is a winner. If there is no winner, Buffett just pockets the fee Quicken has paid him.
WaPo's Lydia DePillis is taking a guess on what Buffett will earn:
 "There's no way of knowing what that would cost, because no one is doing that," says Billy Simons, vice president at Rust Insurance. "They're rolling the dice. Its Vegas. They're saying, 'what sounds good?' And then you strike a deal."
It's probably not that expensive a policy, because of the low likelihood of a payout. Maybe $100,000. Maybe half a million. And Berkshire is probably running what numbers its got. "If I'm an actuary at Berkshire Hathaway, I'm loping at any stats I can get on collective bracket winners over the past 10 years, how close did people get, did anyone get it. I'd look everywhere I could." 
But it's not like other kinds of risk, where you can take in a huge amount of data and find out exactly how often a policy will need to pay out. "Usually, they use the law of large numbers and they say 'we've insured vans before, and we know eight out of 10 vans end up getting demolished,'" Simons explains. "There's not enough data to support that kind of educated response to a $1 billion bond." 
Whatever it is, for Buffett, there seems to be nothing but upside in this deal.

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