Here are the phases of thinking about Quicken Loans' offer of a $1 billion prize for a perfect NCAA bracket, insured by Berkshire Hathaway:
Phase 1: Whoa, that's nuts, why would they do that!
Phase 2 is certainly closer to the truth. As the L.A. Times points out, it's likely that Warren Buffett would offer anyone who got to the Final Four with a perfect bracket some far lesser sum just to walk away, rather than go for the final payout.
And the company has already profited by some amount because of the price of the insurance policy.
How much, though? It's impossible to say, according to underwriters, because policies are based on statistical outcomes -- and in this case, there's nothing to compare it to.
"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.