Commercial Analysis

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False Dilemma, Redux

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This is the same “dilemma” that Aviva Insurance Company tried to capitalize on a couple of years ago. It was discussed on this blog here, and is reprinted here – but edited to reflect the minor, non-essential differences between that commercial and this one.

Insurance is, essentially, risk management. All of life’s aspects are constantly at risk of failure and destruction and theft. Insurance companies provide their customers with the ability to exist in spite of that risk because they are assured that should failure or destruction or theft occur, there will be no financial cost. Of course, by buying insurance – also an aspect of life – the customer is risking the possibility that he will spend money on something he may end up not needing (ie: the aspects of his life which are insured may not fail or be destroyed or be stolen within the term of the insurance contract, and thus he will not need to exercise his contractual right to be reimbursed by the insurance company). The reason why a person buys insurance for one or a number of his life’s aspects is because he judges the risk of failure or destruction or theft of those aspects to be greater than the risk of “wasting” money on insurance he will end up not needing. The only way this works – the only way this is beneficial (read: profitable) to the customer is if he assesses the aspects of his life which he wishes to insure correctly. If he assesses them incorrectly he will either buy no – or too little – insurance, suffer failure or destruction or theft of those aspects, and then suffer financially as well because he will be required to correct the damage; rather than the insurance company. Or, if he assesses his life’s aspects incorrectly by purchasing too much insurance, he may suffer no – or too little – damage to those aspects, and then suffer financially because he will be paying for a perogative which he does not need.

Another factor – one which is almost never considered – is that the insurance company doing business with the customer must also make these assessments of his life’s aspects. If it assesses them correctly, the amount of damage caused by failure or destruction or theft will reflect the premiums they received from the customer, and they will be able to reimburse him while also profiting themselves from the agreement. If they do not assess them correctly – if they ask him to pay too small of a premium – when the failure or destruction or theft occurs, the amount that they will be contractually obligated to pay to their customer will be more than they needed to receive from him and they will lose money. Similarly, if they overassess the risk of failure or destruction or theft – if they ask him to pay too large of a premium – when the failure or destruction or theft occurs, this fact will be brought to the customer’s attention and he will demand to renegotiate or stop doing business with the company entirely.

In other words: it is in an insurance company’s financial self-interest to “put members first.” To to make sure that he isn’t being “robbed” (ie: paying unnecessarily high premiums). That is how they make a profit. If an insurance company writes policies which does not take into account the interests of it’s members, it will fail to meet the interests of it’s shareholders. Members’ interests and shareholder’s interests: there is no valid distinction between the two!

Why, then, does Nationwide present this invalid conflict between members and shareholders as if it were implicit in for-profit business? The reason is two-fold. First, the public is soaked in altruistic and egalitarian sentiment. Because most people in the culture are altruists or egalitarians, when a customer incorrectly assesses the risk of failure or destruction to his life’s aspects which he wishes to insure, and (voluntarily) buys the incorrect amount of insurance, the negative consequences of this are automatically blamed on the insurance company. Because the insurance company is “big” or “wealthy”, the average member of the public assumes that the insurance company is solely responsible for this (ie: the customer is not, to any degree, responsible for evaluating his own life and bringing that to the negotiations). In other words: the “big” and “wealthy” insurance company – because it is big and wealthy – is, according to altruism and egalitarianism, morally responsible for doing all of the leg work that is involved in establishing proper terms for a given agreement. Thus, if improper terms are (again, voluntarily) agreed to, and negative consequences to the consumer occur (and occur to the insurance company also, as is much more often the case than altruists and egalitarians wish to acknowledge), it is necessarily because the insurance company was “greedy”, “heartless”, “inhuman”, “money-grubbing”, “selfish.” According to altruism, to not take care of someone (to not “put him first”) isn’t morally neutral (let alone morally good) – and isn’t even just morally wrong – but criminal.

But wait, Nationwide is a big insurance company (and the fact that it’s a mutual, instead of an equity, company doesn’t change that)*. Why would it wish to perpetuate the misconceptions surrounding the nature of insurance caused by altruism and egalitarianism? The answer is the second, interrelated cause of the existence of this commercial: pragmatism in a mixed-economy. What Nationwide is attempting to do in this ad is to appeal to the public’s short-term, unthinking, emotional urges in order to gain for itself new business in the short-term. They are attempting to portray themselves as a unique insurance company – one that exists not for self-interested purposes, but purely for altruistic and egalitarian reasons. By appearing to be a servant of the customer – as opposed to a partner with the customer in the “business” of managing the risks inherent in the act of being alive (an arrangement which they smear as being predatory on the part of the for-profit insurance companies) – they hope to gain a short-term edge over their competition. They are trying to win the business of that vast portion of the public which believes that the primary purpose of having a business is to serve others, not oneself.

Why would a company like Nationwide risk inculcating even more altruistic, egalitarian, anti-business, and anti-self-interest sentiment in the general public when, given the general public’s ability to influence public policy, it is not in their long-term self-interest to do so? The answer is that, from the perspective of just one company in a large industry, or just one industry in a large economy, there is no “long-term.” In a mixed-economy such as the one that exists today – where there are some freedoms and some controls – there is no way for an individual company like Nationwide to know what the business environment will look like years, or even months, from now. In the future, they could very well be the victims of some new regulation or tax that benefits a competing business or industry or social segment, and so with that in mind, they are going to do whatever they must – up to and including distorting the very nature of the industry they work in – in order to make sure that it’s someone else who suffers right now.

The irony of all of this, of course, is that while Nationwide, in this commercial, presents the false dilemma between serving the interests of members and the interests of shareholders in a relationship that is actually beneficial for both, they are doing so precisely because the real dilemma that exists between “us” and “everyone else” in a mixed-economy pressures them to do so.

*To be clear: there is nothing at all wrong with a business model that doesn’t have shareholders – it’s smaller operating costs may attract customers because they can charge lower premiums and/or offer better service – but that doesn’t change the fact that it’s still a for-profit business (it’s just the the profit is in the form of better pay for the management and employees, instead of shareholders that were funnelled through Wall Street). If that is the company’s competitive advantage, that’s fine – and they should proudly talk about it in their advertisements – but not by disparaging their competition’s business models as immoral, and tantamount to illegal.

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Written by commercialanalysis

June 26, 2013 at 5:00 pm

Posted in Finance

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