Commercial Analysis

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The purpose of insurance is risk management. A person buys insurance because she believes that the risk of paying premiums without ever having to file a claim (ie: “wasting money”) is less than the risk of having an incident and, not having insurance, having to pay the costs entirely out of pocket. Simultaneously, an insurance company agrees to sell a person an insurance policy because it believes that the risk of having to pay a claim filed by that person is less than the sum total of the money it will collect from her via premiums. It’s a text book case of quid pro quo – but why is it a quid pro quo? Precisely because the level of risk is measured correctly. How, exactly, is it measured correctly? By turning to the only thing anyone has to use as a predictor of future behavior: past behavior.

Why, then, does this commercial denigrate (ie: smear as unfair) the practice of insurance companies factoring in past behavior when they determine premium prices? It is because Liberty Mutual knows that most of the culture believes in altruism. The company is attempting to capitalize on the false dichotomy created by that moral code (ie: the belief that any action is either altruistic in nature or predatory in nature, but never mutually-beneficial; or even mutually-harmful). Because of that false-dichotomy, many people would regard an increase in their insurance premiums not as a legitimate response to the increase in risk that their behavior indicates, but simply an arbitrary act of “greed” by the party with greater leverage in a relationship. This is why the slogan “Hey insurance companies, news flash: nobody’s perfect” is expected to resonate, despite the fact that the very act of selling an insurance policies and charging premiums is acknowledgement that no one is perfect! (ie: if anything, the act of not raising someone’s rates after she causes an accident, or having an a priori policy of “accident forgiveness”, would be an evasion of that fact).

Liberty Mutural, in a cynical, pragmatic style that is so common in a mixed economy, is merely attempting to exploit that sentiment in order to garner more business for itself in the short-term.


Written by commercialanalysis

September 22, 2014 at 3:39 pm

Posted in Uncategorized

2 Responses

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  1. So answer this if the risk factor is always right. You have a 30 year driver who has never had an incident until one day it happens. Is this person now more likely than before the accident to be careless, or the opposite? The preponderance of past behavior statement is correct. In this case the past behavior should indicate the mistake that ALL humans will eventually make, would probably lead to more cautious behavior, not more risk.


    September 6, 2015 at 3:15 pm

    • Which is exactly why first time murderers should be given a pass. In fact, they should be given preferential treatment when police departments hire new officers – since having recently committed a murder means that someone is less likely to commit another.

      The point of the blog post is not whether or not a particular insurance company’s actuarial models accurately reflect the risk of particular demograhics. The point is merely that this commercial presents the raising of rates as wrong prima facia. No argument – not even one as convoluted as yours – is presented. It’s merely baldly asserted that raising someone’s rates is categorically wrong (as if premium rates were a futures contract in the stock market, instead of an ongoing collaboration between client and agency for the management of risk). Such bald assertions can only be made – and accepted by the public as uncontroversial – because the culture has been saturated with altruistic moral paradigms, and therefore an anti-business predisposition.


      September 6, 2015 at 9:51 pm

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