Why Are Insurance Ads So Weird?
The other day I found myself teaching my elementary-age kids about insurance. Insurance? Isn’t that pouring it on a bit early, econ guy? At first the only reason I did this was because there are so many advertisements for insurance during sports highlights on YouTube. I had to tell them something. My economics lessons for kids spring from the desire to teach them about the world around them. I want them to understand.
“Dad, what is this?” they would ask when they see a TV ad in which a grown man crashes through a window, or another grown man bickers with an emu, or yet still another grown man can’t pronounce “liberty” while standing in front of the eponymous statue itself.
“Well, what do you think they’re selling?” I ask, sticking with the question I recommended in my previous post about ads.
“Umm…” They have no idea. None of them guessed that “they are shielding people from risk by sharing it between many people.” It’s not that they can’t understand because they’re kids. They can’t understand because no one could interpret this buffoonery unless you already know what it is.
Insurance ads used to be stodgy things. They tried to convey solidity. The jingle that sticks with me from childhood is “The rock! The Prudential! Above and beyond!” (Nonsense, when you see it written out.)
Now the ads are flamboyant oddities, designed not to describe a product but to catch your attention, like a skill game caller at the county fair.
This all started, especially for auto coverage, in 1999 with the first Geico gecko ad. The company chose the gecko because focus groups thought the name was “gecko.” Geico decided to lean into this and made their mascot a gecko. Their goofy ads stood out from the competition. The ads were so successful that all their competitors followed suit: Aflak has a duck, LiMu has an emu, and Farmers has a farmer. The '90s were a time when everyone tried to out-weird each other. The '90s are over, but the insurance industry is still at it.
Insurance companies need to stand out for reasons unique to the industry: 1) their products are nearly identical, so they have to differentiate somehow, 2) the number of consumers doesn’t change much, so they can only grow by stealing customers, 3) the industry is heavily regulated, 4) regulation is dramatically different state by state, meaning that a combination of government regulations and individual risk profiles sets prices. (The #1 indicator of insurance risk and therefore insurance cost is a person’s credit score.)1
If you seek freedom from insurance ads, go to New Jersey, New York or California. In these places, insurance is so heavily regulated that some insurers have fled the state. They've just given up. Targeted state or local ads are rare. Sure enough, in these states policies can be uncompetitive or difficult to get, and expenses are rising.
At the opposite extreme is Mississippi. Almost a third of drivers are uninsured there. Liability insurance is required, just like everywhere else in the nation (except New Hampshire), but many just ignore the law.
Why? Kate Scott, my colleague at the Virginia Council on Economic Education and a native Mississippian, explained to me: “You will get a ticket if you are pulled over. However, the cost of the ticket is less than the cost of year’s worth of insurance. Many people ‘ride dirty’ and take the risk of not being pulled over more than once a year.”
Trey Shiflett, a former Mississippian and current Virginia barista, experienced this: “I got hit. The man who hit me said that his brakes hadn’t been working well the last few months(!), and he was sorry this happened but it was to be expected. But he didn’t have insurance, so bye and have a blessed day.” So be advised: for one-third of Mississippians, car insurance is considered a suggestion, and some people have iffy brakes, but if they hit you they will be really friendly about it.
In Florida they aren't friendly about anything if insurance is involved. The laws of the state encourage people to sue if a person or their insurance company gets any detail wrong. The law heavily favors plaintiffs. When you drive from Mississippi through Alabama and into Florida, you are immediately greeted by billboard after billboard advertising prosecuting attorneys. If there is a crash, someone is getting sued. The billboards urge you to make sure you’re the one doing the suing.2
How did I teach my kids about insurance? I explained through the analogy of a broken toy.
“You know how sometimes your toys break? And you know how Mom and I say we won’t buy you a new one? If you had insurance for your toy, then your broken toy would be replaced.”
“Can we buy insurance for our toys?”
I was about to say no, but then I had an idea: we have a household mini-economy in which everyone (even the parents) gets play money for chores.
“I’ll tell you what,” I said, “if there is any toy that you want insurance for, you can get it in our mini-economy for just one DayBuck.” (A DayBuck is our family currency, and it converts at two DayBucks per one U.S. dollar.)
The kids discussed this with each other. Two of them decided to buy insurance for new and breakable toys. This was a good deal — the toys are very likely to break. One child has cashed in a policy already.
A simpler way to teach about risk is by involving your children in some family choices. Ask “what do you think? Should we try such-and-such, or is it not worth the risk?” If the decision doesn't work out the way you hoped it would, you can tell them that we made the best choice you could, and we can feel good about it.
This teaching helps kids see that risk has a cost, and the cost is more than just hoping the grown-ups don’t scold them for not being careful. They can put a price on the risk. That’s the economic lesson here: risky behavior has a cost.
My source for a lot of this information is my brother Peter, to whom many thanks. He has worked in the insurance industry for most of his adult life.
Peter further explained that “what makes Florida unique (and to a lesser extent NY, NJ, and MI) is that litigation is frequent for both the first party (insured) and the third party (tortfeasor).” That is, in Florida if you get hit, the law encourages you to sue both the guy hit you and your insurance company if you think they didn't pay you enough.
A previous version of the footnote above said that tortfeasor could sue the driver he ran into. That wasn't right (Peter emailed me), and I've corrected it.
“Tortfeasor” is a word that neither you nor I have ever encountered. It means “a person or entity that commits a wrongful act that causes another individual or business to suffer a personal or financial loss.” It’s pretty much “someone who does something bad to you.” Why don’t we use this word more?! If you manage to use it in a sentence this week, please email and let me know how it went.
Great article! I used to love this day in class with high schoolers. My 13 year old and I recently had a discussion about this topic as well and he astutely observed that they hardly ever discuss prices in their ads. They just say they can save you money or might reference a specific %. That opened up a good discussion about how insurance pricing is determined.
Stephen, I'm curious how you might explain a different kind of insurance—life insurance—to your kids.