Speaking of Insurance

Unfortunately, I must name a particular brand to make the point. It's not meant as criticism, only as another example of how people often don’t ask the right questions about money and economics.

The example is the Allstate commercial about their accident forgiveness program. Whenever I see it I ask, “Where do people think the money is coming from – surely not some magic money tree?” But that is the impression the ad leaves. Have an accident and your rates don’t go up, even though you expect the insurance company to pay for the repairs.

If the company has some sort of accident forgiveness fund set aside in a secret vault, where does that money come from?

As always, the company’s money comes from their customers. They use it to pay their employees, pay their rent and utilities, pay the claims that come in, reward the shareholders by making a profit and pay for the production and airing of those television commercials. To make this work, they must collect more money in premiums than they pay in claims! On average every one of their customers pays them a little more than they get back; that’s true for all insurance companies – even the non-profits.

Generally, insurance companies reward good drivers by raising premiums only minimally to account for inflation and industry-wide claims experience. Drivers who have accidents are considered a higher risk and must pay more, so on the surface accident forgiveness sounds like a good deal. But beware the details. 

The program has been around for a long time. Here from Fox Business back in 2011 is one explanation of some of those details. It’s not free. “At Allstate, for example, you get accident forgiveness by upgrading to a Gold or Platinum coverage plan. Gold costs 8 percent more, and Platinum 15 percent higher than a standard policy.” To qualify for Gold coverage, “you need to go three years without a collision,” but with Platinum coverage it kicks in immediately.

So there apparently is an accident forgiveness fund, but the people who signed up for the program are the ones funding it. It’s almost like buying auto insurance and then buying more insurance against a first accident. 

It’s similar to life insurance where the company is betting, based on life expectancy tables, that you are not going to die until you have given them enough money to invest and come out ahead. For auto insurance they set rates betting you are not going to have an accident, based on your driving record so money is left over to pay for the exceptions. The added premium is a bet you make against the company to protect you against an unforeseen incident. 

The rest of the article says that this added protection might be good for some but not for others, and it’s best to talk it over very carefully with an agent. 

Several other companies also offer some form of accident forgiveness and the Allstate program may have changed since this 2011 review, but the main point remains the same: There is no magic money tree! Companies don’t reward us out of the goodness of their hearts or by lowering the CEO’s salary. They collect it from their customers; and in every transaction it’s our choice whether a purchase meets our needs and is fairly priced compared to the competition.