Car Accident, Bicycle Accident and Pedestrian Accident Attorney for Maryland, D.C. and Virginia
"Well, the bad news for him is that he has to cover me this Sunday. The good news is that he can save up to ten percent by switching to GEICO."
-Cincinatti Bengals wide reciever Chad Johnson, referring to Green Bay Packers Cornerback Al Harris
This offhanded joke by Chad Johnson was picked up and replayed all over the country on ESPN and local sports radio. It was also reprinted in the Sports section of almost every major metropolitan daily newspaper. Johnson was referring to one of the many colorful GEICO advertising spots that are seen and heard on a daily basis on televisions and radio station across the country. It’s almost impossible to turn on the TV or listen to the radio without coming across the lizard with the British accent, or the sophisticated cavemen with the wounded pride glaring at the television producers across a restaurant table. GEICO’s advertising campaign is so pervasive that their taglines have almost become part of the American lexicon.
It’s also very easy to come across other insurers while you are watching TV or listening to the radio. Nationwide and Allstate have taken a more serious track, presenting their agents as pillars of the community who are always willing to go the extra mile for their policyholders. One ad shows an agent offering driving tips to a nervous young female driver, while another offers reduced rates for teenagers with good grades. And who doesn’t remember those jingles? “Nationwide is on your side” and “You’re in good hands with Allstate” can be accurately sung by almost anyone with a television. You’re probably singing one of these jingles right now.
All of this clever and pervasive advertising leads to a few questions: How much does all of this cost? Are your premiums high because of all the cartoon lizards and cavemen? Or has this ad blitz brought in so many new customers and so much new revenue that your policy rates will go down?
The Costs of Advertising
GEICO spent $502 million on advertising in 2005 alone. The cost of a 30 second Super Bowl advertisement is over $2 million dollars. A 30 second ad during a lower profile national broadcast is close to $350,000. You can also factor in local television advertising, which is cheaper and can therefore be utilized more often, plus a near constant stream of radio and print ads. If you consider what all this advertising costs compared to how much GEICO is spending, then the near constant parade of GEICO visibility starts to make sense. And when you hear an enormous number like $502 million, you start to wonder how it is that you can possibly save “up to 15% on your car insurance” if so much of GEICO’s revenue is being put toward advertising. The answer is simple. GEICO is part of an investment group called Berkshire Hathaway, and to them, $502 million is a drop in the bucket.
“When Berkshire acquired control of GEICO in 1996, its annual advertising expenditure were $31 million. Last year we were up to $502 million. And I can’t wait to spend more.”
-Warren Buffett, quoted in the Berkshire Hathaway 2004 Annual Report
We’ve added the link to the Berkshire Hathaway Annual Report because we think it’s an extraordinarily illuminating document. We’ll add page numbers for you to check as we go along.
The Berkshire Hathaway investment group is the brainchild of Warren Buffett. According to Forbes Magazine, his net worth is somewhere around $42 billion dollars. Berkshire Hathaway has a very simple strategy: find businesses that are profitable and purchase as much stock as they possibly can. It’s worked well for them over the years. Berkshire Hathaway is the proud owner of high volumes of stock in companies such as Coca-Cola, Gillette, Wells Fargo, and Proctor and Gamble. They also have money involved in everything from energy to hotel chains to retail jewelry to furniture sales. And out of all these money-making giants, Mr. Buffett’s favorite holding is GEICO. (P.8)
GEICO is so profitable that it’s helping to cover Berkshire Hathaway losses in other insurance areas. Hurricane Katrina payouts would have adversely affected Berkshire Hathaway’s overall insurance income had it not been for the enormous amounts of premiums that they get on a daily basis from GEICO. In other words, the profit from GEICO was enough to cover the $3.4 billion worth of “mega-catastrophe” damages from a multi-state natural disaster without breaking a sweat. Considering that Berkshire Hathaway has $49 billion worth of insurance premiums (or “float”) in its holdings, they could easily handle quite a few Hurricane Katrina’s a year and not even feel it. (P.6-7)
You would think that with such enormous profits from one insurance company available to alleviate the suffering of another that Berkshire Hathaway could also pass the savings onto policy holders. Not so.
“…we’ve concluded that we should now write (mega-catastrophe) policies only at prices far higher than prevailed last year…” (P.8)
What this tells us is that even though they had a year of record profits that allowed them to not even feel the damages of Hurricane Katrina, the rates of their catastrophe insurance will still be raised exponentially. Having learned its lesson of not making as many billions as it possibly could have, Berkshire Hathaway will certainly not make that same mistake twice.
What Makes GEICO so Profitable?
With the premiums from GEICO able to cover the damages from Katrina, it’s easy to see that GEICO is an enormous breadwinner for Berkshire Hathaway. The advertising is obviously working. The parade of talking lizards and cavemen and colorful parody ads has clearly attracted scores of new policyholders. But it’s interesting to notice that while all of the commercials mention “saving a bunch of money” or “saving up to 15%,” on your insurance, none of them say anything about how things are going to go should you actually NEED your insurance.
GEICO engages in the same tactics as any other insurance company. Complaints of bad billing, refusal to pay on claims, stalling and delay tactics and low-ball settlement offers abound on most consumer watchdog group websites. GEICO also engages in the reprehensible practice of charging more for premiums based on education and economic status. A recent company document encouraged adjusters to charge higher rates to “unskilled and semi-skilled blue- and gray-collar workers” because they are more of an insurance risk. These differences in rates vary from state to state; in Louisiana the difference between what an executive and a janitor pay for insurance can be as high as 125%. There is another factor to these differences besides simply stereotyping the driving habits of entire groups of people. GEICO is offering lower rates to those that they think can afford to be in an accident and won’t need as much compensation as a result.
Lewis and Tompkins: Standing up to Big Insurance
Almost everyone has experienced difficulties with an insurance company. If simply getting a claim handled over something as minor as a fender bender is so difficult and frustrating, imagine what it would be like if the consequences were much more severe. Imagine if you couldn’t work as the result of an accident? Or if you couldn’t walk? What sort of help do you think you would be offered by an investment group that values the size of its “Float” and the strength of their investment returns more than it values their policyholders? The insurance companies aren’t only banking on stereotypes. They are also banking on your lack of knowledge of the law. If they simply shrug their shoulders and say “We’re sorry” in a magisterial voice, they’re expecting you to believe them and lay down.
At Lewis and Tompkins, we know the law. We know that insurance is a contract that goes both ways. You’ve lived up to your obligations by paying your premiums faithfully and on time every month. When the time comes for insurance to live up to their end of the contract, we’ll be there to make sure that they follow through, and that you receive every penny of compensation that you deserve. If you or a loved one has experienced unreasonable claim denial or are experiencing unreasonable delays with a settlement, contact Lewis and Tompkins for a free legal consultation today.