Rafi Mohammed

Some Insurance Executives are Not Sleeping Very Well These Days

Posted on September 19th, 2007 (0 Comments)

Insurance Executive (nervously): “Honey…let’s hold off making our annual holiday ski vacation plans”

Spouse (surprised): “Why”

Insurance Executive (sheepishly): “My insurance company made a large bet that the Red Sox wouldn’t win the World Series”

Spouse (angry): “YOU DID WHAT???”

Boston’s Jordan’s Furniture (a division Warren Buffett’s Berkshire Hathaway Inc.) ran an interesting sales promotion this spring: all purchases made between March 7 and April 16 will be FREE if the Red Sox win the World Series. Instead of running yet another sale, Jordon’s used this novel promotion to drum up business during a normally slow period.

To avoid rooting against the Red Sox and covering the potential downside (which could be as high as $20 million dollars), the furniture company purchased an insurance policy. I’m sure that at the time, insurance executives were thinking “sure the Red Sox took the crown in 2004, but that was 85 years after their last World Series win (1919)…they aren’t going to win again this year.” With a week and a half left in the regular baseball season and the Red Sox in first place by 2.5 games, I bet some insurance executives are furiously sticking pins in their Dice-Kay (the Sox’s ace pitcher) voodoo dolls.

I’d have loved to find out more details of the insurance, but sadly that information seems to be under lock and key. However, Keith Reid wrote a Boston Globe article (“Jordan’s is betting Sox won’t win series”) that discussed a promotion being run by Elyse Jewelers, a local jeweler. Their promotion is: if it rains on a couple’s wedding date, their wedding rings are free. For every ring it insures, Elyse’s insurer checks weather records and determines the premium. Elyse reports that insuring a $5,000 ring costs $200 - $500 while a $15,000 ring may cost $1,500 or more. So let’s say roughly a 10% premium. Since the odds of the Red Sox winning the World Series are lower than that of rain, Jordan’s premium is probably lower. That said, Jordan’s is also paying a licensing fee to the Red Sox to use their name – so let’s put the total cost of the promotion at 10% of the each furniture purchase.

In essence, Jordan’s is running a lottery. Instead of a 10% sales discount, furniture buyers are being enticed by the chance to win free furniture. Out of curiosity, suppose you were buying $2,500 worth of furniture: would you rather have 10% off in cash ($250) or the chance of free furniture? What percentage discount would it take for you to say “I want the cash discount” instead of playing the furniture lottery? I’d take the cash if the discount were 10% and play the lottery if it were 5%. How about if you were making a $10,000 purchase, would you be more inclined to take the cash discount?

On another note, my sincere thanks to the folks at books4biz.com for their kind review of my book, The Art of Pricing. It’s extremely gratifying to know that two years after the book’s release, readers are still purchasing and enjoying my book!

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