Insurance advertising wars, Kars4Kids and “buying eyes”

Advertisements featuring the GEICO lizard, the apron-wearing Flo from Progressive Insurance, and the emu from Liberty Mutual are incessant on the channels I watch. They ought to be; Berkshire Hathaway’s GEICO is consistently one of the top advertisers on television, spending an estimated $1.6 billion annually to reach your eyes, and the other two are close behind

Medicare Advantage and Kars4Kids advertisements are equally annoying. In my experience, most people claim that they are not affected by advertising, but the bulk of internet and television content is still produced on a “faith proposition” that companies are getting a return for the billions of dollars they spend to “buy eyes.”

The different philosophies of spending between the marketing department’s “Go first class!” approach and the editorial “tightwads” working for the publisher that employed me for many years would sometimes make my accountant’s eye twitch like Herbert Lom in the Pink Panther movies. This post is my admittedly-biased take on three different and timely reasons why companies still spend huge dollars to support free TV and internet.

The Insurance “Cola Wars”

This advertising battle among property and casualty insurers is reminiscent of the “Cola Wars” that spawned billions of dollars of advertising from Coca-Cola and Pepsi for many years. Each cola brand tried to dominate a market where a small rise in market share was worth billions of dollars in top-line sales over time. The soda business has been a classic duopoly, a two-competitor market. More recently, the power of the two traditional colas has been “watered down” by competing beverages, including bottled water. However, Coke and Pepsi still control most of this new brand diversity between them. Coca-Cola brands still command some 45% of the market, while Pepsi brands control about 26%.

The property and casualty insurance market, on the other hand, supports an amazing ten companies locked into competitive position. Ranked on insurance premiums written in 2020, as shown below, there is no single dominant player in this market. Although State Farm heads the list, it’s lead is not anything approaching the soda market bifurcation.

Property insurers 2020

Source: The Insurance Information Institute. Premium amounts are in thousands. Berkshire Hathaway owns GEICO.

If you put the correct number of zeroes on the list above, you can see how GEICO justifies that $1.6 billion in annual advertising spending, as it drives over $46 billion of annual billings. Auto and homeowner insurance are regular and painful “big bills” for millions of U.S. households every month.

A little math shows that just two-tenths of one percent of additional property and casualty market share would pay for GEICO’s annual advertising. And since they are much more dependent on direct-to-consumer sales of insurance products than is market leader State Farm, television remains GEICO’s biggest shot at getting you to switch.

And I say “you” because I have used an independent insurance agent for many years who represents multiple insurers and supposedly looks out for my best interest. Anecdotally, when I recently tried to research the costs of the big direct-to-consumer marketers, the promised savings just were not there. So, color me skeptical on the “saving money” pitches. And thus lies the downside of broad-market blasts in advertising. A lot of our eyeballs are just waiting for the show to start, and I have enough Florida lizards skating around my yard as it is.

The end result of a “Cola Wars” advertising campaign is stalemate. There may be incremental movement in market share, but now none of the participants can now afford to drop out of the heavy advertising, lest they yield market share to a competitor. The insurance companies are, in effect, addicted to their advertising campaigns for fear of the financial pain of withdrawal. We will likely see these geckos and emus on our television screens in heavy rotation until something new disrupts the market, but I am not convinced that the billions in advertising are saving anybody any money. Indeed, a healthy chunk of your premiums are going to supporting customer churn.

Using somebody else’s money

I recently posted updates about how to evaluate both Medicare Advantage (Part C) and Medigap (Part B) plans, the latter being supplements to traditional Medicare coverage while the former are privatized substitutes. Advantage provider commercials are currently in heavy rotation on television screens, especially here in Florida. However, there are very few commercials for equivalent Medigap/Part B plans. In addition, the tone of those Medigap commercials tends to be “just the facts” while the Advantage commercials have celebrities and promises of free stuff. Why the massive difference in advertising spending between these two alternatives for seniors?

To jump to the punch line, there is simply a lot of profit to be made in convincing you to jump to a Medicare Advantage plan, while Medigap plans work on a much thinner margin requiring very careful control over costs. Medicare literally pays Advantage plan providers from government funds a price markup to take seniors out of traditional Medicare and to put them into cartel-like healthcare provider networks, where the plan provider, and not Medicare, often decides what treatment to cover (or not). Recent investigations demonstrate that costs for this option have climbed sharply. As a recent NPR report has claimed:

“Switching seniors to Medicare Advantage plans has cost taxpayers tens of billions of dollars more than keeping them in original Medicare, a cost that has exploded since 2018 and is likely to rise even higher, new research has found.”

In short, hundreds of millions of dollars collected as your Medicare taxes every year while working wind up paying for Medicare Advantage pitches on television. The worst are what I call the “Free beer!” ads, which promise services and rebates to plan-switching seniors that, in practice, are often not what they are promised to be. Doctor, hospital, and procedure coverage can be very limited in these plans. And it can be costly to “switch back out” once you are in a low-cost plan if you try to change after your medical condition deteriorates.

This “free government money” for advertising new plans and processing Medicare beneficiaries has spawned, according to the Kaiser Family Foundation, almost 4000 plans nationwide. The average senior now has a choice of 56 Medicare Advantage plans.

The Part B Medigap plans, on the other hand, simply offer eight (formerly ten) standardized (regardless of insurer) alternative mixes of deductibles and cost sharing on any procedures left uncovered by traditional Medicare, and provided by any Medicare-accepting healthcare provider. These plans get a very small, fixed markup for processing the claims. Thus, they have very little accounting headroom room for advertising. The combination of known statistical “bets” on the deductibles and typically low overhead earns these my endorsement over Medicare Advantage.

The profit in non-profits

As one who has volunteered in financial roles for several great non-profits, I have a particular beef with “non-profits that are not not-for-profit.” True media “PSAs” (public service announcements) cost very little for not-for-profit charities to create and air, but some charity advertisements are paid and incessant, such as Kars4Kids. Charity Navigator gives this charity a rating of only one out of four possible stars (that is not good), mostly due to its poor “fundraising efficiency.” Those annoying advertisements and other costs of its primary fundraising method, which is auctioning off donated automobiles, amounts to 29 cents out of every dollar raised.

The most recent IRS 990 filing (the equivalent of a tax return for non-profit organizations) for Kars4Kids shows almost $25 million dollars spent in fundraising expenses, enough to fund a significant financial ecosystem of producers, advertisers, and car towing services. This advertising supports a top line cash inflow that now exceeds $107 million dollars annually.

In 2020, Kars4Kids reported that their highest-paid vendor was their law firm. They have been sued in several states for deceptive fundraising, and they have lost millions in speculative real estate deals. Non-profit organizations are usually prohibited from high-risk investing of donated funds.

I have documented in past posts how some organizations that are ostensibly non-profits, like the National Rifle Association, can enrich related parties in creative ways, with “captive” advertising creation and media placement being a common one. From a technical accounting perspective, they maintain non-profit tax status, but they support a large contingent of well-paid “hangers-on.”

In general, you can assume that any charity that uses a hefty amount of paid advertising, runs big prize contests, or calls you frequently is spending your donor money to support that. Charity Navigator is an excellent resource here, making it easy to see examples of “4-star” charities that deliver vital services while raising money efficiently, often while paying below-market compensation to cause-dedicated employees. Shop around here.

And so, here is the bottom line: If the television commercials are incessant, someone is paying to “buy your eyeballs.” And that someone may well be you.

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1 thought on “Insurance advertising wars, Kars4Kids and “buying eyes”

  1. Peter R Robinson

    Many of the Geico Gecko ads are hilarious. One of my favs:

    The ad is perfectly done. The way the Gecko swallows when he realizes what he has done. The way he has to put the dollar in the machine twice. The offer of the “crisp” at the end…

    Quite enjoyable!


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