Moral hazard, via dumb commercials

Another commercial which I’ve always wondered about is this one for Traveler’s insurance:

The trouble with the commercial is that the dog, after seeking out ways to protect his most prized possession, finds a solution in purchasing insurance. Keep it on your person? Too hard. Put it in a bank? Too risky. But with insurance, you can just leave it out in plain sight and go out to play.

This is of course a problem known as moral hazard. The shifting of risk from the original owner of an interest to an external organization causes the owner to act in ever more risky ways. Imagine if everyone just got insurance and then instead of protecting their business/car/house went outside to play. I mean, what the hell, if you’re paying for insurance you might as well not worry about it.

In the real world, insurance companies protect themselves against moral hazard by doing things like dropping you from your car insurance if you make more than 3 claims in a 5 year period. Or penalizing you (or dropping you) on your health insurance for gaining too much weight. In the finance world, we can arguably trace some of the roots of the 2007-now financial crisis to the fact that banks laid off their risks onto someone else, allowing them to take some fees and sleep better at night.

In short, the ad with the dog is almost exactly what insurance companies do not want you to do. What they want is for you to continue to act paranoid, but after doing everything possible to reduce your own risk, not worry about what’s left over. The thing is, carrying some risk – maybe a lot, maybe some – makes you more responsible. This crazy mutt has no more skin in the game…

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