For the last few months, at least, my wife and I have been annoyed by the silliness of Liberty Mutual’s ads for auto insurance. Thank goodness for the mute button, or, if we’re watching something we have DVRed, the fast forward. The latter, by the way, has to be one of those little drops in the “prosperity pool” that Don Boudreaux writes about so eloquently and, for me, a pretty big drop.

Now to the content.

The gist of almost all the ads is that Liberty Mutual’s auto insurance competitors are big meanies because they raise their rates when the person insured has an accident. Their complaint would be justified if there was no positive correlation between having an accident now and having one in the future. But, due to imperfect information about other factors that are relevant for setting auto insurance premiums, increasing premiums based on the insured person having an accident makes a lot of sense. The more accidents you have, the higher the probability that you will have one in the future.

And talking about probabilities, the probability that Liberty Mutual’s actuaries do not know this is approximately zero.

Which means what? It means that Liberty Mutual, to make money or break even with its policy of not raising rates for clients who have accidents, must charge more now. Thus the title of this post.

I ran this reasoning by frequent commenter Greg Sollenberger, an insurance actuary, who says it makes sense.

Here’s one further thought I’ve had since running it by Greg. So he’s not necessarily vouching for this one. Who will find such ads appealing? I suggest it will be people in two categories: (1) those who don’t think through the point I made above, and (2) those who do and who think of themselves as people who are likelier than the average person to have an accident. To the extent the latter are heavily represented (assuming Liberty Mutual takes this into account, as it is highly likely to do), the initial premiums will be even higher than I suggested above.