Tuesday, February 23, 2010

How to Lie with Statistics -- Allstate Edition

For our latest statistical lie of the week, check out the following commercial.

At the risk of putting too fine a point on it, here's a full breakdown.

Customers of the two companies fall into one of four categories:

Geico customers who would get a better deal with All State;

Geico customers who would get a better deal with Geico;

All State customers who would get a better deal with All State;

All State customers who would get a better deal with Geico.

If we knew the relative sizes of those four groups and the average savings of the first and last groups we'd have a fairly comprehensive picture. Not surprisingly neither Allstate nor GEICO went that far. Both companies talk about the savings of people who switched.

Most people presumably switch providers to get a better deal (putting them in the first or last groups). Furthermore, switching is a hassle so the savings have to be big enough to make up for the trouble. The result are highly biased self-selecting samples of the first and last groups.

When GEICO simply mentions a potential savings of 15%, they are being a bit less than forthcoming but the claim that you might be able to save a substantial amount of money by switching is reasonable. For honest-to-goodness lying you need to wait for the Allstate commercial.

Allstate also bases their claims on the savings of those who switched to their company, but unlike GEICO they use those claims as part of a classic lie-by-hypothesis -- making a statement then supporting it with an incomplete or unrelated statistic. The ad starts with a trustworthy-sounding Dennis Haysbert saying "If you think GEICO's the cheap insurance company, then you're going to really be confused when you hear this" then touting an average savings of $518.

Yes, you might be confused, particularly if you don't realize the sample is ridiculously biased or that we aren't told the size of the policies or how long a period the $518 average was calculated over (the small print at the bottom refers to 2007 data which seems a bit suspicious, particularly given the following disclaimer at the bottom of Allstate's website "*$396 Average annual savings based on information reported nationally by new Allstate auto customers for policies written in 2008." No competitor is mentioned so the second number is presumably a general average. This could explain the difference in the numbers but not decision to shift periods).

I would also be suspicious of the data-cooking potential of Allstate's bundled products. Here's how the old but effective scam works: you single out one product a loss leader. They may sell this as a feature -- save big on car insurance when you get all of your coverage from Allstate -- or the numbers may be buried so deeply in the fine print that you have no idea how your monthly check is being divided. Either way this gives the people massaging the data tremendous freedom. They can shift profits to areas that Wall Street is excited about (happens more often than you might think) or they can create the illusion of bargains if they want to counter the impression of being overpriced. I don't know if any of this is going on here but I'm always cautious around numbers that are this easy to cook.

I would also take into account Allstate's less than shining reputation in the insurance industry, particularly regarding the company's strategies since the mid-Ninties. The story has been covered by Business Week, PBS and Bloomberg which supplied the following:

One McKinsey slide displayed at the Kentucky hearing featured an alligator with the caption ``Sit and Wait.'' The slide says Allstate can discourage claimants by delaying settlements and stalling court proceedings.

By postponing payments, insurance companies can hold money longer and make more on their investments -- and often wear down clients to the point of dropping a challenge. ``An alligator sits and waits,'' Golden told the judge, as they looked at the slide describing a reptile.

McKinsey's advice helped spark a turnaround in Allstate's finances. The company's profit rose 140 percent to $4.99 billion in 2006, up from $2.08 billion in 1996. Allstate lifted its income partly by paying less to its policyholders.
Allstate spent 58 percent of its premium income in 2006 for claim payouts and the costs of the process compared with 79 percent in 1996, according to filings with the U.S. Securities and Exchange Commission.
So, even if we put aside the possibility of data cooking, we still have an ethically tarnished company dishonestly presenting a meaningless statistic and that's good enough for our statistical lie of the week.

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