There are times when insurance is used as a marketing gimmick so spectacularly that you have to take your hat off and say “Well Done.” One of my favorite all-time examples of this is the 1958 B movie “Macabre”. Famous movie marketer William Castle provided $1,000 of “Fright Insurance” underwritten by Lloyds of London for anyone who literally was scared to death during the movie. Movie-goers had to sign a “policy” on their way into the theater. (There were two exclusions: people with a known heart condition and suicides.)
Into this hollowed tradition steps one of my favorite people to watch, Warren Buffett, when he covered the NCAA brackets contest for $1 billion through his insurer Berkshire Hathaway. While he doesn’t need the publicity, Mr. Buffett and this contest fast became one of the major headlines throughout the entire NCAA tournament. Similar to the Fright Insurance on Macabre, the chances of Berkshire Hathaway having to pay out a claim were almost non-existent. The chances of actually predicting a perfect bracket are 1 in 9.2 QUINTILLION (a quintillion is a million times a trillion, or a 1 followed by 18 zeroes). By comparison, the chances of winning the Powerball lottery are 1 in 175 million. The chances of getting hit by lightning in the US are 1 in a million (literally).
For all of these situations, contestants can improve their odds of being “the one”. For the lottery, you can buy extra tickets. With lightning, you can disregard all of your mother’s warnings and play on a golf course with big chucks of metal during a thunderstorm in the state of Georgia (where you’d have the best odds for getting hit by lightning). For Mr. Buffett’s contest, you can do the research and know something about NCAA basketball to improve your odds. For example, Mr. Buffett himself pointed out that the Number 1 seed has beaten the Number 16 seed 100 times in a row, which helps prognosticators eliminate possible permutations – with the caveat that possibly the best and most fun aspect of the NCAA tournament is the upset, the 100 to 1 shot that actually happens.
Insurance is all about risk management. How did Mr. Buffett manage his risk? First he did the math. I’m sure that once the Berkshire actuaries figured out the 1:9.2 quintillion odds, it was a no-brainer. The second move was by limiting entries to one per person. This eliminated the possibility of someone just figuring out all of the permutations and then entering them all into the contest (what size computer would you need to calculate that?). Also, the number of participants in the contest was limited to 15 million, resulting in the chances of loss being 8,500 to 1 (assuming that all of the 15 million participants had unique entries, with no duplications). If someone did win, the actual loss to Berkshire Hathaway would only really be $500 million since the $1 billion prize was to be paid out as an annuity, similar to the lottery, with a $500 million one-time payout option.
The funny thing about the “Buffett Bracket” is that the company that sponsored the contest, Quicken Loans, received almost no attention for their participation. It was all about Buffett, all the time. The premium of the policy was not disclosed but estimates range from $1 million – $10 million.
To be honest, I’m not even a basketball fan, pro or college. But I was drawn in by the Buffett Bracket. While winning the prize would have been fantastic, watching the final game with Mr. Buffett himself would have been a thrill in and of itself.
The Buffett Bracket is a great example of how fun insurance can actually be. Well done, Mr. Buffett. Well done.