« Counter-cyclical asset: Safes | Main | TheBrowser.com »
Insurance markets in everything
Hyundai is gaining market share:
Besides the Genesis, Hyundai is also benefiting from a novel scheme, launched in January, in which it offers to buy back cars from customers who lose their jobs within a year of their purchase. (The company essentially offers a smaller discount and then uses the money to buy an insurance policy.) This has proved so successful in stimulating sales that General Motors said on March 3rd that it was considering a similar scheme.
Posted by Tyler Cowen on March 8, 2009 at 02:07 PM in Economics | Permalink
Comments
Of course GM isnt the original innovator. Sorry, I just couldnt resist. GM is kind of like that slow kid who is always a few steps behind. We all know that our support will never help GM gain a lead in the race but at least with our support the special kid can feel better about himself.
Posted by: John Pertz at Mar 8, 2009 2:20:00 PM
I think a better idea for GM would be to offer a multi-year bumper to bumper warranty.
But, you say, what if GM goes bankrupt? That's why you have it co-sponsored / insured by a high-credibility third party. GEICO comes to mind, because they are already in the auto insurance business so they have the infrastructure, they could see it at a way to get additional policy business, and there's that wonderful Warren Buffet connection.
Warmed-over Hyundai ideas aren't necessarily bad ideas, but do indicate a certain intellectual bankruptcy.
Posted by: ZBicyclist at Mar 8, 2009 2:32:25 PM
There is some parallel to the economy in general here. People basically have the money to lend/consume, but have so much uncertainty about the economy and worst-case scenarios. The uncertainty then makes these scenarios all the more likely. Take away the relatively remote possibility of losing their job and they are willing to consume somewhat like before.
How we do that on a wider scale than cars, I haven't a clue. Applying a wider guarantee to new debt of bank-holding companies seems like a good idea, provided regulation makes default less likely in the future. However, the implementation of such an idea would be fraught with difficulty.
Posted by: MW at Mar 8, 2009 3:32:15 PM
When I heard the Hyundai commercials I thought about how they refute a big part of the Keynesian story: This heuristic employed by Hyundai is a good way to stop the fall in "aggregate demand" induced by the loss of confidence by consumers.
I'm glad it is actually working.
If only business schools would teach more of such tricks --instead of applied optimization theory masquerading as economics -- then maybe the economy would not be in such a bad shape.
Posted by: Alex at Mar 8, 2009 4:17:01 PM
@MW - more comprehensive unemployment insurance? To me, it's better to let firms go bankrupt and fortify personal balance sheets instead.
Posted by: Sean Brown at Mar 8, 2009 4:23:46 PM
So, you wouldn't be able to get insurance like this directly, because of your bad credit. But wait! Hyundai will make a judgment about whether to give you a car (and, you know, take your money) and then sell the risk to an insurer (who is presumably depending on Hyundai not making crazy sales of cars).
Distance between debtor and the one ultimately bearing the risk of default...where have I seen that before...
Posted by: Vernunft at Mar 8, 2009 6:05:34 PM
How can they be confident that the insurer will survive? I know, they take out insurance against the risk of its collapse.
Posted by: dearieme at Mar 8, 2009 6:11:08 PM
I'm guessing the cost to Hyundai is slight. For one thing, if you lose your job you are likely to need some kind of vehicle to look for another job. Sure, you could trade down, but that's a bit of a hassle and a used-car-lemon risk.
Posted by: Zbicyclist at Mar 8, 2009 9:18:39 PM
So, you wouldn't be able to get insurance like this directly, because of your bad credit.
You wouldn't be able to get insurance like this directly because no insurance company has any idea what to do with a lot full of year-old Hyundais. And as an individual selling your car, you won't be able to get anywhere near the price that a Hyundai dealership will for the car. I think it is an economies of scale story rather than a let's-repackage-and-sell-risk-to-some-other-sucker story.
You have to admit, it's no crazier than the idea of group health insurance offered through your employer.
Posted by: Ricardo at Mar 9, 2009 1:35:43 AM
It also does not hurt that Hyundai cars are now rated as
among the tops in quality, up there with the best that
Toyota is producing, while still maintaining a noticeable
price advantage. Nothing like the basics, quite aside
from gimmicks like this one that GM now wants to do.
Posted by: Barkley Rosser at Mar 9, 2009 2:54:46 PM
Lol, I got a better idea for GM. They offer a basic economics class with every purchase. It would go something like this.
“Alright you are going to buy this asset. As soon as you leave the lot it will depreciate between 10 and 20%. Now we have extended the loan period just beyond the low maintenance life expectancy of the car and most of its parts. For you there is no advantage at all. That simply allows us to make the care available to people who in the past were ‘willing’ but not ‘able’ to buy our product. This allowed us to raise the price on the product of course. Now, you are going to have to be confident that over the next 6 years that you are going to remain employed and healthy. We recommend that you get briefings from your employer about his or her business plan and voice any concerns that you might have about the future of your company. Alright, are you ready to sign?”
While this approach might not bring in as many customers, the banks would be more then likely to give loans to the ones that did.
Posted by: Dwight from cleveland at Mar 10, 2009 7:25:54 AM
It is not surprising that companies are looking for way to take advantage of the struggling consumer. It is sad to think that consumers will ultimately in up baring the burden of a decaying industry. Therefore, is now more important than ever that people protect them selves from schemes and money traps by becoming educated. The American consumer can only know as much as they are educated which is why it is important that the state support personal finance education. This will allow people to develop good financial decision making early on.
Posted by: rg at Mar 10, 2009 5:52:38 PM
I agree with the Hyundai approach to attract customers with the buy back program. It gives the customers guarantee and security in their purchase of a vehicle. In these bad economic condition it is good for customers to start spending money to help build the economy back up again. The customers will feel more confident in their life situation.
Hynduai should be commended with their innovative and creative approach to attract customers.
Posted by: Don F at Mar 11, 2009 10:43:58 AM
