Quicken Loans' Brilliant Promotion Is A Triumph of Actuarial Mathematics
January 27th, 2014, 4:39 PM
When I heard about Quicken Loans' $1-billion promotion in connection with the NCAA basketball championships in March, it struck me that this imaginative exercise to stimulate business could be very positive for Detroit. But it wouldn’t be possible without insurance or the advanced mathematics that created it.
Raising awareness of Quicken Loans could motivate more homebuyers to use the retail mortgage lender to attain financing, as well as more homeowners to rely on it for refinancing. That’s more work for Quicken employees, the bulk of whom work in Detroit and pay city taxes. Thanks, therefore, to Fibonacci, Pascal, Markowitz and many other math pioneers for their help to revitalize the city. (Disclosure: My son is a Quicken banker.)
By dint of its digital technology – not to mention its relentless energy – Quicken has vaulted to No. 4 among U.S. mortgage lenders, according to the latest league tables, behind Wells Fargo, JP Morgan Chase and Bank of America. It’s been as high as No. 3; and I have no doubt that Dan Gilbert, Quicken’s founder, won’t be entirely satisfied until his company is on top.
Is anyone going to win the $1 billion? Almost certainly not. The odds of a winner, roughly one in a quadrillion, are infinitesimal. Quicken hopes as many as 10 million will register for the contest, according to Jay Farner, the company’s chief marketing officer. Each will have to provide a name and email address, possibly a bit more information about plans to buy or refinance a home. At some point they should expect to read a Quicken ad or hear from a Quicken banker.
“Americans love March Madness anyway,” said Farner, “our contest will just make it more fun and exciting.”
The billion-dollar sweepstakes idea isn’t unprecedented. Pepsi, to drum up soft-drink sales, in 2003 created a contest that involved a billion codes, 100 of which would make the holders eligible to appear on a two-hour game show. Eventually, a $1 million winner would become a $1 billion winner if a six-digit number held by the winner matched one selected by a monkey. The numbers, of course, didn’t match.
Pepsi wasn’t interested in accepting even the remote risk of paying out $1 billion – and neither is Quicken. But Warren Buffett, left, and his company, Berkshire Hathaway, were prepared to guarantee the jackpot, if it was won, for the princely sum of $10 million. How Berkshire came up with that premium is a question only an actuary could answer. (If you’re interested in how human beings figured out the math that created insurance, read Peter Bernstein’s fascinating book, “Against the Gods.”)
Hole-in-one contests, in which a car or a large sum is given away to a golfer making an ace on a specified hole, usually involve an insurance policy. The probability of a hole-in-one changes for the length of the hole, whether professionals are playing and so forth, said Daniel Kaufman, an executive of Kaufman Financial in Farmington Hills. A precise assessment of the risk is determinable via equations and formulas applied to real-world data, such as how many times a golfer swings and how many holes-in-one result.
Farner declined to say how much Quicken is paying for its insurance policy. The premium probably is similar to Pepsi’s. Berkshire Hathaway can underwrite the policy because it has the financial wherewithal to be able to pay out $1 billion – it would sting, but the company could survive.
I’m no actuary, but Berkshire Hathaway’s bet sounds like a pretty safe one on a one-in-quadrillion chance of a number coming up. I’d like to take a bet like that, too, for $10 million; I’m just a bit dubious how I’d get the billion for the payoff, if my luck ran out.