Where's the Growth in the Auto Insurance Market?

I recently had the opportunity to interview Jon Swallen, SVP of Research for TNS Media Intelligence, about his thoughts on the auto insurance market. Jon has more than 25 years of experience in the media research industry. For the past 5 years, he’s been responsible for mining the TNS-MI database of ad spend activity and extracting insights on key market segments, including auto insurance. Prior to joining TNS-MI, Jon held the title of Director of Media Knowledge at Universal McCann. His career in the industry also included various media research positions at Ogilvy & Mather and Grey Advertising.

Where is the growth in auto insurance? Are there consumer segments that will be the growth market for auto insurers in the coming year or two?

Growth of the auto insurance market is tied to the number of insured vehicles and the levels of coverage sold. Motor vehicle registrations, a key metric for the available pool of insured vehicles, have been flat for several years. The average age of vehicles on the road continues to tick upward and the corresponding depreciation in their value can eventually lead policy holders to cut back on non-mandatory collision and/or comprehensive coverage. These factors limit market growth potential in the core, private passenger vehicle segment and have led insurance companies to expand their sales efforts against faster-growing specialty segments, including motorcycles, RVs, ATVs and watercraft. But these are – and will remain – much smaller business opportunities as compared to the traditional market for auto coverage.

As overall category growth rates have slowed, the battle for market share has become more intense and marketing activity has escalated, especially among the well-funded leading brands. There are some fundamental and enduring reasons behind these developments. It’s a fragmented market with 80 percent of the premiums distributed across the Top 25 underwriters. Insurers compete for the same pool of profitable, preferred-risk drivers. A short purchase cycle (polices are typically written for 6-12 month periods) forces customers back into the market at regular intervals. Annual customer churn rates of 10+ percent across the industry – equivalent to over $15 billion of policy premiums – encourage companies to pursue twin strategies of customer retention and acquisition.

That last point is significant. Given the common practice of bundling auto with other insurance (e.g., homeowners coverage), the financial value of policy churn is multiplied. Every insurance underwriter attempts to increase its customer retention rate while concurrently increasing its new customer win rate. That’s how you build share. But to have a chance at the win, you first need to get prospects to shop your brand. A classic role for marketing.

If you’re looking for insight about the consumer segments which auto insurance companies have identified as worth targeting, look at the evolution of ad message content over the past 1-2 years from the leading marketers. You’ll see evidence of increased targeting towards ethnic groups (African-American, Latino) and women.

There has been a huge increase in ad spend over the past 5 years. Will that trend continue? If not, how do you see advertising strategy changing for insurers?

Over the past few years, ad spend on auto insurance has increased at an annual rate of 31%. Back in 2003, it was a $600 million ad category. Last year, a $1.77 billion category.

Obviously, these growth rates are not sustainable. In fact, the 2007 growth rate was just 13% (representing an increase of $200 million in ad spend) and in Q1 ’08 it slowed to 7%.

The run up has been propelled by the competitive battle for market share and also the favorable profit performance that auto underwriters have turned in during this period, enabling them to support higher marketing budgets. Profit levels have recently begun to ebb, in large part because industry price competition has led to slower revenue growth.

The Big 4 national brands – Allstate (ALL), GEICO, Progressive (PGR), State Farm – continue to set the marketing tone for the category and their actions force smaller competitors to respond, or risk losing share. This elite group currently accounts for over 70% of total category ad spend.

Behind the Big 4, a group of companies are forming a second tier of sustained ad spending and they may drive auto insurance ad growth in 2008 and 2009. These include AIG (AIG), Esurance, Farmers, Liberty Mutual and Nationwide (NFS).

As private passenger auto insurance has evolved into a commodity, price-driven market – thanks to the ease of obtaining comparative quotes and filing applications via the internet – advertising’s role has gravitated towards building awareness, conveying a message of price competitiveness and articulating differentiated product features.

Price is generally not a sustainable advantage and given the nature of underwriting, advertising claims about cost savings may not be the experience for individual customers. Recently, ad messaging from a few of the leading auto insurers has taken a sharp turn towards product features, while still retaining the umbrella message about low price (and superior customer service).

For example, Allstate has been promoting a cash-back rewards program for safe drivers, new vehicle replacement coverage and accident forgiveness. Progressive has targeted pet owners with a message that pet injury coverage is a standard feature of its auto policies.

In addition, the insurers have been spending more to promote non-auto vehicle insurance and to reach more targeted audiences. GEICO, Allstate and Progressive have run dedicated messages about motorcycle coverage. State Farm has directed a significant share of its media budget against the Latino market. State Farm has also targeted women via print advertising with a very striking, unconventional campaign.

What is the opportunity for insurers online?

The internet can serve multiple purposes and if you look across a range of auto insurers, a variety of strategies are apparent.

All insurers recognize that growing numbers of people are using the internet to research and shop for polices. Providing online price quotes has thus become a standard offering on insurer’s web sites, taking their place along side various agent web sites that provide comparative quotes from multiple insurers (e.g., insurance.com, insure.com)

The next rung on the ladder is giving customers 24/7 online access to account information, claim filing and other customer services. This can reduce operating costs and deliver greater customer value. The opportunities here are essentially the same for agent-based as direct-to-consumer companies.

Taking it one level higher, web-enabled technology can be used to capture real-time customer information and other data, allowing an underwriter to respond quickly to changing loss trends and continually refine pricing. That’s a very real benefit to the companies.

Agent-based networks are not necessarily an anachronism as the insurance business moves towards online. Allstate and State Farm illustrate the point. These companies sell more than just insurance. They are diversified Financial Service providers selling a wide range of insurance and investment products. Agents fulfill an important advisory role that is not well-suited to an internet-based model.

What is the value of specialty lines (e.g. motorcycle, boat) to the big insurers?

It’s taking on more importance as growth rates slow for the private passenger auto business. Being able to offer a policy bundle which covers all vehicles, regardless of type, offers more selling and revenue opportunity. Ad spending for specialty lines is heavily skewed towards motorcycles, is growing off a small base, but still only amounts to about two cents for every dollar spent on conventional auto insurance.

GEICO and Progressive have been actively marketing to motorcycle owners for several years. Allstate launched its first dedicated ad campaign for motorcycle coverage in 2007.

Thanks Jon. For more information, click here to view a TNS Media Intelligence presentation on Insurance Advertising for 2007.