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Why all those car insurance ads are good for us

Competition among property insurers for your car premium dollar has created an ad-buying frenzy. The 2009 advertising budget for auto insurers was a hefty $4.1 billion, and an Ad Age magazine poll of marketers indicates it increased in 2010. Insurance companies now attract the best creative talent in the advertising business.

All that talent has created a cast of flamboyant characters to compete for your attention in slick television commercials that seem to run nonstop. They include the GEICO's diminutive Gecko, Progressive's perky clerk Flo, Allstate's manically destructive Mayhem, and Farmers’ know-it-all professor.

car insurance adsThis exposure comes at a price, however. GEICO's parent, Berkshire Hathaway, spent $834 million in 2009, according to insurance rating agency A.M. Best. The largest auto insurance company, State Farm, was second with $514 million. Allstate, the largest publicly traded car insurer, was third at $420 million, with Progressive, Liberty Mutual, Nationwide, Farmers and Travelers not far behind.

Do ads affect auto insurance rates?

You may wonder if insurers pass on the cost of advertising by charging higher car insurance rates or skimping on claims payments. However, researchers who analyze the industry dismiss that idea. "There's no evidence of claims dissatisfaction," says Alan Dobbins, vice president of Conning Research. 

Howard Mills, chief adviser to the insurance group at Deloitte and former superintendent of insurance for New York State, agrees that it "doesn't detract from their operations. Regulators are watching them closely."

Doug Pawlowski, a Fitch Ratings insurance analyst, says it’s not likely that insurers will reduce claims services to pay for their high-cost television ads. "Advertising will drive people to try you, but claims service will keep them there," he observes.

Regular stream of revenue

So far, the cost of advertising hasn’t driven insurance companies into poverty. Analysts say that while property/casualty carriers face challenging times, the one area where they can count on profits is private passenger auto insurance. Total premiums rose $9.3 billion to $161.9 billion between 2003 to 2009, according to Birny Birnbaum, executive director of the Center for Economic Justice.

A sign of the times

While ad spending has doubled during that time, the overall cost insurers pay to sell their products has risen less than 1 percent, according to Birnbaum's figures. So the obvious question is: “Where did the money come from to pay for Flo, the Gecko and the other TV characters who have wormed their way into our subconscious?

It came, in part, from people who lost their jobs. The fortune that is being invested in TV advertising represents an insurance industry shift away from brick-and-mortar offices to a more nimble strategy aimed at getting consumers to shop online or by telephone, according to a study of insurance buying habits by J.D. Power & Associates. Technology rather than people-to-people selling is the wave of the future. Geico led the charge, but others have been following suit by shutting down offices that are not productive enough. 

What's an insurance consumer to do?

Seeing anyone lose their job during the recession is painful, but that shouldn’t stop consumers from taking advantage of the current competitive market for car insurance. “There’s no substitute for shopping around,” says David Snyder, vice president of the American Insurance Association.

As safer cars lead to lower rates, every auto insurance carrier seems to be offering discounts and special pricing on its website. There are discounts available for:

  • Multiple drivers
  • Combining home and auto policies
  • Military and federal service
  • Putting a computer in your car to monitor how well you drive
  • Insurance company loyalty

While taking advantage of the competition, consumers should shop wisely, says Robert Hunter, director of insurance for the Consumer Federation of America. Get auto insurance quotes from multiple companies and compare them to what you’re paying now. And check with your state insurance department for complaints against an insurer before signing up. 

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