Making Money in a Contracting Market with Declining Margins

Vehicle-insurance companies are challenged by conditions—market contraction and declining profit margin for auto insurance—that are not a result of the financial crisis. Vehicle coverage is to the property/casualty insurance industry what checking accounts are to a depository: an entry-level relationship builder.

New vehicle insurance has two primary customers: young adults who acquire a driver's license and households that change insurance providers. Several market and social conditions indicate that market contraction of both sources will continue. In the past decade, the number of households that have changed their auto-insurance company has declined by almost half—from 11% of households in 1998 to 6% of households in 2008. The largest decline is among the youngest households: Gen X/Y. More young people than previously are not interested in obtaining a driver's license. Urbanization, group dating, boomerang kids, helicopter parents, cell-phone ownership, and the cost of even basic entry-level cars—not to mention the cost of insurance for new drivers—are all factors that contribute to this change. The proportion of Boomer households that have changed auto-insurance providers shows the second-largest decline. As these households approach retirement and the proportion with a ready supply of new drivers is dwindling, fewer are changing auto-insurance providers.

When customers become harder to find and one or two players in the category aggressively advertise, the entire category becomes energized as companies compete for new customers, or at minimum, try to protect their customer base. In the case of the current auto-insurance competition, some providers compete on the basis of price in an effort to generate profit from volume. Insurance providers with deep pockets are better positioned than less established companies to use auto insurance as a loss leader in an effort to cross-sell additional products such as other property and casualty and life insurance. Both options carry profit-margin risk.

The current auto-insurance-industry dilemma may be instructive for other financial-services sectors to note when facing a similar scenario. We invite you to view a few auto-insurance-industry television ads to identify each company's unique value proposition in its competition for customers. The December 2010 release of the 2010–11 MacroMonitor data will tell how successfully these advertising campaigns have moved upward the number of households that have changed their auto-insurance company in the past two years.

http://www.youtube.com/watch?v=JhlWddAXSRA  (GEICO's Therapist Sarge)
http://www.youtube.com/watch?v=DcmdW4H_WSQ  (Progressive's Save Money w/Flo)
http://www.youtube.com/watch?v=zCUfquwDX-k  (Nationwide Spokesperson)
http://www.youtube.com/watch?v=vtP-S9OS0o0  (Allstate's OMG)
http://www.youtube.com/watch?v=KYVST8lmFd4  (Farmers' University)