This is just one of the stories from our “I’ve Always Wondered” series, where we tackle all of your questions about the world of business, no matter how big or small. Ever wondered if recycling is worth it? Or how store brands stack up against name brands? Check out more from the series here.
Listener Steve Arkowitz from Atascadero, California, asks:
Why are there so many auto insurance ads on TV? We see far less ads for other types of insurance.
From the Geico gecko to Flo from Progressive, car insurance commercials have become so ubiquitous that the characters starring in them are as recognizable as any celebrity.
It’s no surprise when you look at the companies’ ad budgets: The biggest auto insurance companies spend billions each year on advertising. In 2021 alone, Geico spent more than $2 billion; Progressive, $1.87 billion; Allstate Corp., $1.3 billion; and State Farm Mutual Automobile Insurance Co. and affiliates, more than $1 billion, according to S&P Global Market Intelligence.
The high cost of TV advertising may be a barrier for companies selling other types of insurance. But the big auto insurance companies can spend billions because they earn billions.
Soaring auto insurance profits
In 2005, Slate reported that auto accident rates had declined along with insurance claims, leading to “a profitability spike.” As a result, insurers were “spending more than ever on ad buys,” according to Ted Ward, the vice president of Geico marketing.
A similar scenario unfolded early in the pandemic: As auto insurance claims dropped, auto insurers earned windfall profits of at least $29 billion in 2020, according to the Consumer Federation of America.
A big reason why car insurers think TV advertising is worth it is for the simple fact that most people who have cars are required to get car insurance, explained Pranav Jindal, an assistant professor of marketing at the University of North Carolina at Chapel Hill’s Kenan-Flagler Business School.
Every U.S. state has minimum car insurance requirements, with the exception of New Hampshire and Virginia.
“So the market size is big,” Jindal said.
Compare that, he said, with home insurance. There are many people who rent instead of own a home. Plus, while mortgage lenders will require you to have home insurance, it’s not required by law.
Lots of competition
Another reason why auto insurance companies feel like it’s worth spending big ad bucks, Jindal said, is because auto insurance pricing can be variable, and that makes it easier for drivers to shop around for lower rates. “They can price based on risk. And different companies assess risk differently. That’s why we see so much variation in prices,”Jindal said.
How often you drive, your driving record and your age, among other factors, all play a role in the cost of your car insurance. And companies may place a different level of importance on some of those factors compared to their competitors.
“So what that means is at any point in time, if you look up the quotes at two different companies, those quotes could be very different for identical insurance or identical coverage,” Jindal said.
Jindal said that’s why Geico might advertise that you could save 15% or more on car insurance, or companies say that you could save an average of $300 to $400.
“Does everybody save that much? No, not at all. But there could be a portion who could save that much,” Jindal said. “So if there is that much saving, then there is a bigger incentive for an auto insurance company to advertise and let consumers know about those savings.”
For example, Jindal said that when his wife moved to the United States from India, some insurance companies gave combined quotes for the two of them between $2,000 to $4,000 for six months. (Immigrants usually don’t have a driving record, so they typically pay a higher price, according to AutoInsurance.org,)
But one insurance company, recognizing that his wife had already been driving for 15 years, quoted around $600 to $700.
“There is a lot of variation in the quotes, and because there is a lot of variation, companies want to advertise. They want to let consumers know that it is beneficial to search,” Jindal said.
Inflation means smaller ad budgets
But we might see fewer ads in the future — record rates of inflation are hitting a wide swath of industries — including auto insurance companies.
Geico, State Farm and Progressive have decreased the amount they spent year over year. S&P Global Market Intelligence says Geico slashed its advertising budget by 4.4% between 2020 and 2021, while Ad Age recently reported that the company has “made sizable staff cuts in its marketing department.”
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