The Race Is On

Car-insurance discounters gain ground as changing consumer habits transform the industry

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Illustration by Mark Matcho for TIME

Correction Appended: July 14, 2010

Forget the Gecko. Never mind that good neighbor. And those good hands are old news. Love her or hate her, today's auto-insurance It girl is Flo, the chirpy salesclerk from Progressive. The Ohio-based insurer has come to see Flo as far more than a mascot. "Flo embodies many of the qualities we want customers to see in us as a company," says CEO Glenn Renwick. "She's funny and perhaps a little quirky, but I'd give her my problems any day."

That combination of clever marketing and earnest salesmanship is a crucial tool for the car-insurance industry. Auto insurers have taken a beating in the past three years, growing just 3% a year, compared with a peak of 15% in 2002. It's no surprise then that low-price carriers such as Progressive and D.C.-based Geico (with the aforementioned gecko) are for the first time posing a serious challenge to the U.S.'s largest auto-insurance providers, State Farm and Allstate. They are relying on cutting-edge technology, direct-sales prowess and sharp branding and may, in the process, change insurance-buying habits permanently.

To overtake the longtime leaders, the upstarts will need more than just new ideas in marketing. "Geico and Progressive are clearly the innovators in this field, and it's helped them continue to bring in business despite the recession," says Piper Jaffray analyst Michael Grasher. "Hanging on to customers, though, is what's important in the long run, and that's where an Allstate or State Farm still has the advantage."

Americans spent nearly $160 billion in personal-auto-insurance premiums last year. Though that was a slight increase over 2008, cost- and eco-conscious drivers have downshifted their car-buying habits since the recession began, in December 2007. They are either waiting longer to trade up for newer models or reducing the number of cars they own. For insurers, that means fewer new policies. Premiums, in turn, are only now gradually rising again after months of tepid demand. "Most households have considered lower prices, higher deductibles or even dropping coverage entirely," says Cliff Gallant, an insurance analyst at Keefe, Bruyette & Woods. "It's an incredibly difficult environment for an insurer to grow in."

Yet drivers haven't stopped shopping for deals. And that's thanks to Flo and her pals. Collectively, insurers spent more than $1 billion last year on auto-insurance advertising alone, according to Kantar Media. They have built up a nightly drumbeat of reminders to consumers that they might be paying too much for their car insurance, missing out on discounts or not getting the best customer service. So now, instead of buying a new policy only when purchasing a new car or insuring a newly licensed driver, households are looking for better rates all the time. "As our competitors create this emphasis to shop, we benefit," says Craig Allen, a vice president at State Farm, which has one of the more conservative ad budgets among the top four companies.

Price isn't everything, though, particularly for young drivers. They have grown up buying everything else online and expect to buy their car insurance that way too. A recent poll by J.D. Power found that more than half of drivers born from 1977 to 1992 report buying coverage directly from an insurer — either on the Internet or by phone — rather than through an agent; only 36% of baby boomers did so. "At more than 70 million strong, this group will have a dramatic impact on the insurance-distribution landscape in the years ahead," says Jeremy Bowler, senior director of J.D. Power's insurance practice.

So far, Geico and Progressive have dominated direct sales, allowing each to gain significant market share. Shunning the agent model, Geico has added 7 million policyholders since 1996, the year it was fully acquired by Berkshire Hathaway, the firm of legendary investor Warren Buffett. In the same period, its market share has gone from 2.5% to 7.8%, propelling it from the No. 6 auto insurer into the top three. Its underwriting profit last year was $649 million.

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