Advertising Spending Booms in War of Car Insurers

Progressive, Geico Campaigns Push Industry Outlay to $1 Billion

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COLUMBUS, Ohio (AdAge.com) -- Looking for that rare beast, a booming ad category? Look no further than the car insurance business, where Geico's Gecko offensive has spawned a billion dollar ad war that looks set to escalate in 2006.

There are actually a host of reasons why car insurance providers have beefed up their marketing outlay in recent years. For one thing, greatly improved and rapidly searchable consumer databases allow the insurers to better analyze the risk they're taking underwriting any applicant, making them considerably less wary than they used to be about promoting their services to the masses. For another, the same technologies have lead to something of a commoditization of the business, a leveling of the playing field that has made brand differentiation and share-of-voice increasingly important.

"They have more confidence to advertise aggressively in the broad market today than ever," said Bruce Hale, an analyst with Conning Research & Consulting, Hartford, Conn. "Their computer systems are slick. They do all kinds of things you could never do by hand or you'd have a million monks working around the clock doing it."

The Geico factor
But no factor has played a bigger role in pumping up ad spending than the aggressive spending of the No. 3 and 4 players in the market, Progressive and Geico, which drove total outlay in the category beyond the billion-dollar mark in 2005 -- up 20% on 2004, and up more than 100% on 2001, according to TNS Media Intelligence. Progressive and Geico, with combined spending of more than $500 million, have completely outgunned the top two players, which, despite increasing their own marketing outlay, spend $170 million less than the upstarts.

The point, of course, is that spending has to deliver results for these companies, and it seems to have done that. For the last five years, Geico and Progressive have logged double-digit market-share gains. In just five years, Progressive doubled its market share. Between 2003 and 2004, market leader State Farm's share of net premiums written -- the industry's best indicator of market share -- fell 0.3%, while Allstate's share rose 4%. Progressive, No. 3 in the market, increased its share by 12.2%, while No. 4 Geico, grew its share 14.8%. (Figures are according to A.M. Best's Aggregates & Averages.)

Of course it wasn't just advertising that contributed to the growth spurt. In recent years prices have been high, prompting consumers to shop around and leading, inevitably, to some loss of business by the biggest players. Also, they were fairly early adopters of the predictive modeling and database tools that allow the insurers to do more thorough checks on prospective customers in a short time.

Now, however, those advantages could be slipping away for Progressive and Geico. State Farm and Allstate also have the risk-assessing technologies, and the premium rates of recent years are expected to soften, which may reduce consumers' interest in shopping for better deals. In his annual letter to shareholders, Progressive CEO Glenn Renwick pointed to an industry-wide deterioration in margins: "... the industry may begin producing smaller margins and trending toward more historical norms," he wrote.

But product parity and softening rates doesn't necessarily mean less ad spending. Conning's Mr. Hale certainly expects to see more spending, and Todd Bault, an insurance analyst with Bernstein & Co., thinks there are already signs that the booming outlay will keep growing. The players have two options, he said. "One is to cut prices and one is to increase advertising and branding and it appears this cycle they are spending on advertising rather than across the board rate decreases," he said. "As a side comment-the commercials have gotten much better."

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