This is just one of the stories in our ‘I’ve Always Wondered’ series where we address all your questions about the business world, no matter how big or small. Ever wondered if recycling is worth the effort? Or how store brands stack against name brands? See more from the series here.
Listener Steve Arkowitz from Atascadero, California asks:
Why are there so many car insurance ads on TV? We see far fewer advertisements for other insurance policies.
From the Geico gecko to Flo from Progressive, auto insurance commercials have become so ubiquitous that the characters that star in them are as recognizable as any celebrity.
It’s no surprise when you look at the companies’ advertising budgets: the largest auto insurance companies spend billions on advertising each year. Geico spent more than $2 billion in 2021 alone; 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 can be a disincentive for companies selling other types of insurance. But the big auto insurance companies can spend billions because they make billions.
Rising auto insurance profits
Geico ads started proliferating in the 2000s, with gimmicky but memorable spots featuring characters like the outraged caveman and parodies of reality shows and soap operas.
In 2005, Slate reported that auto accident rates had fallen along with insurance claims, leading to “a spike in profitability”. As a result, insurers “spent more than ever on ad purchases,” according to Ted Ward, Geico’s vice president of marketing.
A similar scenario unfolded at the start of the pandemic: While auto insurance claims fell, auto insurers earned windfall profits of at least $29 billion in 2020, according to the Consumer Federation of America.
A big reason auto insurers think TV advertising is worth it is the simple fact that most people who own a car should have auto insurance, explains 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 auto 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 rather than own a home. In addition, although mortgage lenders require you to have home insurance, it is not required by law.
Lots of competition
Another reason auto insurance companies feel it’s worth spending a lot of advertising money, Jindal said, is because auto insurance prices 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 habits and your age, among other things, all play a role in the cost of your car insurance. And companies may attach different importance to some of those factors than their competitors.
“So what that means is if you look up the quotes from two different companies at any given time, those quotes can be very different for identical insurance policies or identical coverages,” Jindal said.
Jindal said that’s why Geico could advertise that you can save 15% or more on car insurance, or companies say you can save $300 to $400 on average.
“Is everyone saving that much? No not at all. But there could be a part that could save that much,” Jindal said. “So when there’s that much savings, there’s a greater 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 both of them between $2,000 and $4,000 for six months. (Immigrants usually don’t have driver’s licenses, so they tend to pay a higher price, according to AutoInsurance.org)
But an insurance company, acknowledging that his wife had been driving for 15 years, quoted about $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 it’s useful to search,” said Jindal.
Inflation means smaller advertising budgets
But we may see less advertising in the future — record inflation rates are hitting a variety of industries — including auto insurance companies.
Geico, State Farm and Progressive have reduced the amount they spent year over year. S&P Global Market Intelligence says Geico cut its advertising budget by 4.4% between 2020 and 2021, while Ad Age recently reported that the company has made “significant headcount cuts in its marketing department.”
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