J.D. Power researcher speaks on auto insurance shopping chill

Tracking the decrease in auto insurance shopping

February 13, 2024 6:38 AM

J.D. Power headquarters building in Troy, Michigan — J.D. Power headquarters building, 320 E. Big Beaver Road, Troy, Michigan.

J.D. Power recently issued its quarterly shopping list report for Q4 2023. The report indicates how much individual auto insurance consumers are shopping and switching carriers. In the past, issues like car theft have been a factor.

The latest edition states that because premiums have stayed high, shopping and switching activity has decreased. Notably, GEICO has typically been the top destination for customers who switch, but this changed during 2023 after the carrier cut ad spending in 2022 once the adequacy of rates became an issue. This could change, however, as discussed when Digital Insurance spoke with Stephen Crewdson, senior director, Global Business Intelligence – Insurance, J.D. Power.

Should the recent decrease in auto insurance shopping reported here be attributed mainly to GEICO’s moves?

Stephen Crewdson of JD Power — Stephen J. Crewdson, senior director, Global Business Intelligence – Insurance, JD Power

It could be but I think it's more. In future quarters, we'll be able to test this hypothesis. It's more due to GEICO's conscious efforts to pull back from customer acquisition. That being said, there's emerging indications that GEICO is coming back, and maybe spending more on advertising, maybe getting back into the game to acquire new customers.

GEICO is apparently moving into the independent agent channel now too. If I were an insurer that's not trying to acquire new customers, I wouldn't be expanding into new channels. That's a sign that when they're expanding into a new channel, they're looking to get back into the game of acquiring customers again. From that you could assume they must feel that their rates are adequate now, they can profitably write business again and they're going to come back to market.

Do insurers have the means to simulate shopping or attract policyholders from other carriers? Do insurers deciding to pull back affect that?

I definitely think it does. In the report data, within a week or two of GEICO taking the steps they took in summer of 2022, their quote volume started to come down. Initially, we saw that for essentially every quote that GEICO stopped providing, if you looked at their traditional rates of providing quotes, when it started to go down, Progressive's was the mirror image of that. Progressive's went up as much as GEICO went down.

That went on for some time. And that was a story that we highlighted back then a year and a half ago that as GEICO is pulling out of the market, Progressive is staying in and Progressive is basically getting quotes out in front of all those customers that in a normal environment would have quoted GEICO, and that contributed to Progressive's growth. In '22, they surpassed GEICO and became the second largest personalized auto insurer in the US. Some of that was GEICO. You can think of it as like a running race. GEICO intentionally slowed down and Progressive kept running at full speed and Progressive passed them.

There are people that are already insured, people of all ages, all different living situations who are looking to switch. A big reason is price saving. Some have a bad service experience, perhaps they had a claim with their insurer, it didn't go well. And they want to find a different insurer for that reason. There's any number of reasons that people shop and look to switch. Price is a growing reason amongst them.

Is the freezing of prices at higher rates the only factor in the decrease in shopping?

In the report we issued three months ago, we said Q3 was the first time in a year that we saw the shop rate come down on a quarterly basis. We said it looks like because the switch rates went down too. You can shop but you may not switch insurers as a result of shopping. So we look at both numbers. How many are shopping, how many are switching when they shop. In Q3, both the shop rate and the switch rate came down.

So what we took from that was earlier in that rate taking cycle, if you go into 2022, when the shop rates started to go up, the switch rate went up with it. That's an abnormal pattern. Usually – not always but usually – as the shop rate goes up, the switch rate goes down. Because when the shop rate goes up in a normal environment, you might be getting more people who are just passively price checking, they don't really intend to switch. They're just making sure that their carrier isn't charging a lot more than others.

This time, though, people were intent to switch. They were looking to switch because their premiums are going up quickly. While early in the cycle, not every insurer was increasing their premiums. Some were sitting on the sidelines and waiting to see what happened with inflation, waiting to see what happened with their claims costs. So if you were a shopper early in the cycle, you could find a lower premium. And you would switch then. So that's why we saw some shopping and switching going up simultaneously.

After a few more months went by, all other carriers basically were then increasing premiums. So it was harder for a shopper to go out and find a lower premium. So I might shop but I may not switch because I can't find that lower premium. And if I had shopped three months ago, I would have. Now I can't. So we said in Q3 If this continues into Q4, that would support the thinking that consumers are now essentially resigned to higher premiums, they can't find a lower premium. So they're pulling back from shopping.

Are higher auto premiums – and shopping and switching activity – just a function of the economy?

This cycle of rate taking was definitely stimulated by macroeconomic conditions. So insurers set their rates based on the claims experiences that they're having, their loss costs. Those costs began to move up rapidly as the effects of inflation were affecting specifically used car prices. If I'm an insurer and your vehicle is a total loss, I have to give you the cost of your vehicle. That price for the actual cash value of the vehicle took off because inflation was picking up steam. Used car prices were moving up very quickly. There were isolated examples of the used vehicle selling for more than the brand new version of that vehicle.

The cost of parts to replace a vehicle that isn't a total loss, that can be repaired, went up. The cost of labor to replace those vehicles went up. The time that the vehicle was in the repair shop to be repaired increased because of supply chain constraints. Prior to the pandemic, perhaps a car could be repaired in 14 days, because the parts were readily available. In an environment where there are supply chain constraints, it might take weeks to get the part. If you have rental coverage, the insurer is paying for a rental car for twice as long or even longer than before.

Also medical costs are continuing to go up. Third party liability is part of your insurance, and if you are liable for somebody else's medical costs, and those are going up, that affects the severity of the claim as well.

Then insurers saw that their rates were not adequate to pay those claims in a profitable way. They were spending more than they were bringing in as a company – obviously not a long term successful formula. So they took some cost cutting measures, and they increased revenue by increasing rates, which then increased premiums. The macroeconomic conditions really drove that cycle.

Will the shopping or switching bounce back? Will there be renewed competition between the carriers?

I'm not going to prognosticate but I will tell you what happened in January. In January, the shop rate did tick up from what we saw in December and November of last year. It's back to where it was in October at 12.2%. That's not a massive increase and one data point doesn't make a trend. So let's see what February and March have in store. Looking at the rate filings that have been submitted for the first half of 2024, we're still seeing across the industry for personal lines auto insurance that premiums are going to continue to move up.

If you go back six months and six to 18 months ago, they were finally shopping more. They were doing what the insurers wanted -- get out and shop more. But the insurers went in the opposite direction. They said, Well, now we don't want you to shop because we can't write you profitably. So there's that tension of we've been asking you to shop for 20 plus years, now you're doing it, we don't want to win you as a customer.

Right now we're seeing consumers say, Well, I'm not going to shop, I can't find a better premium. But some insurers are coming back to market. So how is this? In both cases, you're seeing that insurers and consumers are going in opposite directions. There's that tug of war between them. And what's going to happen now that consumers are pulling back from shopping, at least through Q4. Insurers are slowly starting to come back to have an appetite to win new customers. I'm going to keep my own eyes on the data moving through '24 and customer retention. Again, we just talked about January, it looks like consumers are starting to respond to maybe come back to shop.

Some say Super Bowl ads are a barometer for the competition between carriers. A year ago, most were absent. Will they turn up again this year and what might that mean?

I'm going to be watching that as well. In our industry, you can get really quality data, but you have to wait a long time. So in April, I'll know what insurers spent for advertising and marketing in '23. There are limited sources that are more timely, but they only capture certain spend. As I've been looking into those, I have found that there are emerging indicators that insurers in Q4 did start to increase spend, at least through certain channels. I don't know what's in the cards for the Super Bowl, but it's worth keeping your eye on, seeing if they're willing to buy those placements. Maybe they're going to be coming back more aggressively in '24.