Auto insurance has become a commoditized product that will increasingly be dominated by the direct writers, and as the leading direct insurer, GEICO might be “uncatchable” in the market share race while competitor Progressive faces formidable challenges.

Those are among the observations of a new report from Nomura Equity Research. The firm also notes that technology is playing a key role in the commidization of auto insurance and the growth of direct insurance in the market.

Nomura says a critical point has been crossed in the American consumer’s view regarding auto insurance, making it a commodity. The causes are numerous, the firm notes, including relentless ads emphasizing cost, falling numbers of claims, tight household budgets and improved auto safety.

But technology, and in particular customers’ rising comfort level with shopping on the Internet for insurance, is a key factor.

“Consumer mindset has changed with regard to online shopping,” says Clifford Gallant, managing director at Nomura Securities and a co-author of the report. “It’s not just buying a pair of socks online anymore; people are comfortable buying things that are more complex like insurance,” Gallant says. “There’s a greater trust in the Internet. There was a time when people didn’t feel that way.”

Policies purchased online have more than quadrupled over the past decade, Nomura notes in its report. One reason for the rise in online transactions might be that people are less concerned about security issues—or might not even be aware of them, Gallant says. Another is that they have had satisfying experiences and have saved money buying other types of products online, and decided to do the same with insurance.

Gallant says technology such as online applications for buying auto insurance is the “backdrop” for the dramatic changes that are underway in the industry. Online research and purchasing has made it much easier and less costly for people to buy auto insurance without going through an agent, he says.

“There was a time when people thought the agent gave them the best deal,” Gallant says. “Now everybody knows you can get products online, and you [generally] get the best price when you are empowered to get it yourself.”

Both GEICO and Progressive use technology to improve processes and win new customers in the auto market, but GEICO is moving ahead in the direct market because of certain clear advantages the company has, Gallant says.

“GEICO is the only pure direct auto insurance company” and it is fully leveraging its advantages, he says. “They never have to pay any agents. Since agents take 10 to 12 percent of premiums, they can save that and largely pass it on to the consumer and spend it on advertising. Passing on savings to the customer is the secret of how GEICO is growing.”

Progressive, on the other hand, “is stuck with a legacy agency business” model that includes many indirect agents that the company can not cut out, Gallant says. That absorbs money that could produce greater returns in ad spending and lower prices. The issue has become critical because lower prices are what consumers want, he says.

Progressive declined to comment on the direct insurer market, and GEICO did not respond to multiple requests.

According to the Nomura report, it’s particularly foreboding for the competition is that the larger GEICO gets, the greater are its advantages.

Nomura views Progressive initiatives such as Snapshot — a device that plugs into a car's diagnostic port and automatically keeps track of driving performance — or customer retention efforts as either missing the problem with regard to the direct market or investing into an agency business that is incapable of growth.

Progressive’s leadership in developing user-based insurance (UBI) or telematics is often discussed as the company’s “next big thing,” the report says. It cites a recent study by Towers Watson that showed significant interest in UBI, with 90 percent of the driving population open to buying a UBI policy.

But the introduction of UBI presents its own risks, Nomura says. “It appears to further commoditize the product, emphasizing price,” the report says. “In theory, the tool would reduce the profits made from the best drivers in a pool. Furthermore, the underwriting edge gleaned from UBI has not yet been made clear and as technology evolves rapidly, similar tools may be developed by competitors at much less the cost.” Smart phone versions are already emerging, the firm notes.

Nomura stresses that its focus in the report is the “pure auto transaction.” Direct penetration into the homeowners market remains weak and is nonexistent in small commercial lines, due to the more

complex nature of the risks, Nomura says.

As for auto, providers will face continue to face a number of challenges.

“Auto insurance is an incredibly difficult business to manage,” the Nomura report says. “Fifty state regulators, fluctuating legal environments, thousands of auto repair shops, organized fraud, weird

weather and millions of policyholders are among the ever-changing playing field. With the plethora of ‘things that might go wrong’ in the business, Progressive management are trustworthy. Nonetheless, we view that the consumers attitude towards auto insurance has evolved to the point that Progressive must either find a solution to its legacy issues or investors must value the company as an ‘also ran.’”

For a look at how one insurer is approaching the direct market, click here.

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