For several years now, drivers have been paying more each year for insurance policies they’re legally mandated to carry. State Farm, Allstate, Farmers and even Geico, which advertises relentlessly as a money-saving alternative to those three, have driven up costs for their customers by percentages well into the double digits.
That could finally be changing in 2018, as the biggest player of them all, State Farm, pulls the brakes on the rate-hike train. The Bloomington-based company says it has cut auto insurance rates in 28 states so far this year while raising them in just eight.
Last year, State Farm, which insures nearly 1 in 5 cars in the U.S., hiked prices 49 times and reduced them in just three states. In some states—like Maryland, where State Farm policyholders saw increases totaling more than 17 percent—the company raised rates twice.
The about-face from the industry’s giant will put pressure on others to follow suit if they want to maintain or grow their market share. Northbrook-based Allstate, in particular, is on the spot, given that it was early to aggressively boost prices following an unanticipated industrywide increase in accidents and claims payouts beginning in 2015. “Insurers are put in the position of, ‘Do I follow or do I lose share?’ ” says Brett Horn, ​ an industry analyst at Morningstar in Chicago. “State Farm is a big enough presence in the industry that you can’t ignore it. They’ll have a decision to make.”
State Farm and Allstate have similar business models, employing an army of agents around the country to take care of existing customers and find new ones, so the two are particularly sensitive to each other’s pricing.
Since the price hikes began, Allstate has bled customers due in large part to its relatively high rates. Allstate has made it a goal this year to reverse that trend, but so far it it hasn’t followed State Farm’s lead and cut prices. In the first quarter, Allstate made rate changes in 24 states, which collectively raised prices in those places by an average of 2.4 percent, according to investor disclosures. At least, the company slowed the pace of the increases. In the fourth quarter of 2017, it hiked rates by an average of 5.4 percent in 25 states.
An Allstate spokesman didn’t respond to a request for comment.
State Farm’s decreases are around 3 percent on average in most states. That includes State Farm’s home state of Illinois, where it announced a 3 percent reduction in April. State Farm insures about 1 in every 3 vehicles in Illinois. From 2014 through 2017, State Farm’s auto rates in Illinois increased 12.8 percent on average. In April, State Farm Senior Vice President Rob Stewart said, “The company’s current financial strength is allowing us to pass along a rate reduction to our Illinois customers.” The insurer used similar language to explain its rate reductions in other states as well.
UNDERWRITING LOSSES
The price cuts are somewhat surprising simply because State Farm’s auto insurance business didn’t turn an underwriting profit last year. Claims payouts and costs were $2.8 billion more than the $41.6 billion in auto premiums State Farm collected. Still, that was a vast improvement over the record-breaking $7 billion auto-underwriting loss State Farm absorbed in 2016.
Allstate, by contrast, has enjoyed some of its most profitable years in recent memory. In 2017, the company’s Allstate brand auto business pocketed $1.3 billion in profit on $19.7 billion in premiums.
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As a mutual insurer technically owned by its policyholders, State Farm doesn’t experience the investor pressures felt by Allstate. And State Farm is sensitive to drops in market share.
State Farm’s auto insurance market share slipped in 2017 to 18.1 percent from 18.3 percent the year before, according to the National Association of Insurance Commissioners. Meanwhile, Geico and Progressive, faster-growing insurers that sell directly to consumers over the internet, took 12.8 percent and 9.9 percent of the market, respectively, in 2017. The year before, Geico’s market share was 11.9 percent and Progressive’s was 9.1 percent.
Allstate’s share fell more than State Farm’s, to 9.3 percent in 2017 from 9.7 percent the year before. Thanks in large part to its relatively high rates, Allstate has dropped from the second-largest U.S. car insurer as recently as 2012 to fourth-largest, behind State Farm, Geico and Progressive. Progressive overtook Allstate only last year.
Allstate investors tend to be far less concerned with the company’s market-share erosion than its profit margins. Worries that the cycle of repeated rate hikes is ending have driven Allstate’s stock price down more than 11 percent this year, while shares of faster growing Progressive, whose investors prize growth, have risen 4 percent.
State Farm’s market-share grab via the time-tested lever of price cuts is only likely to add to Allstate investor concerns.