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Is the Auto Insurance Market in Trouble?

There is no question that the world economy is in the throes of a difficult credit crunch and combined with rising commodity prices, consumer confidence is crumbling. This is having a severe affect on the auto insurance market which depends on a number of factors, like the number of vehicles sold, for its profits. The closure of U.S. car plants is another indication that the market for larger vehicles is ending. Add in the cost of gas which is steadily creeping up the auto insurance business looks like it’s facing an uphill battle.

The Problem with Sluggish Car Sales

If you haven’t yet guessed the correlation between sluggish car sales and poor auto insurance sales, consider this; if vehicle sales stay flat or decline that means the average age of the vehicles on the road is going to rise and the number of cars owned outright will increase. As these vehicles depreciate and loans are paid off, policyholders will cut back on the coverage they buy since they will have less capital at risk and no lender forcing them to buy full coverage. There is less need to carry comprehensive or non-mandatory collision cover if the vehicle itself is of low value and the second-hand market will provide a cheap replacement. This will affect all vehicle segments both commercial and passenger and will seriously limit market growth.

To compensate for this loss, the auto insurance industry has been trying to refocus its marketing on motorcycles, watercraft, electric or hybrid vehicles and other non-traditional specialty vehicles because these smaller business opportunities show signs of growth.

Generally, the battle for market share is growing more intense as the leading brands try to hold on to their customer base. As it stands, about 80% of business is held by the top 25 insurance underwriters. Within this 80% there is a hard core of profitable, preferred-risk drivers. Young, inexperienced and more reckless drivers are merely tolerated to maintain brand awareness in word-of-mouth. There is significant policy churn with all drivers buying policies on a six to twelve month cycle. It is estimated that about 10% of all policy holders get new insurance quotes and change their insurers at renewal. If these holders have bundled auto with homeowners, the value of the churn increases significantly, leaving the industry with the need both to improve retention and increase new business attraction to maintain stable policy income. As household budgets are squeezed, the tendency to get new insurance quotes and transfer policies to lower-cost, more service-oriented providers will increase. The auto insurance industry is in for a hard time.


August 6, 2008



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