April 19, 2021

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Allstate to cut auto insurance rates in a bid for market share

3 min read

That battle ended badly for both State Farm and Allstate. Allstate responded by repeatedly raising prices, harming its price competitiveness. Executives vowed at the time they would never repeat that mistake.

“I think competition in general has notched up higher,” says Paul Newsome, analyst with Piper Sandler in Chicago. So far, though, he says he doesn’t foresee insurers sacrificing profits excessively.

Wilson has reassured investors that these rate cuts won’t come at the expense of profitability. He laid off nearly 4,000, or 8 percent of Allstate’s workforce, late last year to ensure this year’s cuts don’t eat into profits. Allstate wouldn’t say how much in annual cost savings the job cuts would provide.

A key question is whether a 5 percent cut will be deep enough to enable Allstate to win new customers from competitors, or simply is meant to stave off customer defections.

With an expensive army of agents on which Allstate and State Farm have relied in the past, the two often aren’t able to compete on price with Geico and Progressive, whose greater online sales make for lower costs.

State Farm is the largest U.S. auto insurer, but is on course to be overtaken in the next few years by Geico. State Farm chopped its rates by double digits nationwide beginning last summer in large part to fend off that challenge. It’s too soon to assess the results of that.

But Georgia—the state where Allstate just moved to cut rates more deeply than any other so far—could be instructive as to the limitations of price-cutting. State Farm filed in June for a 12.5 percent rate reduction in Georgia. By early November, when State Farm filed for changes to the rate structure that didn’t affect total premiums collected, the company’s auto policies in the state had fallen 4 percent in just those five months.

Responds a State Farm spokeswoman in an email, “Since implementing auto rate cuts in Georgia, State Farm has grown policies in that state. The Georgia auto rate cut went into effect at the end of August, and it would be more accurate to look at State Farm data from that time frame for your story.”

That suggests policies plummeted from June to the end of August and then recovered some after that. State Farm didn’t say how much policies have increased since late August.

It will take many more months to determine how much COVID and the change in American driving habits are upending the car insurance business. It seems clear, though, that the pandemic is one of those pivotal moments for the industry. More Americans are questioning what they’re paying for when they’re not driving as much. More may be open to pay-by-mile approaches that before they wouldn’t have considered.

Geico, the second largest U.S. auto insurer, is offering pay-by-the-mile insurance in a growing number of states, including Illinois, emulating Progressive and Allstate, which have a substantial head start.

Illinois has emerged as one of the more hotly contested states in the price contest. Geico established a new business unit in Illinois last summer to serve as its primary vehicle for winning customers from competitors. Next month, that unit will cut rates on average by more than 4 percent for existing customers, just a half year after its creation. Already, as of December, it had amassed nearly 21,000 policies, according to a filing with the Illinois Department of Insurance.

Compare that with Allstate from July 2019 until January 2021. Its three main business units insuring Illinois drivers added a little over 6,000 policies in those nearly 18 months, according to filings.