Are the deals in auto insurance ads for real?

The next time GEICO’s little green gecko talks to you, listen carefully. He’ll say that you could save 15 percent by switching to GEICO, but not that you will.

Consumers should be wary of the drumbeat of auto insurance ads touting savings of hundreds of dollars, according to insurance analysts, consumer advocates and even some insurers. The blowout deals being advertised on TV apply only to a small group of people.

The millions of dollars that auto insurers spend every year on ads demonstrate that insurers are highly competitive and hungry for business, and if motorists are seriously shopping for a better deal, they just might get it. Fair warning: Consumers need to look beyond the auto insurance ads and do their own research.

Referring to GEICO’s gecko, Robert Hunter, director of insurance for the Consumer Federation of America, says: “If you let a lizard sell you something, you probably deserve it.”

The teaser

GEICO’s little gecko tells consumers that the auto insurer can save you 15 percent or more on car insurance — but it’s not a guarantee.

Here’s how the game is played, according to the insurers themselves. A GEICO ad, for instance, says that “15 minutes could save you 15 percent or more” if you visit its website and check its prices.

Yes, you could save lots of money. But the number who do is probably pretty small.

“The amount of people who would see these savings simply by going to the GEICO website and getting a quote could be less than 2 percent,” estimates Eric Poe, chief operating officer of CURE Auto Insurance.

Relatively few people actually find that GEICO’s prices (or prices for any other major auto insurer) are cheap enough to make them want to switch from their current carriers. But by counting only those who found it cheaper to switch, GEICO makes it appear as if its prices are a lot cheaper than its competitors, when other insurers actually may be as cheap or cheaper.

In other words, it’s a false comparison, as it tracks only a small percentage of the actual insurance population — the percentage who switched because GEICO’s prices were lower than their current carriers. Retail stores do this all the time, advertising “bargains” where one item may be on sale but other items are marked up.

Alan Dobbins, vice president of Conning Research, says auto insurers “have created a self-fulfilling prophecy” with this approach.

This numbers game is no secret to anyone in the business. But according to Donald Light, an insurance analyst with research and advisory company Celent LLC, auto insurance companies know what the reality is but aren’t giving up their secret.

Don’t count on the numbers

Although the insurers themselves may not say, there are statistics out there that do. A Consumer Reports study in October 2010 showed that only 14 percent of the magazine’s 4,500 subscribers who compared premiums had saved money by switching insurers.

Many of those consumers wouldn’t switch insurers because the savings wouldn’t be big enough to make it worthwhile, says Fitch Ratings analyst Gerry Glombicki, who follows Progressive (home of the perky spokeswoman Flo). “People don’t want the paperwork,” he says. People who do switch usually have had a fight with an insurer over a claim, or their current insurer bumped up premiums by several hundred dollars.

In 2009, the Insurance Research Council discovered that only one in four respondents to its survey had shopped for auto insurance coverage, and 60 percent of those stayed with their current insurers. In other words: Only 10 percent of those who even responded to the survey actually saved enough to switch. Divide that 10 percent by the number of auto insurers, and you have a very small number who actually moved to another carrier.

The fine print

Insurers are reluctant to talk about their ads. Some couldn’t be reached for comment; others referred questions to the industry-funded Insurance Information Institute.

Progressive’s Flo is just one of several TV characters who are competing for your auto insurance dollars.

Insurance Information Institute spokesman Michael Barry says auto insurers have covered themselves legally in their ads. “In almost every auto insurer advertisement I’ve ever seen, there’s a citation detailing how the auto insurer justified making a specific claim,” he says. “(They) volunteer that a prospective policyholder’s anticipated savings are based on the experience of drivers who’ve switched.”

Consumer advocates are quick to rap insurers’ knuckles when they do cross the line. For example, Allstate stopped selling “Your Choice Auto” in California in 2011. The insurer charged up to 15 percent more to Your Choice Auto customers with the promise that future tickets or accidents would not increase premiums. Consumer Watchdog called the policy “deceptive and overpriced” because the purported benefits weren’t worth the extra premium. In a statement, an Allstate representative says the company is “putting this debate behind us.”

A free-for-all

Putting aside the hype, both industry analysts and consumer advocates say this type of advertising may signal opportunities for consumers to find good auto insurance deals in a market where technology is creating a free-for-all.

“There is clearly more competition now,” says David Snyder, vice president of the American Insurance Association, which represents auto insurers in every state.

Analysts say the major carriers are pursuing a “Walmart strategy,” growing at the expense of smaller carriers that can’t afford the high cost of ads or the technology that allows the big guys to narrowly target customers.

But advertising is only part of the effort to win the war for the $161 billion yearly personal auto insurance market. The big auto insurers know that direct marketing through TV ads, websites and toll-free numbers, as opposed to agents and local offices, offers them flexibility to move into lucrative markets more quickly. And a steady stream of consumer data enables them to drill down to the smallest detail to find out where the biggest profits are.

“The rate you are quoted includes hundreds of factors the insurer has figured in,” says Snyder, the American Insurance Association executive. So there actually could be hundreds of dollars of savings if you meet an insurer’s criteria, he says. Snyder doesn’t want to comment on specific auto insurance ads, but does say: “There’s no substitute for shopping around.”

Snyder’s claim might seem like just more industry hype, except that consumer advocates agree. “Companies have refined their pricing models to the point where they can virtually have a different rate for every consumer,” says Birny Birnbaum, executive director of the Center for Economic Justice.

–Ed Leefeldt