Why auto insurance companies pour money into pursuing you

Kathryn Hawkins

Are you familiar with the Gecko, the cheeky British spokes-animal for GEICO? If the answer’s yes, there’s a compelling reason why: GEICO spent nearly $100 million, or 6.5 percent of premium costs, on advertising last year.

GEICO far outspent its competition on advertising, increasing its budget by 10 percent from the previous year. By contrast, State Farm spent just 2.5 percent of its revenue on advertising.

The entire insurance industry is increasing its ad spending as a whole, however; according to a Kantar Media report, insurance companies spent a combined $5.5 billion on advertising in 2011, up nearly 14 percent from 2010.

Why are insurance companies spending so much on advertising, and is that cost reflected in higher premiums?

Brand recognition

When it comes to advertising, insurers have two key objectives, according to Stephen Terrell, senior vice president of market development and branding of The Lifeline Program, a life insurance settlement company – building brand recognition through constant exposure, and creating an identity for your service that represents your value.

GEICO first made a splash with its caveman ads in 2004; now, the company uses the Gecko and a host of other characters to broadcast a simple message: You can save money on car insurance by switching to GEICO.

For consumers, the focus on creative marketing campaigns can make a difference. A 2010 study by Market Force Information found that one-fourth of customers who’d considered switching insurance providers had been spurred to do so after seeing a TV ad for another insurance company. And according to J.D. Power and Associates’ 2011 Insurance Shopping Study, consumers who can recall an insurance company name without prompting are four times as likely to get a quote and six times as likely to buy from that insurer, compared with brands that consumers recognize but don’t initially recall.

“When consumers make insurance choices, they’ll remember GEICO,” Terrell says. “GEICO’s market position will become stronger in the insurance industry unless others step it up.”

Lynford Morton, a Washington, D.C.-based photographer and consultant, recalls his aunt being a GEICO customer 20 years ago “and snickering to myself.

“A barrage of commercials later, when I was in the market to switch insurance companies, they were the first and only ones I called,” Morton says. “I’m pretty sure it was the goodwill they built up with all that advertising. I had no other experience with them outside of that.”

According to the J.D. Power study, just 10 percent of insurance customers switch companies from year to year. That makes competition for new business high, and increases the value of every new customer.

“Insurance companies spend so much because the long-term value of a client is so high. Insured people who have multiple policies with one company stay with that company for a long term,” says Raymond Weiss, marketing director at Weiss Insurance Agencies in Illinois.

Ad spending vs. premium costs

So are insurance companies bumping up costs for customers to compensate for their increased ad budgets?

Sonja Larkin-Thorne, a consumer representative for the National Association of Insurance Commissioners, says it doesn’t work that way.

“Advertising costs are part of an expense budget,” she says. Larkin-Thorne says that the loss ratio — which compares a company’s expenses to its profits — is regulated by state insurance departments. “States always retain the right to look at excessive overhead,” she says.

And while companies like GEICO spend considerably more on advertising than some other insurance companies, these expenses are customary for GEICO’s direct-to-consumer business model, Larkin-Thorne says.

“Advertising expenses will vary based on how the company sells the product,” she says.

In contrast to GEICO, Chubb focuses on paying agents’ commissions to sell policies to high-end business clients. Although Chubb’s advertising expenses are much lower than GEICO’s, the company has substantial marketing expenses for agent payments.

In fact, a study comparing the two companies found that in 2008, Chubb spent about 13 percent of revenue on agent commissions, while GEICO spent just half  of 1 percent. And while GEICO spent 5 percent of premiums on ads that year, Chubb spent less than half of 1 percent.

Ads can lead to significant growth

When the recession hit in 2008, many companies pulled back on their marketing expenses. But according to a study of a previous recession from 1989 to 1991, brands that increased advertising expenses saw strong growth: Kraft salad dressing boosted sales by 70 percent, and Jif peanut butter by 57 percent.

Terrell suggests that for companies struggling to return to pre-recession levels, investing heavily in marketing can pay off with new business. And when companies are gaining customers through their advertising campaigns, they don’t have reason to raise premiums for existing customers.

“If advertising is working, why would companies raise fees on customers?” Terrell asks. “If anything, they could go down.”