Insurers May Reap From Clunkers Plan: Taxis Agency and International Coverage Reviews

Insurers May Reap From Clunkers Plan

(Bloomberg) — Progressive Corp. and Berkshire Hathaway Inc.’s Geico Corp. are among insurers that may benefit from the U.S. “cash for clunkers” program as drivers pay higher premiums to protect new cars.

The government’s vehicle trade-in initiative could yield as much as $375 million in premiums, said Robert Hartwig, the president of the New York-based Insurance Information Institute.

“When they buy that new vehicle, the insurance generally will cost more,” Hartwig said in an interview. “It’s a newer vehicle and people will normally take out full coverage of the car. Any auto insurer would stand to gain.”

A rebound in auto sales amid the clunkers program may bring relief to auto insurers facing pressure from rising medical costs, reduced consumer purchases and declines in the value of fixed-income holdings. Progressive last month reported its first quarterly gain in net income since 2006, and Geico’s profit fell 63 percent in the second quarter on an increase in claims.

Sales of cars and light trucks plunged in the three years through February, falling to a 9.1 million annual unit pace from 16.5 million in the same month in 2006. The figure was 11.2 million in July, the highest since September.

Unexpected Surprise’

Auto insurers probably considered the clunkers plan “a pleasant, unexpected surprise in what is otherwise a market that has seen very little growth in terms of new vehicles on the road,” Hartwig said. “This is going to increase sales in 2009, but the bigger picture is going to be the recovering economy.”

The Obama administration created the clunkers program to stimulate the auto industry and offered buyers discounts of as much as $4,500 to trade in older cars for new and more fuel- efficient models. The program, which began in July and ended Aug. 25, produced almost 700,000 automobile sales, the U.S. Transportation Department said.

The clunkers sales may prompt consumers to add to coverage for fixing or replacing a damaged car, according to State Farm Mutual Automobile Insurance Co., the largest U.S. auto insurer.

“If you are driving a 10- or 15-year-old vehicle that was paid for, chances are very good that you probably did not have collision and comprehensive coverages on that vehicle,” said Kip Diggs, a spokesman for policyholder-owned State Farm, based in Bloomington, Illinois. “That’s where we would see benefits.”

Diggs couldn’t provide a figure for the financial benefit to State Farm, which has about 18 percent of the U.S. private passenger market. The industry generated about $97 billion in policy sales according to 2007 data from the National Association of Insurance Commissioners.

Allstate, Progressive

No. 2 Allstate Corp. has seen a “little bit” of a gain in average premium and additional cars added to policies in the last few weeks, said George Ruebenson, president of the Northbrook, Illinois-based insurer’s property and casualty business, in an interview today. Most of the increase has been in changing cars, he said.

“It was a nice stimulus for the economy, and it was good for the car dealers, but from an insurance standpoint, it’s a small blip,” Ruebenson said. “When the economy really does start to turn, and car sales increase, you’re going to see more of a premium-per-policy increase because there is some pent-up demand.”

Progressive Chief Executive Officer Glenn Renwick said the effect of the clunkers program would be “relatively muted” given the size of the market.

Bit of Stimulus’

“We might see a little bit of stimulus in buying that will generally mean a trade up in the coverage for those vehicles,” Renwick said in an Aug. 12 conference call.

The U.S. had estimated the program’s initial $1 billion in funding would spur 250,000 sales and expanded the plan by $2 billion earlier this month. Hartwig said the extension caused him to triple his estimate of premium revenue to a range of $225 million to $375 million.

Progressive eliminated 280 jobs in May, after investment losses cut into income. The Mayfield, Ohio-based insurer has fallen behind Geico at Warren Buffett’s Berkshire in the past year as the firms compete for policyholders. Geico, the third- largest auto insurer in the U.S. behind State Farm and Allstate, added about 596,000 customers in the first half of the year. A call to Geico’s media office wasn’t immediately returned.

State Farm and No. 6 Nationwide Mutual Insurance Co. encouraged drivers to switch from rival insurers when they purchased new cars through the clunkers program.

“Buying a new car is a great time to shop for insurance deals,” Columbus, Ohio-based Nationwide said in an Aug. 6 statement.

Copyright 2009 Bloomberg L.P. All Rights Reserved.

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Insurers May Reap From Clunkers Plan

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International Coverage Reviews

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