P&C Specialist has an important article about how State Farm is intensifying is aggressive auto insurance pricing strategy which has lost tens of billions of dollars by pricing its auto policies below cost. This began during Covid as a defensive move – a badly timed rate reduction designed to stem share losses. This led the market share leader to rapid policy growth at the cost of huge underwriting losses. Now, they appear to be doubling down on that strategy by what the industry euphemistically calls ‘leveraging their capital strength’. Progressive also rapidly gained share throughout this period by aggressive pricing. The only difference is that Progressive makes money doing so. Its underwriting profits are about as big as State Farm’s losses.
Thus, both leaders are rapidly gaining market share at the expense of the rest of the industry by pricing that the rest of the industry can’t afford to meet. The competition – lacking State Farm’s deep pockets or Progressive’s superior risk selection and management capabilities – is in ‘runoff’ – steadily going out of business.
This raises two questions:
- How long can State Farm keep it up? Their losses are enormous and at some point, their excess reserves will run out. What’s their end game?
- Can other carriers without State Farm’s deep pockets replicate enough of Progressive’s superior model to make money at the rock-bottom premiums that SF’s price aggression and Progressive’s superior economics demand?
If they can’t, then they need to get out of the business. Either rapidly through a sale, or slowly, painfully through runoff.
But one thing is obvious: trapped in an unprecedented competitive vice, between the only competitor that knows how to consistently make money and one that doesn’t care if they do, the rest of the industry needs to act. Or suffer the inevitable consequences.
