Berkshire Hathaway's primary P&C insurance subsidiary, GEICO has announced plans to begin selling auto insurance in Massachusetts following the implementation of reforms that eliminate price regulation by the state and permit companies to set their own rates. With GEICO’s entry into the Massachusetts market, the company will now offer auto insurance in all fifty states.
The auto insurance reform introduced by Governor Deval Patrick one year ago has encouraged several other insurers including Progressive, to enter the state. When Progressive entered the Massachusetts market in May 2008, it rapidly attracted customers and it seems likely that GEICO’s entry will interest a significant number of customers as well. While GEICO has not offered insurance in Massachusetts, it has run advertisements in the state and the well known GEICO gecko has built up brand awareness.
One additional benefit for GEICO and other entrants into the Massachusetts market is that the reform law exempts new insurers from participating in the assigned risk pool for two years. Under assigned risk pools, drivers who have poor driving track records are “assigned” by the state to the insurers operating in the state. These higher risk policies are generally undesirable compared to policies voluntarily written by the insurers.
According to the Federal Highway Administration, Massachusetts had approximately 4.7 million drivers in 2007 which is roughly 2.3% of all licensed drivers in the United States. This market is slightly smaller than the New Jersey market which GEICO entered in 2004 following similar market based reforms in that state. Following entry into the New Jersey market, GEICO quickly built market share and reached 12.7% of the market by 2006 according to the Insurance Advocate:
During 2006, GEICO enjoyed a great year across New Jersey. A written premium increase of $192,447,000 was an eye-popper. In 2006, the written premium increased to a total of $725,754,000. That was up from 2005, which was $560,307,000.
That’s a three-point increase in overall market share. GEICO now has 12.7 percent of the New Jersey personal auto insurance industry.
This is certainly an impressive record for GEICO given that overall market share in the United States was 7.7% in 2008. Given that both New Jersey and Massachusetts had strict regulatory regimes in place along with very high average premiums, I anticipate that GEICO should enjoy a great deal of pent up demand for lower cost alternatives and will rapidly gain market share.
Since Progressive entered Massachusetts nearly a year ago, it is possible that GEICO may have to be more aggressive with premium rates in order to attract business. However, it seems plausible that GEICO should eventually achieve a market share in Massachusetts that is at least on par with the nationwide market share and perhaps closer to the share achieved after entry into New Jersey. Since there is already widespread awareness of the GEICO brand in Massachusetts, market share gains could be rapid.
GEICO’s Track Record
Obviously market share is only a means to and end and it is important to write policies that will produce underwriting profits over time. GEICO has displayed a great deal of underwriting discipline in the past as one can see from the data presented below. GEICO has been able to grow the overall level of float while not significantly sacrificing underwriting standards.
Source: BRK Annual Reports: 2004 to 2008
While I anticipate that GEICO will be very aggressive in Massachusetts, the company track record indicates that underwriting discipline will be maintained and that the business should be profitable over time. While adding a relatively small state may not significantly “move the needle” when measuring GEICO’s overall results, it is very likely that the incremental business will be solidly profitable particularly since GEICO’s nationwide “gecko” advertising campaign has already built so much brand equity and name recognition. This should result in a large number of new customers with a low marginal cost of advertising given pre-existing brand equity.