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A thread on the broad stroke dynamics of the “rate cycle” in personal auto-insurance.
The past 10 years (2010-2019) has seen the auto-insurance industry, in aggregate, raise premiums on policyholders.
The past 10 years (2010-2019) has seen the auto-insurance industry, in aggregate, raise premiums on policyholders.
This has different effects on different players (competitive positioning).
First level: industry’s premiums rise (good). Good or less bad? Was underwriting making losses before? The latter describes the industry as a whole.
First level: industry’s premiums rise (good). Good or less bad? Was underwriting making losses before? The latter describes the industry as a whole.
Second level: customers shop around more when rates are rising. Bad for players that don’t have cost advantages. Good for players like $PGR and Geico that (for one reason or the other) can *profitably* offer lower prices. Let me reiterate the emphasis on *profitably*.
Ergo, if you are $PGR or Geico, you want to lag the industry in raising rates and when the cycle flips (industry cuts rates) you want to lead.
So what happened in the past decade?
Sans hiccuppy start, $PGR consistently lagged in rate increases, widening the gap starting 2013.
So what happened in the past decade?
Sans hiccuppy start, $PGR consistently lagged in rate increases, widening the gap starting 2013.
The thing that might surprise some is that Geico seems to have had issues. 2017-18 is of particular note - raising rates *faster* than the industry.
To again re-emphasise the notion of “offer lower rates *profitably*, here are some combined ratios.
Point is that Geico raised rates in 2017-18 because their earlier pricing was *inadequate*. It was essentially a screw up.
To further drive the point home as to how much of a big deal these gaps in rate increases can be, here are “growth” pictures for the same time period:
To further drive the point home as to how much of a big deal these gaps in rate increases can be, here are “growth” pictures for the same time period:
I am not going to get into the underlying reasons for these differences or into “third level” dynamics/nuances. For now let’s leave it at: Geico stumbled, $PGR took the opening and just stepped on the gas.
Aside: it says something about complacency (dare I say cult behavior/ignorance) on the part of Berkshire fanbois that Buffett isn’t being pestered about these issues at one of Berkshire’s crown jewels.
P.S.: I hold Berkshire in size.
P.S.: I hold Berkshire in size.
But I digress, let’s talk about where the rate cycle is headed.
2020 was an anomalous year. However, all preliminary indications are that the rate cycle is turning, i.e., rates on policies are headed down.
2020 was an anomalous year. However, all preliminary indications are that the rate cycle is turning, i.e., rates on policies are headed down.
The first order effects are clear: premium growth slows/reverses in aggregate. For an individual player, growth in premiums is going to come from taking share from a competitor.
Second order effects: policyholders are less likely to shop if their rates are flat/declining. Players that are going to have the toughest time are the ones being forced to raise rates. Everyone else is lowering, your churn increases, customer acquisition is harder, yadda, yadda.
$ROOT seems to be in this position. Lest the tech bros think I am purely dunking on them, here’s a dunk on the value bros: $MCY also seems to be in the same position.
Incumbents who were pricing profitably before but don’t have any cost advantages are most in position to benefit: their customer retention increases, it becomes harder for the low priced competitors to steal their customers because policyholders dont shop around as much, etc.
For the “growth” players with structural advantages, like $PGR and Geico, growth slows, customer acquisition costs go up.
If pricing becomes irrational, i.e., other players start writing at a loss to maintain/grow market share, then there is a bit of trouble - the right thing to do is to lose marketshare as opposed to write unprofitably.
Of course, the structural advantages these players have give them some padding here. Regardless, point is that the only thing worse than smart competition is irrational competition. Note: mutuals like State Farm have no need to write profitably.
The point of this whole jig-a-maroo: beware extrapolating/normalizing the last 10 years for $PGR into the future. These were halcyon years, their largest/strongest competitor stumbled, industry dynamics were favorable.
Geico has stumbled, but it still has twice the scale of Progressive Direct, if they get their act together and the entire industry sees multiple years of intense price competition…
Competitive dynamics matter.
Aside for the $CSU ML fanbois (not aimed at you GW): what would Axelrod say?
Aside for the $CSU ML fanbois (not aimed at you GW): what would Axelrod say?
