Auto Insurance: The Big Guys Do A 180

How times change. For years, the big-name insurers shunned the millions of drivers with blots on their records, from those who were caught driving drunk to those simply involved in an accident. Even drivers with the best records found it hard to buy insurance from the industry's big names. Smaller, specialized auto insurers stepped in to fill the gap. Now, guess what? The big guys want to get back into the game.

Auto insurance has suddenly become very profitable. More and more states are cracking down on drunk driving, cars are safer than ever, and insurance companies themselves are becoming more efficient at handling claims and rooting out fraud. Losses from claims hit a 10-year low in 1993, while premium income for the industry hit a high of $90 billion. "Everyone is trying to figure out how to get a bigger share of the market," says Alfred L. Austin, Aetna Life & Casualty Co.'s auto vice-president. "The personal auto market is the most desirable market to be in."

For big multiline companies, such as Aetna, getting back their lost business will be tough. In neglecting the market, the big insurers have pushed many "good" drivers into the arms of smaller rivals, who were willing to take on the risks of writing nonstandard coverage, or policies on "bad" drivers. Large insurers also alienated independent insurance agents--the people they rely on to sell their policies. The result: Last year, for the first time, the niche firms, selling through independent agents, beat the industry giants in market share (chart).

Some big-name insurers admit they hurt their business by opening the door for smaller competitors. "In doing the downsizing as quickly as we did, we did some damage to our agent relationships, and to our reputation," says Austin. In 1993, Aetna wrote $1 billion in annual premiums on policies, compared with $1.9 billion in 1990, and stopped selling policies in some 28 states. The cuts at Travelers Corp. weren't as drastic, going from $1.25 billion in 1990 to $1 billion in 1993. And in 1991, CIGNA Corp. left the business and now has only a few policies left in four states.

Meanwhile, the competition from smaller companies keeps increasing. Their ranks have grown almost 14% since 1987, to a total of 250 companies. Insurers such as Progressive Corp., in Mayfield Heights, Ohio, and American Premier Underwriters, in Cincinnati, have been growing at a nifty 20% a year since 1988. They're making a tidy profit, too: American Premier's costs, for example, are 96 for every $1 in premiums, compared with $1.02 for the industry. On top of that, insurers earn about a 3% return on investing premium dollars.

LONGER REACH. How do the niche players do it? Auto insurance is their only business, so they pay more attention to rates than the multiline companies, setting up more rating classes. The specialized companies have built better databases on accidents and driving records than their larger competitors. They also benefit from lower overhead costs.

And the niche players keep extending their reach. Progressive, which has focused on risky drivers in the past, is testing a standard policy in Florida, Texas, and Ohio and projects $10 billion in company revenue by the year 2000, almost seven times its current annual premium income. It is also turning up the heat in California, offering standard and nonstandard rate comparisons over a toll-free number. Another move into the market for "good drivers" is being considered by American Premier, which may buy the standard auto business of Great American Insurance Co.

The big insurers are making forays to reclaim their territory. ITT Hartford, Royal Group, Kemper National, and USF&G are adding agents and toll-free numbers to compete with the upstarts. A subsidiary of Travelers is aiming at the nonstandard market--selling in 16 states and looking to expand. Aetna is targeting Tennessee and Virginia but faces stiff competition from smaller companies such as Integon Corp., in Winston-Salem, N.C., and Guaranty National Corp., in Englewood, Colo. They, too, are expanding in the South.

Who will emerge victorious in the battle between the big multilines and their niche competitors is unclear. Either way, consumers will come out ahead. Increased competition translates into lower prices and improved service.

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