The money car insurers spend on their ubiquitous advertising campaigns is breaking records annually--yet the industry's billions are chasing fewer drivers who actually shift their business, according to a new study.
About 9% of auto policyholders, representing annual premiums of $12 billion, switched to a different car insurer in 2011, according to consultants at McKinsey & Co.
That's down from as much as 12% in 2009 and 2010, when the economic recession led to an uptick in the number of people shopping for coverage as they looked for ways to cut costs, said Tanguy Catlin, a principal at the consulting firm and author of the report, which was released Wednesday morning.
To reach potential new customers, property-and-casualty insurers' marketing expenditures--overwhelmingly focused on auto insurance--jumped 21% in 2010, to $5.1 billion, rose another 16% in 2011, to $5.9 billion, and were expected to rise again in 2012. Last year's figures aren't available yet.
Geico, owned by Warren Buffett's Berkshire Hathaway Inc. is the biggest spender in the insurance industry, with almost exactly $1 billion in marketing costs reported by the company in 2011 to state insurance departments. Those figures cover advertising, public relations and other promotional activities, according to SNL Financial, McKinsey's data source.
In second place is State Farm Mutual Automobile Insurance Co., at $813.5 million, and third is Allstate Corp. (ALL), at $745.3 million, according to SNL.
Geico ranks 23rd in U.S. spending on television, radio, billboard and print publications, and Internet advertising, according to a 2011 ranking in the McKinsey report from AdAge. The insurer outspends brands such as McDonald's Corp. (MCD), Nike Inc. (NKE) and Coca-Cola Co. (KO), according to the data.
But the group of price-sensitive motorists that much of the advertising is aimed at "is not as large or as valuable as the marketing firepower aimed at them would indicate," McKinsey concluded.
McKinsey said that 27% of auto-insurance policyholders, representing $45 billion in annual premium, shopped around in 2011, though only about a third, with $12 billion in premium, ended up moving their business.
Meanwhile, the other 73%, representing $125 billion of the total $170 billion in industrywide premium, didn't shop around. McKinsey concluded about a quarter of these stayed put largely to avoid the "inconvenience of shopping and switching," not because they are satisfied customers.
"In other words, a very busy segment of serial shoppers make the price-centric marketing message appear more successful that it actually is," McKinsey wrote. Mr. Catlin said the pool of switchers is likely to remain "relatively stable for the next couple years," after the post-recession shrinkage.
The firm surveyed 16,000 car-insurance shoppers in June 2012 to gauge the impact on consumers of the heavy spending that has made ubiquitous Geico's gecko, enthusiastic Progressive Corp. (PGR) spokeswoman Flo, the "Mayhem" character from Allstate Corp., and actor J.K. Simmons as a professor extolling the virtues of Farmers Insurance Group.
[Also, a Farmers unit has committed hundreds of millions of dollars to place the company's name on a new football stadium in Los Angeles, while Nationwide Mutual Insurance Co. launched its largest-ever ad campaign during the Summer Olympics with voice-overs from actress Julia Roberts.]
The big spending is occurring even though "the industry as a whole is treading water; some carriers are spending heavily for brand recognition and have little to show for it" in market-share growth, McKinsey said. Still, "this expensive battle for customer consideration isn't going away," it said.
While insurers haven't yet reported their 2012 marketing expenditures, Mr. Catlin said another high was likely to be reached.
"I don't see any evidence that [the spending] is ratcheting down," echoed Robert Hartwig, chief economist at trade group Insurance Information Institute. "You'll continue to see very substantial advertising dollars" spent on TV, radio, billboards, the Internet and sporting events.
He said many insurers can afford the media campaigns because car policies are a profitable product to the industry.
"The truth is market share has moved very little for most insurers, and at best the spending has been an effective defense against Geico and Progressive," said Brian Sullivan, editor of Auto Insurance Report, a trade newsletter. "With that in mind, as long as the two growing companies continue to spend, the others will feel compelled to follow."
McKinsey concluded that the industry could be in for a round of consolidation as smaller companies are unwilling or unable to compete for customers' attention. But Mr. Sullivan said many consumers compare prices beyond the biggest brand names, including checking out "regional insurers who have no advertising to speak of, or have campaigns focused in their smaller geographic regions."