AUTO RATES PRICE WAR

New Allstate CEO vows to hold the line as competitors slash Auto insurers engage in price warfare

No rate cuts: That's Allstate Corp. CEO Thomas Wilson's stand.

As its fiercest competitors begin reducing auto insurance prices in earnest, Mr. Wilson and Allstate are sticking to their guns, vowing they won't join a price war. Instead, Mr. Wilson, who succeeded Edward Liddy this year as CEO of the Northbrook-based insurance giant, continues to insist that better products and service will trump price cuts in the notoriously boom-and-bust insurance business.

That has been Allstate's position since the last round of industry price-cutting sent its profits plunging eight years ago. But it is about to face its greatest test from surprisingly deep cuts, backed with heavy marketing, by competitors like Bloomington-based State Farm Insurance Cos.

The latest marketshare battle, which industry experts expect will continue at least through next year, hasn't given Mr. Wilson, 49, the luxury of growing into the CEO job. He's already in the tricky position of defending his company's robust profit margins while still coaxing growth from auto insurance premiums even though his product in many cases will be more expensive than his competitors'.

"It's clearly more competitive now than it was last year," Mr. Wilson acknowledged to analysts on a conference call last month. But, he added, "we're not going to trade off profits for growth. We're going to try to get both."

Indeed, Allstate has raised prices an average of 3.8% in the 15 states where it changed rates in the first half of 2007. By contrast, State Farm has cut rates this year in every state except Rhode Island. In four states, those cuts exceeded 9%. Illinois, where State Farm reduced rates by 6% in May, is one of 12 states where prices were trimmed by 6% to 9%.

What's more, Illinois-for decades dominated by State Farm and Allstate, which together insure two of every five drivers here-is getting new attention from the nation's third- and fourth-largest auto insurers, Ohio-based Progressive Corp. and Washington, D.C.-based Geico Corp. Both have dropped their rates here by about 6% in the last few months. Geico recently blanketed train stations with ads and has flown giant banners along the lakefront on weekends. State Farm, too, is running Chicago television and radio ads touting the rate cuts.

"Every insurance company is trying to create value for consumers, but price is clearly a part of that," says Mark Gibson, State Farm assistant vice-president for advertising. "There's just no doubt about it."

The Insurance Information Institute, an industry-funded information clearinghouse, projected a 0.5% decline in annual car insurance expenses this year, the first decrease since 1999. President Robert Hartwig says the organization underestimated the price-cutting and will publish a revised, lower projection for 2007 soon. He expects to project a further decline in 2008.

Mr. Hartwig says the price cuts thus far largely reflect insurers' healthy underwriting profit margins, but notes that past price wars have wiped out profits altogether. The last such war resulted in most insurers paying out more in claims and expenses than they were collecting in premiums. "The $64,000 question for all insurers today is: Will this be different from the past?" he says.

Mr. Wilson is determined that it will be, at least for Allstate. He has maintained that Allstate's innovative products like Your Choice Auto, which allows drivers to pay extra for services like keeping their rates steady even if they have an accident, will continue to win new customers even as competitors' rates fall.

Others are skeptical that Allstate can ignore the price cuts. Insurance "is a commodity," says Tim Wagner, Nebraska's insurance director. "You can disguise it with a lot of bells and whistles. The reality is people are buying insurance based on price and service."

Wall Street seems dubious as well. Allstate's shares have fallen 18% this year. If competitors keep dropping their rates, it could force Mr. Wilson to cave on price cuts.

"Allstate will eventually have to follow the crowd," says Adam Klauber, analyst with Cochran Caronia Waller in Chicago.

"IT'S CLEARLY MORE COMPETITIVE NOW THAN IT WAS LAST YEAR….(BUT) WE'RE NOT GOING TO TRADE OFF PROFITS FOR GROWTH."

[Thomas Wilson, CEO, Allstate]

standing pat: While other top auto insurers have cut rates in Illinois in recent months, Allstate has not

Geico                            -5.7%

State Farm                  -6.0%

Progressive                -6.7%

Source: Companies

pieces of the pie: Marketshare in Illinois: Auto liability for top four national insurers in 2005

Other                           54.1%

State Farm                 29.7%

Allstate                        10.1%

Progressive                 3.6%

Geico                             2.5%

Source: Illinois Division of Insurance

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By Steve Daniels

THE ABROGATION OF MARKETS IN BRITISH COLUMBIA

Jack is spending some time in British Columbia. He writes that the provincially operated auto insurance is, far pricier than the private Ontario system, in part because of subsidies to bad drivers who wouldn't be insurable there. This is to be expected. If the risk pool includes people who impose high costs on the system, and if they cannot be charged premia to match those costs (probablistically), then everyone else will have to bear a share of those costs. It is inefficient because the system tends to encourage too many risky drivers to be on the roads; it also, because of the higher insurance premia, tends to discourage some very low risk drivers from driving.Jack continues,Privatized alcohol businesses compete with the Provincial outlets. Prices about 25% higher than Ontario though, flying in the face of the usual predictions. This seems unlikely to me. I know from nothing about the BC retail liquor business, but here are my suspicions:It is extremely unlikely that gubmnt and private retail liquor outlets compete head-to-head. One way the gubmnt stores can survive is if they are subsidized, directly or indirectly. More likely in this instance is that the prices are regulated and kept above the Ontario levels to guarantee the survival of the gubmnt stores. Otherwise the private outlets would compete the snot out of them.

http://econoclectic.powerblogs.com/posts/1191547058.shtml

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By EclectEcon

NEW YORK MULLS LICENSES FOR ILLEGALS

Spitzer sees plan exposing group, lowering insurance rates

A new program designed to grant driver's licenses to illegal aliens will actually lower the amount New York residents pay for auto insurance, state and industry officials say.

Allowing illegal aliens access to a driver's license bucks the national trend. Forty-two states do not grant licenses to illegals, citing the need to curb identity theft and to increase airport security.

New York Gov. Eliot Spitzer, a Democrat, is touting the policy change as a way of bringing a hidden population into the open.

The governor has run into trouble in the state Senate, which voted last week to reject the plan, saying it places state security in jeopardy. But Mr. Spitzer's office says it does not need approval from the state Legislature to proceed.

On Saturday, Mr. Spitzer made a deal with the Bush administration that would allow New York to carry out its plan to issue licenses to illegal aliens - although their licenses would be clearly marked to indicate they are not valid federal ID. The deal put New York in compliance with the federal Real ID Act, which will require secure driver's licenses to be used for purposes such as opening a bank account, buying an airline ticket, receiving Social Security benefits or visiting a federal building.

The state agency overseeing auto insurance estimates that 600,000 uninsured vehicles are on the road in New York. About 200,000 fewer uninsured vehicles will be on the road as a result of the new licensing program, the agency predicts.

"We've assumed they won't get insurance at the same rate as current drivers do, but the program will still drive down the number of uninsured motorists out there," said Hampton Finer, deputy superintendent for rates and competition at the New York State Insurance Department.

Under New York's car-insurance rules, Mr. Spitzer's program will decrease the portion of the auto-insurance premium that covers accidents involving uninsured vehicles by 34 percent. Overall, Mr. Finer predicts a 1 percent to 2 percent decrease in auto-insurance premiums for New York drivers after the program takes effect.

New Yorkers pay some of the highest insurance premiums in the country, so they might not notice any difference in their bills, said Mike Barry, spokesman for the Insurance Information Institute. The typical New York resident pays more than $1,000 a year for auto insurance, he said.

Dick Luedke, a spokesman for State Farm Insurance, said the premiums his company charges New Yorkers will not change one way or the other until the effect of the program is known. One thing is for sure, according to Mr. Luedke: The program is likely to increase the number of insured drivers.

"There are a lot people out there right now driving who cannot get a driver's license and therefore can't get auto insurance," he said. "Now they can get both."

In Maryland, where illegal aliens have been allowed to obtain driver's license permits since 2003, state officials say they cannot determine whether the cost of auto insurance has swayed one way or the other.

"An unlicensed driver may not own a motor vehicle and thus would not have a reason to purchase motor vehicle liability insurance," said Karen Barrow, spokeswoman for the Maryland Insurance Administration. "Persons who do own motor vehicles may fail to purchase the required liability insurance for numerous personal and financial reasons," she explained.

"While decreasing the number of uninsured motorists would result in decreasing the cost of motor vehicle liability insurance in Maryland, the Maryland Insurance Administration has not determined that licensing illegal immigrants has lowered insurance rates in the state," Ms. Barrow said.

Most states require driver's license applicants to show two or three forms of identification, but eight states including Maryland allow some form of driver's license to illegal aliens. The other states are Hawaii, Maine, Michigan, New Mexico, Oregon, Utah and Washington.

Mr. Spitzer's decision to proceed with his insurance plan could hit a big pothole in a few years when a new federal ID program goes into effect.

Under the Real ID legislation, passed in 2005, ID cards will be required for people to obtain a driver's license. The system will be phased in beginning in December 2009.

To get a new approved license, or make an old one conform to the new requirements, motorists will have to produce several types of documentation to prove their name, date of birth and that they are lawfully in the United States.

Maryland's licensing program is also likely to be forced to make adjustments when the standards go into effect.

"In order for Maryland to come into complete compliance with the federal law, it would take some changes in the [state] law," said Buel Young, a spokesman for the Maryland Motor Vehicle Administration.

"Leadership in Maryland needs to take a stand, and they haven't made any final decisions," he said.

By : Gregory Lopes