Google Auto Insurance Comparison: Will It Change The Industry?

Google Auto Insurance Comparison: Will It Change The Industry?

Will Google's auto insurance comparison platform disrupt how auto coverage is sold?

Google (NADSAQ:GOOG) recently made headlines by unveiling its much anticipated auto insurance quote comparison tool. By partnering with Compare.com and Coverhound, the new interface gives consumers a single point of interaction to get auto insurance quotes from multiple providers. Currently only available in California, the new platform is designed with a focus on helping consumers find auto insurance options with the best prices.

While a lot of the media coverage has proclaimed this to be Google's entrance into the auto insurance industry, the truth is that the company has long had a role in the insurance acquisition funnel. Google Adwords (the company's paid search business) benefits immensely from advertising dollars spent by insurance carriers. For keywords related to "auto insurance" the company suggests advertisers bid as much as $80 for a single click.

It is difficult to get exact numbers on what paid search brings in from auto insurers but rough estimates derived from search volume suggest that top insurers spend tens of millions annually for such traffic. Through the comparison shopping platform, Google would instead earn revenue through a commission model typically referred to as CPA (cost per action), getting paid only when policies are sold.

If Google can manage to establish comparison shopping for insurance, it would certainly present significant upside for insurance-related revenues. Though the company has had success in doing just that in the UK, investors looking at the same prospects in the United States will want to remain cautious.

Buy-In From Auto Insurance Companies Key to Success But Uncertain

One of the long standing issues with insurance comparison platforms in the US has been participation among insurers. After all, much of Google's offering relies on services already provided by Compare.com and Coverhound.

To date, many major auto insurance providers in the United States have refused to voluntarily participate in any form of quote comparison services. GEICO (NYSE:BRKA), Progressive (NYSE:PGR), Allstate (NYSE:ALL), and State Farm - the largest private passenger vehicle insurers in the nation are conspicuously absent from the list of carriers providing quotes in California. USAA, which offers a number of financial services to military members and their families, is also absent. Not only do these companies have among the most competitive car insurance quotes in many states, from California to New York, but they also have an overwhelming percentage of market share.

Rank Company Market Share
1 State Farm 18.68%
2 Berkshire Hathaway (GEICO) 10.77%
3 Allstate 9.97%
4 Progressive 8.70%
5 USAA 5.17%

Source: NAIC Property and Casualty Industry Report

While a price comparison platform appears to be a no-brainer for potential policyholders, the same cannot be said for all insurers. The largest auto insurers currently spend hundreds of millions of dollars annually on advertising. It's difficult to go through even a single commercial break on TV these days without seeing a car insurance ad.

The status quo of massive advertising budgets has allowed the larger insurers to use sheer scale in creating barriers to entry for smaller carriers. It costs too much for a small or mid-sized insurer to establish the same brand that GEICO, Allstate, and State Farm have through this multi-channel advertising approach. 

Esurance, acquired by Allstate in 2011, is a perfect illustration of such difficulties. This segment of Allstate's insurance business, organized to compete with GEICO's direct sales approach, continues to experience pre-tax losses as a result of high expenses in customer acquisition. The brand has an expense ratio (the % of premiums spent on non-benefits expenses) of over 40% with 17% of premiums going towards advertising alone (source: Allstate 10-K). Contrast this with GEICO, which earned premiums of over $20 billion in 2014 and had a total expense ratio of only 16.6%.

For the larger brands to endorse a quote comparison model would place their branding alongside smaller companies, significantly reducing the benefits provided by their current strategy. It's hard for us to see the case where the carriers would validate an acquisition model that reduces the effectiveness of their existing advertising spend.

Over the long term, comparison shopping platforms like Google's should be able to carve out some piece of the insurance acquisition space. Without full participation however its likely that they'll only compete for a small portion of all auto insurance premiums.

Mark is a Senior Research Analyst for ValuePenguin focusing on the insurance industry, primarily auto insurance. He previously worked in financial risk management at State Street Corporation.

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