16-Allstate’s Innovative Pricing

Posted 4/28/08

The automobile insurance market has seen price declines since 2006. During this declining-price period, Allstate has done well, gaining market share by offering innovative pricing.

The company instituted a program called “Your Choice Auto”. It launched this program in 2005, just before industry prices started to fall. This Your Choice program offers drivers a specific benefit in return for a slight premium in the cost of their insurance policies. One option in Your Choice offers a 5% rebate on premiums paid by drivers who remain accident-free during the term of the insurance. A second option in Your Choice is “accident forgiveness.” This option guarantees that the insured’s rates will not go up, even if the customer has an accident. These creative uses of the components of a price have increased Allstate’s market share and profits at the same time.

The two examples in this story change the components of the price by changing the performance benefits and the price simultaneously. There are four other components of a price that also improve revenues and profits. You may find them, in their many variations, in the Improve/Pricing/Brainstorming Ideas on StrategyStreet.com

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Updated 1/19/22

Allstate’s pricing innovations reduced prices for some low-risk customers in the market. They were a direct threat to all the competitors in the market. Accordingly, others copied the new pricing approaches.

These pricing policies were so successful for Allstate that other leading companies copied the innovations. By 2022, several large companies offered both safe driver rebates and accident forgiveness options. Successful pricing initiatives rarely remain unique for long.  They are simply too easy to copy once proven successful.

It is difficult to use even innovative, lower, prices to gain share. To see more about why go HERE.

Short audio takes: HERE and HERE

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Update 8/8/25

The automobile industry has continued to be a competitive marketplace over the last 10 years. Pricing innovations have continued, but they have been expensive and have led to margin squeeze through the loss of high margin customers. The industry has responded with high prices, raising them at rates well in excess of inflation. Progressive has taken advantage of this situation to gain notable market share using low prices.

The automobile insurance market has seen more pricing innovations in the last several years. No important innovation, however, has remained unique. The industry leaders continue to copy one another’s pricing innovations. The industry has become more Convenient to all customers and more responsive to its best customers. The industry leaders now offer online pricing through digital channels, a more Convenient way to buy.  They back their pricing offers with extensive and creative national advertising touting their low prices. They are also more responsive to their best customers, the safest drivers and those driving the fewest miles. They introduced telematics to measure drivers’ actual real-time driving profiles. The best drivers benefited with lower prices. They also introduced usage-based insurance, including mileage-based pricing. This change in the Basis of Charge enables those who use their cars the least to benefit from low prices as well.  In essence, the industry leaders could price right down to the individual customer and did so with some of their best customers.

These innovations were not cheap. They significantly raised industry costs and reduced the margins on its best customers.  To enable driver level pricing an underwriter had to invest massively in people and technology, raising its costs. At the same time, the industry as a whole voluntarily cut the margins they had previously enjoyed on the industry’s best customers by offering them lower prices. The latter move was nonnegotiable since lower prices for customers have moved market share.

To deal with rising costs and margin declines the industry has raised its prices far faster than inflation. Industry prices over the last 10 years have increased at a rate of 5.7% per year. This far exceeds inflation over the same time, which averaged 3.9% per year. There were certainly industry-specific cost increases behind some of that disparity in rates of price increases. However, the industry discounts in price competition for the best industry customers certainly contributed a good deal to the price push as the average customer had to pay more to make up for the margin losses due to discounts to the best customers.

The industry is consolidating around its largest national competitors, with price-aggressive Progressive the big winner. The smaller national and regional underwriters ceded share to the industry leaders. They simply could not afford the extent of the leaders’ investments in technology and marketing. The top four competitors as a group have gained over five share points in the last 10 years…a trend that is likely to continue in the future.

 

AUTO INSURANCE INDUSTRY-MARKET SHARES %

COMPANY 2015 2025 State Farm 18.3 18.9 Progressive 11.0 16.7 GEICO 12.3 11.6 Allstate 10.4 10.2       Top 5 underwriters 52.0 57.4

 

Progressive is by far the biggest winner among the four top leaders. They are a Predator competitor offering low prices against everyone else in the market. Even Geico has stumbled in competition with Progressive, though it follows a similar market strategy. Eventually, State Farm, which has nicely held its own, will have to find an effective way to counter the onslaught of Progressive.

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THE SOURCES OF STRATEGYSTREET.COM: For over 30 years we observed the evolution of more than 100 industries, many hostile.  We put their facts into frameworks applicable to all industries and found patterns.  Strategystreet.com describes the inductive results of these thousands of observations and their patterns.