Susan Hume, Professor of Finance, was recently featured in a WalletHub article, “Best Car Insurance Companies.”
How influential do you think TV advertisements are when people are choosing their car insurance provider?
Advertising is one large cost of doing business for insurance providers, and there is no shortage of TV ads in this sector. In 2023, the four largest firms spent a little less than $4 billion total on advertising expenses. (i) What matters the most is the cost of doing business, or the relationship between direct losses of money paid out in claims to the premiums earned from policies, and how these relate to advertising expenses. The earned premium per $1 of advertising ranges from the most profitable of $90 to a low of $49, and among these firms, there was an inconsistent relationship between losses and advertising. Most importantly, the real car insurance losses are related not to advertising but to the more aggressive driving patterns of drivers since the pandemic, increased car repair costs from inflation, and losses from extreme weather patterns. (Sources: S&P Global Intelligence, National Association of Insurance Commissioners (NAIC), and Quadrant Information Services).
In sum, there is no benefit to switching to a company with lower advertising expenses.
Trends we are seeing in the industry are:
*Knowing a customer’s loss experience better through driving data capture in the car
*Using AI for risk assessment, customer service, and claims processing
*Using AI to match customers with car insurance providers
We are just at the forefront of this trend in the use of AI to manage the costs of many expenses, including advertising. Insurers working with the regulators must ensure ethical considerations of these automations to include fairness, transparency, and accountability when deploying AI in insurance processes to prevent biases and discrimination.
(i)Some firms are both car and homeowners’ insurance providers so a breakout of types of advertising is not available.