State Farm's embrace of tiered pricing in the wake of losing auto market share will help the company maintain underwriting discipline, according to a property-casualty analyst.
Jay Gelb, senior property-casualty analyst for Lehman Brothers, said the strategy has been successful so far for other personal lines insurers. "We believe Allstate, Safeco and Progressive are far ahead in tiered pricing and should continue to gain profit share."
Tiered pricing refers to the practice of replacing the traditional standard and non-standard classifications with ratings numbering in the hundreds. Scoring customers according to credit records remains a critical element in the new strategy.
Mr. Gelb said he was not surprised that State Farm is turning to tiered pricing. "Our sense is that the company is being adversely selected in the marketplace," he wrote in a note to investors.
What Mr. Gelb termed the "key takeaway" from the annual report is that State Farm is disappointed about losing market share. "In 2005 and beyond the company is focused on returning to profitable growth," he said.
Nonetheless, State Farm remains far behind its competitors in terms of setting up the new pricing structure, Mr. Gelb wrote.
"This means insurers like Allstate, Progressive and Safeco are likely to gain profitable market share for the foreseeable future," Mr. Gelb wrote.
In its Annual Review released last week the company wrote: "In 2004 we laid the groundwork for a new approach to auto pricing and prepared to roll it out in 2005. The new auto pricing approach is a critical element in our auto growth strategy."
"Our approach to auto pricing is that it matches the price we charge to the risk we assume," the report states. "More extensive data about our customers will enable us to provide more price points, create opportunities to lower loss ratios and offer more competitive rates."
While the company is non-public, Mr. Gelb said he tracks its results "because it has enough clout to cause a shift in the personal lines insurance market conditions." He said the Bloomington, Indiana-based company has about a 20 percent personal lines market share.
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