Eco 569 - Analysis of Geico in the Auto Insurance Industry

        One of the most prevalent forms of casualty insurance in existence today, auto or vehicle insurance can most generally be described as a tool for drivers to cover the financial liabilities and risk associated with property or physical damages resulting from automotive collisions.  In exchange for a monthly fee, known as a premium, paid by vehicle owners, insurance companies contractually agree to cover a specified portion of financial expenses that may be incurred by the insured.  For an insurance company to remain profitable, it must be able to accurately assess the financial risk associated with its customers.  The complexity of this process combined with the fact that auto insurance is typically mandatory for all drivers in the U.S., causes the auto insurance industry to be very unique relative to other standard retail and service oriented industries.  

Geico (The Government Employees Insurance Company) is one such company that has successfully grown and evolved with the complexities of the industry to become one of the leading providers of auto insurance in the U.S.  Founded in 1936 firstly to provide auto insurance directly to Federal government employees and their families, Geico expanded to various fields and currently employs over 27,000 people in 12 regional offices and is owned by Berkshire Hathaway, one of the largest and most successful holding corporations in the world.  To fully appreciate Geico’s long term success and rise to prominence, it is important to gain a better understanding of the market in which it operates.

Currently comprised of 140 active auto insurance providers, the United States auto insurance market has many unique identifying characteristics.  Primary among these is the geographic boundaries of the market, which can reasonably be described as encompassing the entire United States.  As auto insurance is legally mandated in almost every state (with few exceptions such as Virginia and Mississippi), and risk factors tend not to vary significantly with drivers relative to geographic location, the market area is much larger than other industries, including other insurance industries that can afford to be more localized.  For comparison, an earthquake insurer would tend to provide policies to homeowners living in very limited areas that are exposed to increased risk factors, such as the proximity to fault lines.  Auto insurers must be able to effectively provide similar insurance policies for drivers at all locations throughout the country.