Insurers may reap $375 mil in 'Cash for Clunkers'

Allstate and other insurance companies are among insurers that may benefit from the U.S. "cash for clunkers" program as drivers pay higher premiums to protect new cars.

The government's vehicle trade-in initiative could yield as much as $375 million in premiums, said Robert Hartwig, the president of the New York-based Insurance Information Institute.

"When they buy that new vehicle, the insurance generally will cost more," Hartwig said in an interview. "It's a newer vehicle and people will normally take out full coverage of the car. Any auto insurer would stand to gain."

A rebound in auto sales amid the clunkers program may bring relief to auto insurers facing pressure from rising medical costs, reduced consumer purchases and declines in the value of fixed-income holdings. Progressive last month reported its first quarterly gain in net income since 2006, and Geico's profit fell 63 percent in the second quarter on an increase in claims.

Northbrook-based Allstate has seen a "little bit" of a gain in average premium and additional cars added to policies in the last few weeks, said George Ruebenson, president of the insurer's property and casualty business, in an interview today. Most of the increase has been in changing cars, he said.

State Farm

The clunkers sales may prompt consumers to add to coverage for fixing or replacing a damaged car, according to State Farm Mutual Automobile Insurance Co., the largest U.S. auto insurer.

"If you are driving a 10- or 15-year-old vehicle that was paid for, chances are very good that you probably did not have collision and comprehensive coverages on that vehicle," said Kip Diggs, a spokesman for policyholder-owned State Farm, based in Bloomington. "That's where we would see benefits."

Diggs couldn't provide a figure for the financial benefit to State Farm, which has about 18 percent of the U.S. private passenger market. The industry generated about $97 billion in policy sales according to 2007 data from the National Association of Insurance Commissioners.

'Stimulus in Buying'

Progressive Chief Executive Officer Glenn Renwick said the effect of the clunkers program would be "relatively muted" given the size of the market.

"'We might see a little bit of stimulus in buying that will generally mean a trade up in the coverage for those vehicles," Renwick said in an Aug. 12 conference call.

The U.S. had estimated the program's initial $1 billion in funding would spur 250,000 sales and expanded the plan by $2 billion earlier this month. Hartwig said the extension caused him to triple his estimate of premium revenue to a range of $225 million to $375 million.

Progressive eliminated 280 jobs in May, after investment losses cut into income. The Mayfield, Ohio-based insurer has fallen behind Geico at Warren Buffett's Berkshire in the past year as the firms compete for policyholders. Geico, now the third-largest auto insurer in the U.S. behind State Farm and Allstate Corp., added about 596,000 customers in the first half of the year. A call to Geico's media office wasn't immediately returned.