Auto insurers should congratulate their Congressional representatives for approving that additional $2 billion for the "Cash for Clunkers" program. It could be just the cash infusion the doctor ordered at a time when at least some insurers are struggling to stem the bleeding.
All told, taxpayers will have invested $3 billion in this wildly successful program to take old cars off the road and give their owners a cash incentive of $3,500 to $4,500 to trade them in for more fuel efficient new ones. The first billion was gone in a week, and if you do the math, it looks like that by year end, there could be 675,000 new cars on the road instead of sitting on the showroom floor.
Allstate CEO Tom Wilson already did the math. "With the Cash for Clunkers program, the average premium per car goes up and people will be putting additional coverage on new cars, such as collision and comprehensive," Wilson said at today's analyst meeting. Collision ensures that no matter who is at fault if an accident occurs, the car owner will be paid. Comprehensive covers losses such as theft and fire.
Wilson found another bonus in the Clunkers program. "New cars are safer," he noted. That could result in fewer medical claims and court costs from attorneys claiming whiplash.
And Allstate's Wilson knows the market. The insurer, in case you haven't seen the ads, is the largest publicly owned company in the auto business (State Farm is a mutual), and its car insurance premiums now more than double its homeowner premiums.
Auto insurance is also more profitable. Allstate took a bath on catastrophe losses in its home insurance line, but auto coverage remains profitable in all weather. And that line could prove even more profitable. If you assume that these new car owners will pay up to $300 more a year for the new coverage, that could bring in up to $20 billion in new revenue for auto insurers across the country.
But don't take this to the bank just yet. A Columbus Dispatch story acknowledges that insurance for a new car could run more than $500 more than for a clunker. But companies such as Nationwide are offering new-car discounts, and smaller cars might cost less in premiums. That's because a new Toyota Corolla causes less mayhem in an accident that an old Ford Explorer. Insurance-wise, it's better not to get clunked by a clunker.