Geico Insurance Operations Essay
Geico Insurance Operations
Given the consumer driven nature of today’s economy, combined with the awesome power that the World Wide Web has to make and destroy businesses in the blink of an eye, there are companies that have entered a totally new level of business activity by utilizing the power of clever marketing and an online presence. One of most well known is the Government Employees Insurance Company, or GEICO. In this paper, various facets of GEICO’s business will be presented to better understand if business activity, at least in the case of GEICO, has translated into a profitable organization or simply a highly visible company with little to show for it.
In the beginning of the GEICO organization, the company was owned and operated by Leo Goodwin, a gentleman who sought in the early 1930s to provide a level of financial stability for those serving in military service and working for the government. Ultimately, the company grew to serve the general public. For many years, the organization remained privately owned, with a CEO and COO leading the company. In 1996, while still retaining the usual corporate structure, GEICO became a publicly owned company when it was purchased by Berkshire Hathaway, the multi-billion dollar conglomerate led by investor Warren Buffett (Government Employees Insurance Company, 2006).
While GEICO has retained a traditional distribution system in some respects-retaining local offices of independent agents, the company has also revolutionized the insurance business by allowing customers to purchase coverage via the Internet 24 hours a day, combined with a live customer service telephone line which is also available 24 hours a day. What this does for the company is allow it to capture the business of the customer at the exact moment that they desire a purchase. This also gives them less time to change their minds or choose another insurance carrier.
Types of Coverage Written
To the average consumer, due to GEICO’s tremendous amount of advertising and online presence, the company is best known as a carrier of automobile insurance, and indeed, has built the core of its business in auto insurance. However, in addition to auto insurance, GEICO offers customers insurance products for their motorcycles, all-terrain vehicles (ATV’s), boats, homes, apartments and mobile homes. Personal umbrella protection and life insurance are also available (Government Employees Insurance Company, 2006).
Taking into account that competitors and critics of GEICO may be stretching the truth in order to justify their dislike of the company, the underwriting criteria that GEICO employs have come under fire in recent years, mostly due to the accusation that the main underwriting criterion that GEICO uses is the credit rating of their potential customers, which in effect qualifies them for policies not based upon their risk as an insured party, but rather on their financial position and the ability to pay premiums.
In fairness, however, the firm has enjoyed top ratings within the insurance industry from such well respected evaluative organizations as AM Best, Moody’s and Standard and Poor (Am Best Company, 2006). Given these awards, it is unlikely that credit worthiness is the only factor that GEICO could use and realistically stay in business.
Under the State of Texas regulations, which is the state in which GEICO is headquartered, insurers are required to use more objective criteria in order to assure the consumer that they are given equal access to insurance coverage, in effect avoiding someone of lower economic standing, though highly desirable in terms of risk for insurance, from not having the chance to obtain adequate insurance coverage, which is especially critical in the health care sector, with Texas having one of the highest percentages of citizens without health insurance coverage in the United States (Texas State Department Of Insurance, 2006).
Key Ratios (using the A.M. Best information)
One of the most accurate methods of evaluating GEICO’s financial health as an organization is to take a look at some of the key financial ratios that are generally accepted in the insurance industry. These ratios, and an explanation of how each is specifically measured for GEICO, according to A.M. Best, are as follows:
*Capital Gains- Year after year, GEICO has enjoyed an excellent level of capital gains, which is indicative of effective fiscal management, profitability, and business growth. All of this is reinforced by the statistics presented earlier which show that the number of policies written increases every year as do the retained assets, etc.
*Liquidity- GEICO’s assets possess a high level of liquidity, which basically means that they have access to ready cash in emergency situations, and threat the company does not have a large amount of assets that are committed and cannot be utilized to help the firm when needed.
*Allocation of Assets- Going back to the point of liquidity, GEICO has wisely allocated assets in high return securities that carry low levels of risk, has bought back a lot of its debt, and avoids excess debt, again benefiting no doubt from the wisdom of Warren Buffett himself.
Expense Ratios/Combined Loss Ratio/Trade Basis Combined Ratio
Wise fiscal management, the backing of vast financial resources, and a successful ongoing business entity has lent itself to GEICO’s enjoyment of impressive ratios in several key areas; because of a level of claim payout that is not extraordinarily high and very few catastrophic claims, the Expense and Combined Loss Ratios remain impressively low, as does the Trade Basis Combined Ratio (Am Best Company, 2006).
Operating Profit or Loss-recent years
Over the past several years, due to intense marketing and no doubt due to an infusion of cash from the Berkshire acquisition of the company, GEICO has enjoyed profitability in an industry when many companies have reported losses and/or gone out of business completely. On average, in recent years, the organization has reported both profitability and liquidity, but these reports should be qualified with a brief explanation of the nature of insurance company cash reserves, much of which must be retained to cover the payouts associated with catastrophic losses on the part of policy holders, which of course, would result in the need to pay large financial claims. Therefore, the firm has only done as well as it has due to the avoidance of any huge claims.
Hotspots (reserve inadequacy- perceived or real, trouble areas such as catastrophe losses)
For all of the success that GEICO has enjoyed, and despite the fact that GEICO possesses over $21 billion in assets, it is possible that a major catastrophe could put the company into a state of bankruptcy, especially if the accusations of loose underwriting criteria are true. Although it does not appear that reserves are inadequate, catastrophic loss could change all of that very quickly. Therefore, this is a hotspot which must be taken seriously.
Each and every insurance company exposes itself to catastrophe risk, which varies based upon the type of insurance that is underwritten. Geico possesses a diversified portfolio in terms of writing different types of insurance policies, which offsets risk to a certain degree. This is very important, and a factor that GEICO needs to watch closely going forward.
An especially profitable portion of GEICO’s business has been in the reinsurance industry, representing the fact that GEICO not only retains its customer base for repeat business, but is also able to provide coverage for customers who have left other companies because of pricing issues, refusal of coverage, or any number of other factors. Undoubtedly, new customers are drawn to GEICO because of its marketing finesse which attracts the average consumer and retains the loyalty of present customers at the same time.
Overall Scope of Operation
Focus on the needs of the customer, ease of doing business, and discounted rates, all driven by one of the greatest marketing machines of all time has given GEICO a spot at the top of the American insurance market. Internally, the company enjoys a high level of liquidity, low levels of debt, and praise for industry experts. Overall, the company is doing a lot of things right, and it is paying off in profits and expansion.
A niche market that GEICO, as evidenced by its very name, has catered to since its beginnings is the market of currently serving and veteran members of the armed forces, which caused the credibility and popularity of the company to soar from the beginning. To this day, GEICO has remained true to this niche market, even going as far as offering discounted policies to the armed services members as well as government workers (Government Employees Insurance Company, 2006).
GEICO has grown to become one of the dominant private insurers in the United States in recent years, evidenced by the fact that the firm is the largest automobile insurance policy writer in the nation, with over 11 million vehicles insured by over 7 million policyholders, a number which has been increasing every year in recent times (Government Employees Insurance Company, 2006).
Reputation Within Marketplace (for claims handling, loss control etc.)
Aside from the biases that competitors are likely to have when evaluating GEICO, which of course leads to an inaccurate picture of the firm, it is more important and accurate to consider how some of the most respected organizations in the insurance industry have judged GEICO:
· Of the 10 auto insurers evaluated in Keynote’s Q2 2006 customer experience study of leading auto insurance sites, GEICO topped Keynote’s Customer Acquisition Index, a measure of success in driving site visitors to obtain a quote and/or an auto insurance policy from the company. The quality of GEICO’s online customer experience, combined with its consumer-friendly auto insurance products, contributes to GEICO’s lead on this index.
· Financial strength rating – A++ (Superior)
Best place to work surveys (2005)
· Named as a “top employer” for college graduates by Collegegrad.com and The Black Collegian
· Mentioned in “The Best Entry Level Jobs” – Princeton Review Guidebook
· Insurer financial strength – AAA
· Senior debt and long-term issuer score AAA
· Consumers rated GEICO excellent regarding customer advocacy and above the national average for simplicity of doing business, trustworthiness and benevolence in a national survey of attitudes about the financial services industry
Fortune’s most admired list
· Berkshire Hathaway ranked top property casualty insurer
Moody’s Investors Services
· Berkshire Hathaway named one of very few major companies with an Aaa rating
Standard and Poor’s (S&P)
· Corporate credit rating – AAA
· Financial strength rating of its subsidiaries – AAA
The Washington Consumers’ Checkbook
· Voted best buy
· Named to Ward’s 50 Benchmark Group for 15th year in a row – Award is presented to companies that have achieved outstanding financial results in the areas of safety, consistency and performance
· Awarded “2005 Webby Award” for the best insurance site
*ALL INFORMATION TAKEN FROM GEICO.COM WEBSITE, 2006
Risk Based Capital Assessment
The data reviewed in the evaluation of GEICO has led to favorable evaluations and ratings, as well as an excellent reputation in the eyes of the consumer; however, when assessing the capital of the firm from a risk based perspective, the catastrophic risk compromises the capital value to some extent.
For all of its past and present success, as well as a favorable look toward the future, GEICO faces some unique challenges unique to the company and particular to the insurance industry itself. However, in closing, let it be said that the firm needs to lessen its catastrophic risks to ensure long term survival and growth.
(Am Best Company 2006 GEICO Insurance Company, Inc. Report)Am Best ; Company. (2006). GEICO Insurance Company, Inc. Report.
(Government Employees Insurance Company 2006 GEICO Insurance)Government Employees Insurance Company. (2006). GEICO Insurance. Retrieved October 5, 2006, from GEICO Insurance Company, Inc. Web Site: http://www.geico.com.
(Texas State Department Of Insurance, 2006) (Texas State Department Of Insurance 2006 )Texas State Department Of Insurance. (2006). Retrieved October 4, 2006, from State of Texas Web Site: http://www.tdi.state.tx.us/.