When it comes to getting people to switch their auto insurance, the biggest factor influencing most consumers is the price. But is auto insurance a commodity product, like buying gas for your car, where the auto insurance offered by one company, is the same as the auto insurance offered by any other company, with the only difference being the price each company charges for its coverage?

I read an article recently, warning insurance agents about the approaching commoditizing of auto insurance, which will push prices lower, making profit margins razor thin (Which is the case with commodity businesses, such as grocery stores, where the profit margins are 1% to 2%), and reducing commissions to the point where it’s not worth the agent’s effort to sell it.

For agents, reduced commissions are happening with some companies. The major captive agent companies, like State Farm & Allstate, have reduced commissions for auto & home insurance over the years. Travelers recently announced a new auto insurance product it will be rolling out nationally over the next year, with lower rates than it offers now, and lower commissions for agents.

However, for the consumer, there is no correlation between the amount of commission & the price of the auto insurance. The last time I shopped my auto insurance, some companies quoting me the highest rates paid the lowest commissions, or no commission at all. Some of the companies with the most competitive rates for me, paid as much as a 15% commission to an independent agent.

Companies reducing agent commissions do so because they can do it without much concern about losing customers. When an agent is restricted to mainly representing one company, like a State Farm, Allstate, Farmers or an American Family agent, the company has more power to dictate commission rates. Companies like Progressive offer lower commissions to independent agents, because Progressive has a substantial business selling auto insurance direct from the company, and it’s very effective selling direct to the consumer. It’s no coincidence Travelers is reducing agent commissions on their new auto insurance product, but it also has a direct sales operation to sell its new, more competitively priced auto insurance, in case independent agents choose not to sell it.

The auto insurance market place is more competitive than ever, with companies spending a lot on advertising, and using multiple approaches to reach consumers, by selling direct either online or by phone, and by using their own agents and independent agents to reach people not responding to advertising, or not showing interest in buying direct. Although more people buy direct from the company today than in the past, the majority of the market never shops their auto insurance, and do not respond to advertising. GEICO, known for selling direct, is currently expanding its agent force, so the company can continue its rapid growth.

In spite of the large amount of competition, and all the advertising bragging about $400 in savings a year, auto insurance companies are not competing to have the lowest rates, or have the lowest rates for everyone. You might understand why auto insurance companies may not want to compete to have the lowest rate for higher risk drivers, like people under age 25 or people with tickets and accidents. For example, if one company has the best auto insurance rates for 18 year old male drivers, it is likely to end up insuring too many 18 year old male drivers, and have much higher claims expenses than its competitors. It’s more profitable for companies to sometimes have competitive rates — but not competing to have the lowest rate — for some 18 year old male drivers.

Most auto insurance companies are in agreement on the characteristics of the lowest risk drivers (if not prohibited by state law): married couples, 30 to 60 years old, owning homes and multiple, newer cars, with great credit, and a long, uninterrupted insurance history of continuous coverage, with no tickets, accidents, or claims for the drivers in the household. You would think all auto insurance companies, except the companies specializing in insuring high risk drivers, would be competing to have the lowest auto insurance rates for any adult driver with 10 or more years driving experience, a recent continuous insurance history, and a clean driving record.

When a driver with preferred risk characteristics contacts all the major auto insurance companies for price quotes, you’d expect all the companies to offer low rates for the same coverage within a few dollars of each other. However, this is not the case. A few companies may have low rates somewhat close to each other, a few other companies will have rates more than double the lowest rates, and the majority of companies will have rates scattered between the two extremes. In my many years selling auto insurance & shopping for it myself, I know this to be true for any driver, regardless if the driver is deemed high or low risk.

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All auto insurance companies will save some drivers lots of money on their auto insurance, which is how they can advertise the savings all companies seem to claim these days. But most auto insurance companies do not compete on price for most drivers. You may meet every auto insurance company’s concept of an ideal customer, but possibly depending on factors like your zip code, occupation, employer, annual mileage, model year & type of car, number of cars, marital status, whether you have a teen driver, or simply whether you have a Costco membership or subscribe to Paypal, one or two companies of all the auto insurance companies in your state may have much lower rates for you than the rest.

Since I blog to help people decide on the right insurance company & coverage for them at competitive rates, it would be great if I could do some research, and determine company “x” has the best rates for drivers over age 25 with clean driving records in a particular area, like Los Angeles, Minneapolis, Seattle or the state of New Jersey or Michigan. Or company “y” has great rates for households with teen drivers.

Unfortunately, making such generalizations are not accurate. The only way to find competitive rates for you is to get quotes for the same coverage with all the major companies in your state, selling direct, through their own agents, and through independent insurance agents.

Most consumers don’t bother to shop their auto insurance, and stay with the same company. State Farm & Allstate have remained the 1st and 2nd largest auto insurance companies in the USA, not by frequently offering the best price or service, but by customer indifference. Unless over-priced auto insurance companies start losing a lot of customers over the cost of their coverage, auto insurance will not be priced like a commodity.

Until consumer behavior changes, the smart auto insurance shopper will always save money over the average insurance shopper. Auto insurance is not a commodity, where all auto insurance companies and policies are the same, but the smart shopper knows not to over-pay, unless there really is greater value. My next blog post will discuss how to shop for auto insurance, with an eye towards finding a balance between real value and price, and why the lowest priced auto insurance company is usually the best choice for the consumer.

Although I, or anyone else, cannot tell you which auto insurance companies are likely to save you money, Progressive & GEICO are two companies having increased their US auto insurance market share greatly over the last several decades. They have accomplished this feat by offering competitive rates to most types of drivers, and a higher percentage of people contacting them for a price quote, compared to other companies.

It’s a mistake to contact only GEICO & Progressive when shopping for auto insurance, but it’s also a mistake to not include them, if you are trying to save money on your auto insurance.

Have you felt ripped off by the rates charged by an auto insurance company? Is price the most important thing when you choose an auto insurance company? Tell me about it. Comment on my facebook page. If you have questions and would like my help, you can reach me at help@smartshopyourcarinsurance.com. Follow me on Twitter for important insurance consumer news & new blog entries at CarInsWatch.