Government Car Trade-In Program Could Generate $375M for Insurers

Based on the amount of new cars on the road because of the government's vehicle trade-in program and average automobile insurance premiums, insurers stand to gain as much as $375 million in new premiums.

Robert Hartwig, president of the Insurance Information Institute, came up with the dollar amount but was quick to point out it represents a fraction of 1% of premiums collected by insurers on about 180 million vehicles throughout the United States. The National Highway Transportation Safety Administration's Car Allowance Rebate System program, also known as Cash for Clunkers, put about 750,000 new cars -- many of them considered safer and more fuel efficient -- on the road in exchange for older vehicles.

"We're not talking about changing the number of cars on the road," Hartwig said. "This was an exchange program. But with the newer cars, drivers are more likely to buy more insurance. They also could be eligible for discounts such as for anti-theft systems or safety features, for example."

Allstate spokeswoman Kate Hollcraft said customers may want to look to getting collision or comprehensive coverage on the newer cars to protect themselves from repair bills or any liability from lawsuits. If a buyer is financing the vehicle, it is normally required that more insurance be taken out.

"Since insurance coverage should reflect the market value of your new car and the cost of repairing it, it makes sense that people would be reviewing their insurance coverage to make sure they are sufficiently protected," Hollcraft said.

Allstate Corp. Chief Financial Officer Don Civgin, during the company's second-quarter conference call, said the program would be "good over the long term." Newer cars equates to a replenished fleet, he said.

"We might see a little bit of stimulus in buying, that will generally mean a trade up in the coverage for those vehicles with the lien holder and so on and so forth, but that will probably be relatively muted in terms of the entire effect, but those effects that are going on, but nothing that I think is material," said Glenn Renwick, chief executive officer of Progressive Corp., in an August conference call.

State Farm spokesman Kip Diggs said the program could mean additional savings for insurers because the newer cars on the road are generally safer, which could mean fewer injuries but "the costs associated with repairs on a new vehicle are typically greater than on an older vehicle because the parts are more expensive," he said.

Hartwig said the true benefit to insurers could come from the program's underlying purpose to stimulate the economy. Hartwig said that by 2010, about 1.5 million new cars could be purchased. If the number of buyers increase, it potentially could "have twice the impact of the Cash for Clunkers program," Hartwig said.

David Snyder, vice president and associate general counsel for the American Insurance Association, said making profits was "never a motivating factor" in the industry getting behind the trade-in program. "The social costs far exceed the insurance costs," he said.