By Doug Heller, CFA Insurance Expert & Michael DeLong, CFA Research and Advocacy Associate
Since the COVID-19 pandemic hit, most auto insurers have agreed to provide premium refunds or credits to their policyholders for at least a few months to account for the massive decline in driving, auto accidents, and insurance claims paid out. These givebacks range in size from 15% to 30% of monthly premium. Most are not adequate, but at least they are automatically given to consumers, except for one. GEICO has instituted a 15% premium “giveback credit,” but there’s a big catch.
GEICO promised customers it would provide a 15% “GEICO Giveback” because, as the company explains on its website, “[w]e also know that shelter in place laws have reduced driving.” But unlike most other insurers, which either sent checks to their policyholders in May or June, or credited the refunds to their next installment, GEICO tied its giveback to customers’ policy renewals. That is, GEICO did not (and does not) give anything back to customers until their policy comes up for renewal, and only if they agree to renew their insurance.
Since GEICO is only giving back credit for customers who renew between April 8 and October 7 (or April 7, 2021 for customers with 12-month policies), anyone who bought a policy in March or early April still has not gotten a dime back from GEICO. GEICO claims that they are being extra generous because their 15% credit applies to the entire six-month policy, not just the two to four months for which most companies are giving back. But if consumers decide not to renew their GEICO policies, they get nothing, even if they had a GEICO policy during the spring, when roads were empty and Americans were stuck at home.
With this user-unfriendly approach to refunding excess premium charged during the height of the pandemic, GEICO is playing two games at the expense of its customers.
First, by conditioning the premium relief on the renewal of the policy, the insurance giant is throwing up a barrier to customers who might want to shop around or who may not need insurance, if for example, they lost their job and couldn’t afford to keep the car. Despite the fact that GEICO customers, like everyone else in America, were stuck overpaying for insurance when driving fell by 70% or more in many places, these policyholders are prohibited from switching companies (or dropping unneeded coverage) if they want to get their rightful refund. It is therefore not surprising that GEICO is the subject both of lawsuits arguing that its premium refund has been inadequate, and of regulatory challenges to its practice of withholding relief.
There is also a second insidious element of GEICO’s delayed-refund approach. By refusing to return its excess premium to all customers at once and holding off on some payments for as much as a year, GEICO gets to pocket all the investment income earned off those withheld premium credits.
All insurance companies invest premium dollars, since they get the premium before they need to pay the claim, but once it was decided that consumers should be getting back some premium as a result of pandemic-driven lifestyle changes, customers, not the insurer should get the benefit of that money. That was apparently too much to expect of GEICO, which seems deeply committed to wringing out as much investment income out of consumer premium dollars as is possible, even during a pandemic.
Warren Buffet, the CEO of GEICO parent company Berkshire Hathaway, reveled the income his company earns from investing policyholders’ premiums. In his 2019 letter to shareholders, Buffett noted that while auto insurers receive premiums upfront, they pay claims later, and those payments can stretch over a long time. As he wrote in the 2019 letter:
This collect-now, pay-later model leaves P/C [property and casualty] companies holding large sums — money we call “float” — that will eventually go to others. Meanwhile, insurers get to invest this float for their own benefit. Though individual policies and claims come and go, the amount of float an insurer holds usually remains fairly stable in relation to premium volume. Consequently, as our business grows, so does our float…If our premiums exceed the total of our expenses and eventual losses, our insurance operation registers an underwriting profit that adds to the investment income the float produces. When such a profit is earned, we enjoy the use of free money — and, better yet, get paid for holding it.
During the COVID-19 pandemic, with its resulting collapse in vehicle miles traveled, accidents, and insurance claims, some of that float stopped belonging to Buffett and GEICO as soon as it became clear that premiums became excessive. But GEICO adopted a relief program that forces millions of Americans to wait months for their refunds; all while GEICO captured hundreds of thousands of dollars of investment income each day on those refunds-in-waiting.
With so many Americans financially stressed and struggling, somebody (we’re talking to you, State Insurance Commissioners) should tell GEICO to provide customers their due relief now.