Has Buffett's GEICO hit the limit to online growth?

The head of Allstate's (ALL) auto insurance unit thinks he made Warren Buffett blink. Bloomberg News reports that Allstate is bragging because Buffett's GEICO -- the third largest auto insurer (behind Allstate) which sells over the Internet and telephone -- has decided it needs to open storefronts to sustain its growth.

I was pleased when GEICO decided to sell auto insurance online. Back in 1995, I pitched the idea of starting up a company that would do just that to a Boston private equity firm. The reason is that about 25 cents of every dollar of insurance premium goes to paying insurance agents. I thought that selling insurance online would cut out a huge portion of that cost, thus leaving room to reduce prices to gain market share.

GEICO, which Buffett took over completely in 1996, also figured this out and used the strategy to achieve rapid growth. For example, it added 430,000 policyholders in the first quarter of 2009, almost twice the 235,000 it added in the same period in 2008. GEICO also advertises more than its peers -- its reputation for low prices has been cemented by its humorous references to its gecko mascot and cavemen who take offense when criticized for their lack of intelligence.

Unfortunately for GEICO, not all customers are comfortable buying insurance online. While those aged 18 to 34 are probably among the 45 percent of insurance buyers who purchase through such direct channels, those over 55 are half as likely to buy without talking to an agent.

Allstate counts 185 GEICO storefronts in the U.S. It believes that GEICO has opened these because it wants to reach those customers who may be comfortable shopping for insurance online but want to make the actual purchase by talking with a live human being in-person.

But Buffett seems happy with GEICO's results. In February, thanks to sales growth opportunities, he said that he and GEICO CEO Tony Nicely felt like "two hungry mosquitoes in a nudist camp."

Meanwhile, Allstate appears to be losing ground to GEICO. In the first half of 2009, it lost 88,000 customers who had purchased its standard auto policy, continuing a decline that began in the first quarter of 2008. I would guess it's feeling the bite of GEICO's gecko.

Peter Cohan is amanagement consultant, Babson professor and author of eight books including, You Can't Order Change. Follow him on Twitter. He has no financial interest in the securities mentioned.

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