Why is State Farm Insurance So Big?
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UPDATED: Apr 8, 2020
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Far and away, State Farm is the biggest insurance company in the country. It currently holds over 18% of the market share, which makes it nearly double the second-largest company, Allstate, which holds 10%. No other competitor holds a share in the double digits. Although other insurers have attempted to bridge the gap, State Farm continues to dominate the marketplace.
Why is State Farm so Big?
State Farm isn’t the oldest insurance company in the country, although it is older than its most aggressive competitors Allstate, GEICO and Progressive. State Farm was founded in 1922 as a mutual company servicing farmers. Although many other companies began in a similar fashion, State Farm is one of the only major insurance companies to continue operating under this model.
State Farm also employs more people than any other major insurer; it has nearly twice as many employees as Allstate and almost three times as many employees as GEICO. State Farm requires this massive staff because it sells policies primarily through agencies. While other companies rely on call center staff to handle claims and policies, State Farm offers more personalized service. All insurance affairs are handled by local agents, and many customers prefer this type of hands-on, personalized service.
State Farm’s size and staffing requirements mean that it makes substantially lower profits than its competitors. For example, in 2010, State Farm made $951 million. Allstate made $31.4 billion that year. State Farm’s low-revenue business model can only work because it is a mutual firm; publicly traded companies like Allstate must maintain higher profit margins in order to satisfy stockholders.
How Mutual Firms Work
Most corporations are owned by their stockholders. Essentially, this means that the company is divided into stocks, which can then be bought and sold by investors. People with a high percentage of stocks have a controlling interest in the company, meaning that they have more votes in what happens to a company.
With stock companies, higher revenues equal higher stock values, which makes investments more attractive. Stockholders are less likely to hold stock in a company with low revenues because each individual stock will be worth less money. This is why a publicly traded firm like Allstate needs to keep an eye on its profit margins; low revenue would lead to a decreased interest in stock, which would drive away investors. Allstate stockholders may or may not be insured in the company, and their interests will be purely financial.
Mutual companies are much simpler. Essentially, a mutual company is owned by its customers. The money paid by premiums is used to cover the operating costs of the company. All members shoulder risks and rewards equally. Because there are no stockholders to satisfy, profit shares can be narrower and companies can put more of their money back into growing the company.
In the case of insurance, a mutual firm can afford to offer greater discounts the larger its customer base becomes. This is why State Farm can offer lower premiums than many competitors despite the high overhead costs of its massive staff. These discounts and personalized customer service attract more customers, which in turn generate more money that can reward the members.
Is State Farm the Best Insurance Company?
It’s not too hard to see why State Farm is popular with its customers. It consistently offers low rates, and it tends to score well on customer service indexes like the J.D. Powers and Associates surveys. As a mutual firm, State Farm can afford to offer superior service to customers; other publicly traded companies do not have this luxury.
Nevertheless, State Farm is not the only mutual firm, and it may not be for everyone. Other companies like Liberty Mutual operate on a similar premise, so consumers who like the idea of mutual firms but don’t want a State Farm policy can consider a policy from one of these companies.
Similarly, a company does not need to be a mutual firm in order to offer great discounts, good customer service or other benefits. Depending on your driving history, gender and other factors, your rates may be better with a different company. For example, you might want to take advantage of Allstate’s accident forgiveness and deductible reduction programs, or you might prefer a tech-savvy direct sales company like GEICO over State Farm’s agency model.
There is no such thing as a single best insurance company. Different companies offer different things, and a company that your friends or family loves may not be the best choice for you. It’s always a good idea to comparison shop widely before settling on any insurance company to be sure you’re getting the best deal.