A vicious cycle overtakes a virtuous one: How Warren Buffett’s Geico trailed Progressive in the auto insurance race

Warren Buffett’s inability to leverage the economy’s digital transformation over the past two decades has damaged his otherwise impressive investor track record. This shortfall didn’t end with the stock market: It spilled over into how he managed Berkshire Hathaway’s operating businesses. Across numerous fully owned companies, Buffett neglected technological advancements, and as a result, Berkshire’s business value has taken a hit.

Grasping this is crucial because the bulk of Berkshire Hathaway’s assets are not invested in publicly traded stocks but in operating subsidiaries such as Burlington Northern Santa Fe Railroad, Energy, and Geico. Though Buffett did invest heavily in wind energy, this was largely driven by government tax incentives. By and large, he preferred to extract cash from his operating subsidiaries rather than reinvest in them for the digital era. A prime example is Geico, which, due to insufficient IT investment, has fallen behind as the country’s top for-profit auto insurer.

Buffett has called Geico his favorite “child,” and with good cause. Since its 1930s founding, the auto insurer has employed a direct-sales model to keep operating costs the lowest in the industry. In a commoditized business like insurance, this is a significant competitive edge. In the 1990s, after acquiring full ownership of Geico, Buffett established a second competitive advantage by branding Geico as a trusted, even beloved American brand. The gecko, the caveman, the camel that celebrated “hump day”—all were marketing triumphs, stemming directly from Buffett’s deep grasp of the mass brand-mass media industrial system. These mascots also underscore that while Buffett was at ease investing in marketing, he was deeply uneasy with—and thus failed to comprehend—tech investment.

When Buffett took control of Geico in 1996, he increased its marketing budget eightfold. From a GAAP accounting perspective, this erased nearly all of Geico’s profits, but Buffett was confident that boosting advertising spending now would attract more profitable customers later. This proved true: Under Buffett’s leadership, Geico’s market share rose from under 3% in 1996 to 12% in 2020, moving it from the No. 7 auto insurer to the No. 2 spot, trailing only State Farm.

Up to this point, things were positive—but while Geico focused on marketing, its rival Progressive invested in technology. Founded just a year after Geico, Progressive began upgrading its IT systems as early as the late 1970s. In the 1980s, it provided its agents with computers and floppy disks to better align prices with risk. In 1996, Progressive became the first auto insurer to let consumers purchase insurance online, and it continuously streamlined its backend systems to accurately quote new business. Today, Progressive boasts tens of billions of price points, with its tech infrastructure enabling the company to adjust rates far faster than competitors—nearly daily. “We are a tech company that happens to sell insurance” is one of Progressive’s internal slogans.

Behind Progressive’s tech investment was an insight perhaps even sharper than Buffett’s marketing insight. Thanks to its no-agent, no-commission model, Geico held a six-percentage-point operating cost advantage over Progressive. Since half of Progressive’s business comes through insurance agents, it’s unlikely to close this gap. However, Progressive CEO Peter Lewis, who led the company from 1965 to 2000, recognized that an auto insurer’s largest expense is claims paid to policyholders—four to five times greater than administrative and advertising costs. Lewis reasoned that if Progressive could better manage these “loss costs” than competitors, it could become the de facto low-cost auto insurer.

The key to managing loss costs was technology in all its forms. Backend systems at headquarters that could analyze price and risk for each driver were vital, but so were frontline innovations like Snapshot, a shoebox-sized device Progressive began installing in willing customers’ cars in the 1990s. Now a mobile app, Snapshot tracks driving behavior; over one-third of Progressive customers buying insurance directly from the company opt for “usage-based” premiums. Thanks to Snapshot and other innovations, Progressive knows more about its drivers than any other insurer, creating a virtuous cycle where the company can reward some with discounts, penalize others with surcharges, and drop unprofitable ones entirely.

Thus, while Progressive’s operating costs have historically been six points higher than Geico’s, its loss costs are 11 points lower, meaning Geico’s low-cost advantage has been undercut by technology. In contrast to Progressive’s streamlined systems, Geico relies on over 600 legacy IT systems. It didn’t start developing a Snapshot-like product until 2019, two decades after Progressive began.

Buffett often said that when the tide goes out, you see who’s swimming naked—and COVID was the perfect storm to reveal how little Geico had invested in its digital “wardrobe.” During COVID, driving plummeted, then surged to unprecedented levels with more reckless behavior once the pandemic eased. Meanwhile, the worst inflation in 40 years hit all sectors, including auto repair. These rapidly changing conditions favored insurers with robust tracking tools, like Progressive, and hurt those without, like Geico. Since 2020, Progressive has nearly doubled its personal auto policy count—while Geico has lost almost 15% of its personal insurance customers. Progressive, not Geico, is now the nation’s second-largest auto insurer.

It turns out that while the gecko’s branding was impactful, it was no match for advanced digital tools. Geico exemplifies what happens when a company—even a dominant one—fails to reinvest in its future. Instead of a virtuous cycle—where tech investment leads to better pricing and products, driving higher profits that fund further investment—Geico is trapped in the same downward spiral affecting , Macy’s, and other legacy firms.