Consumer efforts to cut the cost of auto, homeowner and life insurance are starting to cause some bleeding at insurance companies.

Falling housing prices and rising unemployment have hit consumers hard, and many have been forced to drastically cut back on expenses. Some customers are dropping insurance altogether or reducing coverage to get to a rock-bottom premium.

"Unemployment will have a huge effect," said Bob U'Ren, senior vice president of Quality Planning, a San Francisco auto-insurance research firm. "People start to reconsider what is discretionary spending" when they lose their jobs or have other financial setbacks.

Insurance coverage is a legal requirement for drivers in most states and required by mortgage lenders, so dropping it reveals a high level of financial desperation. As in most financial crises, people at the bottom of the economic spectrum feel the pain first, but the pain eventually spreads.

That's how it worked out for Allstate Corp. (ALL), the largest publicly traded auto and homeowners insurer. Customers cut spending in all its lines of personal insurance, with the heaviest damage coming in its non-standard, or higher-risk, auto policies.

The insurer posted a nearly 4% drop in property-liability insurance premiums for the fourth quarter. Consumers dropped collision coverage, raised their deductibles and cut the total coverage limits to "engineer" lower premiums, said George Ruebenson, president of Allstate's property business. He said fewer customers purchased higher-end "platinum" policies as customers gravitated toward more basic coverage.

Allstate shares fell more than 20% byhursday afternoon trading. Aafter the market close Wednesday, the company reported a loss of $1.13 billion on growing investment losses, market-driven charges on its annuity business and catastrophe losses.

Progressive Corp. (PGR), the third-largest auto insurer, reported unchanged premiums for the fourth quarter but an increase in policies in force, indicating customers were paying less per policy. Progressive will discuss its fourth- quarter results Feb. 27.

Clients at other companies are cutting back as well. A study released last week by the Insurance Research Council said that based on current uneployment projections, the percentage of uninsured motorists is expected to rise to 16.1% in 2010 from 13.8% in 2007.

Online insurance-shopping Web site Insurance.com spotted an even more dramatic trend. Sam Belden, the company's vice president of strategic alliances, said that nearly 40% of shoppers who contacted his Web site's call center recently for an insurance quote were uninsured. Many had let their policy lapse during a financial crisis, especially as rising rates made insurance less affordable.

The cutbacks go beyond auto insurance. Sales were off for Allstate's life-insurance business, too. The company said it will streamline that business by shrinking employment and developing less-expensive products for middle-market customers, who just don't have as much money to spend.

"Their houses are not worth as much, and neither are their savings," said Thomas Wilson, chairman and chief executive of Allstate Wednesday. "We have to come up with a more focused, lower-cost model."

More frequent and costly claims in its homeowners insurance business contributed to a 12% drop in Allstate's fourth quarter property-liability underwriting income, while weakness in the housing market helped pull down premiums.

Moody's Investors Service Thursday sought to look on the bright side. Policyholders will drive less and thus have fewer accidents, it said; however, drivers are more likely to file claims when they do get into a wreck, said Paul Bauer, a senior analyst at Moody's. Overall, the "weak U.S. economy will likely have a limited impact" on insurers.

The weak economic market will favor established, slow-growth insurers, Moody's said, because the drop in new-car and home sales will likely mean less insurance shopping and less turnover of customers.

The largest personal-line insurers are a mix of public and mutual or reciprocal companies. Ranked by market share, according to Moody's, they are State Farm Mutual Group, Allstate, Farmers Insurance, which is owned by Zurich Financial Services AG (ZFSVY), Geico, owned by Berkshire Hathaway Inc. (BRKA, BRKB), Progressive, Nationwide, USAA Group, which focuses on the military and their families, and Travelers Cos. (TRV)

U'Ren said that insurers such as Chubb Corp. (CB), which focus on higher-end drivers and homeowners, will likely lag by a quarter or two behind middle-market insurers in seeing a big pullback by customers, particularly because many buy one-year auto policies. But these higher-end insurers will eventually feel the pinch, too. Chubb reports earnings Thursday after the market close.

"At some point they say, 'I am silly to pay that much money,' " U'Ren said. "If you can get the same coverage at another company, I think the prudent person would do so."

-By Lavonne Kuykendall, Dow Jones Newswires; 312-750-4141; lavonne.kuykendall@dowjones.com

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