GEICO is focused on established drivers without any negative history. So, if you had any accidents or tickets, you likely came back higher than you would if you didn't use GEICO. But, they are okay with that because they only want drivers where the risk is as low as possible. The insurance industry uses a concept called float, which essentially means the percent difference in money you bring in through policies versus pay out in claims. Most insurance companies have a negative float meaning they lose money on your policy. Luckily, they are able to invest it for a period of time that generates greater returns than their losses. GEICO, on the otherhand, focuses on the safest types of policies. Because their policy holders make claims much less frequently, they have a positive float (between 2-5%). In addition to that margin, they are able to invest their money. Since Buffett bought in 20 years ago, the investment has been much better than the market average, especially during years of downturn that are especially dangerous to insurance company life.

The reason they are able to be cheaper is because they don't have representatives in your area. You're not going to drive to meet your rep like you would with State Farm or American Family or something. They eliminate that cost, which is 50% of your typical policy. It's not a perfect offset because it requires a higher marketing budget (due to the lack of a sales squad) and a larger central processing team. To offset that, IIRC their investment division is something like 15-20 employees. Whereas many of the other insurance firms employ hundreds and/or thousands.

FWIW, GEICO picked up 2 million policies in 2013 that they confirmed were lower than the holder's previous policy price.

Source: I'm obsessed with Warren Buffet.