Progressive CAse Analysis

Innovation at Progressive (A), (B) and (C) Case Analysis

Mario Fernando Mayank Anand Jha Piyush Pandey

B11030 B11091 B11097

Innovation at Progressive (A): Pay-as-you-go Insurance 7P analysis Product: Company’s main product is Auto insurance. In this market it is one of the top 4 players and its primary positioning is based on “Pay only for what you use” for regular customers and offering products to higher risk carrying individuals rejected by competitors. In home owners market it has very small market share. Risk: Inefficient underwriting processing of high risk customers can lead to much larger damage. Price: Extensive data mining enables them to offer better targeted prices to the customers. Providing accurate prices to the customers gives them edge over others in attracting new customers. It also enables them to decide a premium for high risk customers. Risk: Fundamentally, consumers like it because they have to pay less in general (as they pay only for what they use) which means lower revenue generation per customer for PI. Thus, PI has to play on volumes. Place: 1400 Immediate response vehicles help them in processing claims at the site of accident as soon as an accident occurs. This gives them a competitive advantage over others. As a fact this enables them process more than 50% claims in first 7 days which is much better than industry standards. Further, PI has only independent agents across the country and no dedicated agents. The advantage is that since, PI offers more customized and lower priced insurance, it will be easier for independent agents to push PI’s products vis-à-vis competitors. Risk: The company totally relies on external factors (since, they have no dedicated agents) to reach out to consumers. Also, IRV’s have their own risk of inefficient on-the-spot processing and costs. Promotion: PI was the first company to offer comparative quotes. This promoted transparency for customers and thus, helped them attract more customers to their phone lines. Further, as per case in more than 50% cases Progressive’s price was less than competitors which further helped them in attracting customers. Risk: Again, the problem here is that customer will buy only when the price quoted for PI is less. In future, if PI is not able to maintain lower prices they can’t sustain this service. People (Big Risk): Progressive has expanded rapidly. Within a span of 3 years (1994 to 1997) the ranks of claim representatives have increased from 3093 to 7561. This has affected quality and thus, the new policies often carry more loss due to inefficient on-site processing by less competitive employees.. Physical Evidence: The company has increased the separability of the services they offer by using IRV’s, websites and extensive data gathering to develop insights without frequent face to face interaction. . Thus, the effect of physical evidence is low (compared to their competitors) as there is very less interaction with customers. Process: The company has a well-defined process of data gathering and claims processing. However, the competitive advantage created here is under pressure as 1) In the face of expansion it is becoming a major cost center with quality concerns 2) Gap with the completion has reduced over time as illustrated by the following graph.

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Fig: Progressive’s Loss ratio vis -a-vis Competitors 85% 80% Progressive Allstate

75%

GEICO 70%

State Farm

65% 1995

1996

1997

1998

1999

Progressive is losing on its competitive advantage as its loss ratio has increased over a short span of 5 years. Customer Input vs. Product Knowledge: The company should primarily rely on product knowledge rather than customer input in order to create innovative offerings. This is because the insurance industry is highly technical and requires a lot of data mining and data analysis. The customers simply cannot determine accurately what impact individual factors may have on the likelihood of accidents, the premiums to be charged, etc. So customers input will be subject to perceptive forces.

Customers can at best provide intuitive insights which may not reflect the reality. Progressive, with its extensive data mining, need only to look to the customers to better package and market its products and should take strategic and technical decisions driving innovations on its own. Moreover, PI has developed one of the most extensive and accurate data analytics unit in the industry. Thus, their internal processes are robust and deep enough to provide better insights than customers.

Conclusion: Rely on internal processes and Product knowledge to develop insights.

Loss Ratio Loss Ratio

=

Losses and Loss adjustments/Premiums Earned

We can divide the customers into three segments: 1) Very high premium due to high risk(not served by competitors) 2) High-to-medium premium due to high-to-medium risk (PI may or may not offer lower quotes) 3) Low risk and lower premium (PI offers lower quote compared to competitors) PI has a monopoly over the first segment and this increases their premium collections vis-à-vis competitors as these customers are high premium paying customers. Second segment may or may not go to PI depending on the quotes offered to the customers. While the segment will go primarily to PI as the quotes at PI for these customers are often low compared to quotes from competitors. And with the Comparative quotes service they also ensure that customers get to know that PI’s quotes are the lowest. So, PI is bound to have a higher share of low risk-low premium customer pie. Low risk customers are the standard customers and constitute about 46% of premiums for PI. As these are the customers with low probability of doing accidents and claiming, PI’s losses are lower compared to the competitors. 2

Market Attractiveness and Viability of the Autograph system The Autograph system from Progressive Insurance is a great value proposition for a large segment of the customer base for auto insurance companies. It is economically efficient, creates consumer savings and it is fair and progressive (as opposed to traditional insurance where low usage vehicle owners subsidize the high usage vehicle owners by paying the same amount as them). Moreover, it makes the insurance more affordable. The typical customer who will go for this kind of insurance would be the vehicle owner who drives infrequently and largely during daytime hours and who may also own multiple cars so that usage of each car is low. The customer who will shy away from this scheme would be the heavy usage person who may also commute during odd hours of the night (e.g. transporters). Also, privacy may be an important concern for many. In the pilot program conducted, the volunteers were assured that their data would be kept strictly confidential but in the future strategy of the company, as described in the case as well as the patent application, they intend to make other use of the personal information of the vehicle users such as in marketing other products and services not related to insurance. However, as the system is fair, it is likely to attract a large number of customers. It is obvious that low users would prefer this system to others. And even for others who are not aware of their exact usage and thus cannot determine whether the Autograph system will result in guaranteed savings can rest assured that the system is fair and equitable. Moreover, this system converts a vehicle owners insurance cost from a fixed cost to a variable cost, thus providing him better control over his expenditure. But we need to see whether it is a value creating proposition for the company. Pay-As-You-Drive insurance pricing makes vehicle insurance more actuarially accurate (premiums better reflect the claim costs of each vehicle)1. Also, research indicates that within existing price categories, annual claims increase with annual vehicle mileage2. This would mean that the company’s claims related liabilities would be reduced. But so would the premiums charged by the companies. There is no data in the case to suggest that the savings created by better data analysis would offset the 25% lower premiums that the company would collect on an average. The viability of the system, therefore, rests on whether the company can attract enough number of new customers in order to offset the losses from claims with the increase in investment gains. The probability of the company attracting new customers is increased because of the fact that the company provides a Comparative Quotes where the potential customers would clearly see that this system charges them lesser than the competitors. Also, because Progressive exclusively uses independent agents, it will help the existing customers of these agents buying the insurance of other companies to migrate to the Autograph system. Let us make some projections. Implementing Autograph will probably result in a decrease in insurance claims from the previous ratio and will also increase in premiums earned due to a greater number of customers being attracted. Reduction in claims 24% Increase in premium received 70%

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Implementing Pay-As-You-Drive Vehicle Insurance Policy Options -Todd Alexander (Litman Victoria Transport Policy Institute) http://www.ippr.org/uploadedFiles/projects/ToddLitman.pdf, Accessed 18/07/2012 2

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The 5 year average data was calculated (using Exhibit 5). The premiums earned through Autograph should be 25% less than the regular system but would increase because of a greater number of subscribers. The claims ratio will also decrease from the regular one by a certain amount. 5 year average data ($ million) Premiums Earned Loss and Loss Adjustment Underwriting Expenses Net Underwriting Income (NUI) Net Investment Income (NII) NUI-NII

Regular 4118 2945 1076 97 211 307

Autograph 5250 3806 1390 55 269 323

The Autograph system is preferable to the regular system if the increase in investment income offsets the increase in claims losses by an amount greater than what the regular system achieved. Difference (Autograph - Regular)

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We used MS-Excel’s Goal Seek to calculate the above cutoff figure of 24% decrease in claims and 70% increase in subscribers for the Autograph system to be preferable to the regular system. Additionally, a data table was created to learn the benefit of the Autograph system at different reduction in claims and increase in subscribers. Difference Regular)

Premium Increase

(Autograph - Claims Decrease 5% 10% 10% -938.475 -717.298 20% -995.86 -754.576 30% -1053.25 -791.855 40% -1110.63 -829.133 50% -1168.02 -866.412 60% -1225.4 -903.69 70% -1282.79 -940.969 80% -1340.17 -978.248 90% -1397.56 -1015.53 100% -1454.95 -1052.8

15% -496.12 -513.292 -530.463 -547.635 -564.807 -581.978 -599.15 -616.321 -633.493 -650.664

20% -274.943 -272.008 -269.072 -266.137 -263.201 -260.266 -257.33 -254.395 -251.459 -248.524

25% -53.7658 -30.7233 -7.68083 15.36167 38.40417 61.44668 84.48918 107.5317 130.5742 153.6167

Thus, we see that only a radical increase in subscribers and a major decrease in claims can make the Autograph system preferable to the current system. Competencies necessary to implement Autograph The Autograph system is a derivative new product with some design innovation incorporated (GPS technology) into a robust data analysis process. According to a study by Scott Edgett and Steven Parkinson quoted in our textbook, the factors that contribute to the success of a new service development are market synergy, organizational factors and market research factors. The competencies required would come under the organizational factors. Since the company’s forte is data processing, the wealth of customer information that Autograph will provide will lead to actuarial accuracy and the company is capable of doing that. Apart from the data processing capabilities upgrade, there would be new billing system.

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Level of customer acceptance required to make Autograph profitable Customer acceptance would be based on the market synergies. As explained earlier, low mileage users would prefer this system to others. And even for others who are not aware of their exact usage and thus cannot determine whether the Autograph system will result in guaranteed savings can rest assured that the system is fair and equitable. What is required is that customer acceptance is huge enough to offset the decrease in premiums earned per customer. Key barriers to customer acceptance of Autograph Again, as explained earlier, the customer who will shy away from this scheme would be the heavy usage person who may also commute during odd hours of the night (e.g. transporters). Also, privacy may be an important concern for many. Importance of Autograph to Progressive Autograph is a reflection of the risk taking and innovative culture prevalent at Progressive. However, it should be ensured that this system makes financial sense to the business too. As we saw from calculations earlier that only a dramatic increase in new subscribers and a large decrease in claims will prove this system to be beneficial to the company. Should Progressive test this concept more? The company should test the system with a more nationally representative sample as the current pilot mainly focuses on problems peculiar to a single state. The privacy issue should be explored as the current users of the pilot have been assured of the confidentiality of their data whereas they intend to use this information for marketing purposes, etc.

Innovation at Progressive (B): Homeowners Insurance One of the major competitive advantages of Progressive was its data crunching and state-of-the-art data analyses (its sophisticated underwriting software). They used 12 vehicle characteristics and 16 variables in a credit-scoring model and included other factors as well. As the case mentions, although hardly constant, auto insurance losses tended to follow patterns unlike home insurance which tends to be more erratic and unpredictable. The case mentions that auto loss levels were governed by demographic factors (which are relatively easier to predict) whereas major underwriting losses in the homeowners market were much difficult to predict – hurricanes, earthquakes and the like. Progressive’s competitive advantage when carried over to the homeowner’s market is nullified in this instance as it is not that easy to data crunch its way into offering lower premiums in a given locality. Another major competitive advantage that Progressive has is its quick response time in clearing claims. This is also nullified to an extent when it comes to homeowners insurance. • Valuation of the claim takes time. The market price of a house in a given locality is easy to obtain. However the extent of the damage needs to be assessed properly, because unlike automobiles, houses are not standardized and require more careful inspection and assessment. Replacement costs of homes need valuation and hence more time. • Relatively bigger sums of money are involved in the claims and the validation of the claims need to be done in a more thorough manner than the current auto insurance claims so that fraudulent or excessive claims can be mitigated • The customer may not actually value or appreciate the quick response time. For instance, in the case of a natural disaster, the insurance claims might be one of the last thoughts in the customers mind. Furthermore, the customer may not actually need the money quickly as needs more time for the status quo to be established before searching for a new house.

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• By a quick response when the customer may not actually need the money immediately, and when such huge sums are involved, the company loses investment income which is a major source of revenue, which is not a valid proposition for both the customer and the company. In spite of the lack of operational synergy, market synergy is still present for Progressive to launch their homeowners insurance. The case fact mentions that many customers sought the convenience of bundling their auto and homeowners insurance than dealing with separate companies for each policy. One challenge which Progressive would face is to update their competencies by training their independent agents and updating their software to tailor the needs of customers seeking homeowners insurance. The key barrier that Progressive would find is the customer perception that they are niche players/specialists in the auto market. Another hindrance would be that their auto customers might already have had homeowners insurance with another company.

Innovation at Progressive(C): Auto Repair Let us evaluate each option available to Progressive. 1. Progressive could maintain TotalPro in its present form. The problem with this option is that although the company can prevent claims frauds but the main reason why such auto insurance companies built relationships with auto repair shops, i.e. to control the quality of service offered to its insurance customers, would not be addressed. Therefore, the current form of the relationship is unacceptable. 2. Progressive could provide the auto repair services. This is a very farfetched alternative. Auto repair is clear not the core competence of the company. In fact, Progressive is a white collar job-type company whereas auto repair is a blue collar job! There is clearly no indication that Progressive would be able to provide good service to its customers and remain profitable at the same time. 3. Progressive could find a way to intermediate between its customers and the repair shops. This option makes the most sense. In the personal computer industry, many vendors outsource the servicing portion to other companies and provide them affiliation by keeping checks and receiving customer feedback. This way they have control over the service provided to their customers while at the same time keeping costs low. The same can be the case here. 4. Progressive could get out of the repairs business altogether and concentrate on its core insurance business. This option will bring the company back to square one and the company would no longer have any control over the service that its customers receive in auto repair shops which directly affects the customers’ perceptions about the company itself. Therefore, it is advisable that Progressive establishes strict standards which auto repair shops affiliated to its TotalPro program need to follow in order to ensure consistently good service to its customers and the auto repair shops in turn will be assured of regular business from the company’s customers.

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