Case Study: Progressive Corporation

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Case StudyProgressive Corporation

• RMI 4700
• Insurance Operations
• Robert Klein

1/28/09
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Key Areas of Focus

• Progressives strategy performance in core
  non-standard auto insurance market expansion to
  complimentary markets.
• Profile of Progressives markets
• Competitors responding to them.
• Where/how has Progressive pursued competitive
  advantages?
• How does Progressive case illustrate certain key
  issues and concepts?

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Progressive History

• Formed in 1937 in Ohio.
• Grew from 48th largest auto insurer in 1980 to
  9th largest in 1993.
• Succeeded with substantial penetration growth
  in non-standard auto insurance market.
• Employed better classification of high-risk
  drivers to attract better risks profitably.
• Standard insurers began to respond in
  mid-1980s.
• Progressive profits fell in early 1990s, then
  rebounded.

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Auto Insurance Market

• Auto insurance market grew with auto ownership,
  risk factors, liability government
  requirements.
• Personal auto insurance is the largest P-C line.
• Divided into preferred, standard and
  non-standard markets.
• Alternative distribution systems branding.
• Market subject to
• strong competition due to low entry barriers
• attraction of cross-selling other products
• regulatory price suppression/compression due to
  political pressures
• adverse claims trends from driving, economic
  legal factors
• low profitability insurer failures

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Non-Standard Auto Ins Market

• Traditionally viewed as higher risk, less
  preferred drivers e.g.,
• poor driving records
• young drivers
• other questionable characteristics
• lower persistency
• Province of specialty insurers
• Attractive to entry many failures
• Lure of low-price strategy
• Segment subject to fluctuations due to residual
  markets, standard insurers.

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Value Chain

• Where can an insurer gain an edge?

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Competitors

• State Farm
• large mutual with strong brand recognition
• market leader
• exclusive agents
• cross-marketing
• Allstate
• stock company
• legacy of Sears connection/outlets
• exclusive agents, cross-marketing
• GEICO
• Berkshire Hathaway (W. Buffet) major stockholder
• use of direct marketing

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The Progressive Angle

• Underwriting Pricing
• heavy investment in better databases
• development of more refined pricing system
• GPS monitoring pilot programs
• More coverage options
• Early use of computerized processes
• Provided comparative pricing in 1982!
• Multiple distribution channels
• Expedited claims adjustment
• Application of preferred provider concept
• Performance based compensation, retention
• Profit over growth

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Hiccups Progressive Response

• Regulatory shocks, e.g., Prop 103 in California
• Unsuccessful entry into insuring long haul
  truckers
• Allstate exploits advantages in retaining its
  high-risk insureds.
• Progressive turns tables by expanding into
  standard auto other personal lines markets.
• Progressive has aggressively pursued boat owners,
  especially fishermen.
• Progressive is now seeking to expand into
  homeowners insurance to get business dropped by
  other insurers.

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How Has Progressive Done?
Rate of Return on Equity/Surplus