Progressive CorporationA Case Study

Scott Campbell - Christina Connolly - Maureen Stafford

MBAM 6192/16/09

P.E.S.T. Analysis

Persian Gulf War

How the Government Dealt With Past Recessions. New York Times. January 26, 2009.

•Economy was weakened by a credit crunch in commercial and housing market•Inflation was on the rise

Hurricane Andrew- 1992

Consumers See an Increase in Taxes

Federal Government Revenue, in Billions, by Major Source, 1965–2008

2008 Federal Reserve & Spending Book of Charts

More Government control on taxes and regulations.

Driving Trends

                                               

                            

Transportation Services Index

Bureau of Transportation Statistics

We see an steady growth in the number of drivers on the road.

Assigned Risk Plan: Requirement of carriers to underwriting non-standard risks

1983: The high accident rate of younger drivers prompts provisional licensing of drivers between ages 16 an 18.

1984: A new financial responsibility law requires that uninsured drivers involved in a vehicle accident have their driver licenses suspended for a year.

1988: Proposition 103

1991: The Vehicle License Fee classification was assessed based on the vehicle market value or vehicle purchase price

Department of Motor Vehicles

DMV Milestones

Technology

• Nationwide voice/data system: faster communication btwn agents & headquarters, increase process claims by 30%

• Express Quote Service: list of competitors’ pricing available to consumers

• Immediate Response System: “office on wheels”

Competition

Company Services Standard/Non-standard Strength Employees

State Farm property/casualty, life & health Standard agents can cross sell all products, highly liquid in-house agency force

Allstate property/casualty, life Standard/Non-standardbrand name, exclusive sales force, proprietary data base

full-time sales force & independent agencies

GEICO property/casualty Standard/Non-standardtargeting customers by mail/phone, Berkshire Hathaway investment

commissioned contract agents

Progressive property/casualty Non-standard

more risk categories, Express Quote Service, Immediate Response System independent agents

Competitive Analysis

Competitors Competitive Advantages

State Farm Largest market shareIn-house agency forceA++ ratingExcellent liquidity position

Allstate Brand nameExclusive sales forceBroad distriubtion systemA- ratingLocation in Sears stores

Geico Government employee angleDirect targeting through phone and mail

Auto Insurance Industry Value Chain

Insurance Provider(Progressive / State Farm /

Allstate / GEICO)

Independent AgencyWriter

Customer (Driver)(80-90% “Standard” /

10-20% “Non-Standard”)

Direct Writer(Internal Sales Force

or Mail / Phone / Internet)

Sources: Siggelkow, Nicolaj. “Progressive Corporation,” Harvard Business School Case. Rev. 5/14/98

http://www.iii.org/media/hottopics/insurance/distribution/ (Accessed 2/13/09)

Auto Insurance Industry Value Chain

Source: Siggelkow, Nicolaj. “Progressive Corporation,” Harvard Business School Case. Rev. 5/14/98

Industry Analysis

Threat of Substitutes

Low threat of substitute due to the legal requirement of auto insurance and the limited number of competitors in the non-standard market

Threat of New Entrants

Low barrier of entry for established insurance companies desiring to target non-standard customers, as demonstrated by Allstate Indemnity

Power of Customers

Non-standard customers did not hold much power due to the necessity of the service and limited companies willing to meet their needs

Growth

Rapid industry growth is not likely, and becoming less lucrative due to legislation

General customer movement was between

providers

Competitive Environment

Competition is extremely high, necessitating innovation of tactics and infrastructure to win over customers and maintain profit under new legislation

Value Creating Activities

Inbound Logistics

Marketing/Sales

After-Sale ServiceHuman Resources

Infrastructure

Technology

Marketing/Sales

After-Sale Service

Human Resources

Infrastructure

Inbound Logistics “The Prince of Smart Pricing”

• Utilized database to price policies appropriately to risk

• Developed 14,000 premiums under which to classify

Technology“Agents’ mispricing policies was identified

as a major cost driver.”

• Computer system to facilitate fast communication with headquarters– Shorter processing time– Decreased operating expenses– Expedited claims process

Marketing/Sales “It’s the difference between a tricycle

and a Boeing 747.”

• Used independent agents to maximize coverage while minimizing fixed costs

• Express Quote Service– Promoted Progressive’s awareness of

consumers

• Channel Options– Open an account with an independent agent

or directly with Progressive via phone– Walk-in customer service centers– Drive-in service center

• Increased brand awareness

After-Sale Service “Most people start out not trusting their insurance company. But if you are there

right away… fewer people will go to lawyers.”

• Immediate Response system– Progressive accident victims who used an

attorney decreased 20%– Rental car duration decreased– Duration a car remained in storage

decreased– Word of mouth promotion– Reduction in fraudulent activity (previously

10-15%of insurance losses)

After-Sales Service Cont’d

• Office on Wheels– Reduced employee and administrative costs– Decreased customers who turned to an

attorney– Decreased number of open claims 50%

• Innovative Cost Containment– Offering special options to decrease

premiums by 12-20% opened up to a greater number of users

Human Resources“The transition towards a service-oriented

insurance company proved to be difficult.”

• Hired “blank slate” employees and trained to their standards

• Great responsibility level• Brought in amenities for a

comfortable working environment• High pay

Infrastructure“We will go for profit, not simply for

growth.”

• Profit prioritized over growth• 4% underwriting target• Nonstandard culture• No regard for industry standard