Progressive Corp

1
Progressive Corp

• Take-Aways

2
Progressives recipe for Competitive Advantage

• Identify a profitable and growing customer
  segment of the market
• Mis-priced non-standard clients
• Key problem Customer retention
• Solution Create superior service
• Main point Pricing and service are complements

3
Progressives Competitive Advantage in
Non-Standard

• Intelligent pricing
• sophisticated historical database of non-standard
  customer attributes accidents
• better ability to rate customers (i.e., estimate
  risk)
• more prices (14,000)
• product managers
• Express Quote 1800

• Better Service
• Immediate Response
• 24/7 operations
• Empowered, trained adjusters
• Measure performance of service organization
• lag between claim filing and closure
• fraction of open claims
• tied to incentives
• Fast Payment

4
The Price is Right

• You are bidding to acquire a client list from a
  rival firm
• The value of the client list to the rival is from
  0 - 9 with equal probability
• Because of your superior service, the client list
  is worth 50 more if you acquire it
• The rival will accept any price for the list
  which is at or above its value
• How much should you bid?

5
Equilibrium Analysis

• The only sensible bid is not to bid at all
• Why?
• You win only in circumstances where the list is
  least valuable.
• Suppose you bid 3.
• Then you win when the list is worth 0, 1, 2, or
  3 (each equally likely)
• Your profits from the acquisition are
• .25 x 9 lt 3
• So you actually lose money on average

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Mis-pricing is a major driver of cost in insurance
Driver Risk Expected Claims
High 2000
Medium 1000
Low 600
Expected Loss 1200 / customer
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Questions about Progressives Competitive
Advantage

• How sustainable is Progressives competitive
  advantage in non-standard?
• how long would it take other firms to develop the
  same (or better) pricing expertise?
• Product advantage versus competitive advantage?
• Can Progressives competitive advantage in
  non-standard be transferred to the standard
  segment?
• do they have better pricing skills in standard?
  can they develop them faster than others?
• can competitors in standard copy Progressives
  Immediate Response System?
• do they have the incentives to do so?

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Progressive met Allstates challenge and entered
the standard segment
Progressive
SP 500
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Progressive performance highlights

• Expansion in other non-standard segments
• 25 market share in 2002 for motorcycles (1
  player)
• nearly 2M total policies for motorcycles, mobile
  homes, watercraft, snowmobiles, and homeowners
• Shift to direct channel
• Approx 30-35 of new auto policies acquired via
  direct channel

10
Progressive strategy in 2004

• Maintain focus on 4 underwriting margin
• Continue to build direct distribution strength
  (I.e., Internet)
• Compete in standard
• Strategic principles remain high-service and
  focus on risk segments in which Progressive has a
  pricing advantage