Progressive Corp TakeAways Progressives recipe for Competitive Advantage

Progressive Corp Take-Aways

Progressive’s “recipe” for Competitive Advantage n Identify a profitable and growing customer segment of the market: u n n n “Mis-priced” non-standard clients Key problem: Customer retention Solution: Create superior service Main point: Pricing and service are complements

Progressive’s Competitive Advantage in Non-Standard n Intelligent pricing u u u 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 Find the “right” customer segment n Better Service u Immediate Response F u u Empowered, trained adjusters Measure performance of service organization F F F u 24/7 operations lag between claim filing and closure fraction of open claims tied to incentives Fast Payment Increase Customers’ Willingness to Pay

The Price is Right n n n 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?

Equilibrium Analysis n n The only sensible bid is not to bid at all Why? u u 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: F F . 25 x $9 < $3 So you actually lose money on average

Mis-pricing is a major driver of cost in insurance Driver Risk Expected Claims High $2000 Medium $1000 Low $600 Expected Loss: $1200 / customer “Dumb” Player: Charge $1200 to everybody “Smart” Player: Charge $1150 to Medium and Low Customers, $2000 to High Customer Gets only high risk customer loses $800 Gets medium and low risk customers, makes $900

Questions about Progressive’s Competitive Advantage n n How sustainable is Progressive’s competitive advantage in non-standard? u how long would it take other firms to develop the same (or better) pricing expertise? u Product advantage versus competitive advantage? Can Progressive’s competitive advantage in nonstandard be transferred to the standard segment? u u do they have better pricing skills in standard? can they develop them faster than others? can competitors in standard copy Progressive’s Immediate Response System? F do they have the incentives to do so?

Progressive met Allstate’s challenge and entered the standard segment Progressive S&P 500

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

Progressive strategy in 2004 n n 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