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Progressive Corporation.Sssg


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Progressive Corporation.Sssg

  1. 1. <ul><li>PROGRESSIVE CORPORATION: </li></ul><ul><li>1984 – 1993 </li></ul><ul><li>PEST </li></ul><ul><li>INDUSTRY ANALYSIS </li></ul><ul><li>VALUE CHAIN </li></ul><ul><li>VALUE-ADDED OPERATIONS </li></ul>
  2. 2. PEST ANALYSIS Nature of Change Impact of Change Opportunities Threats Strategic Response Political Change <ul><li>Compulsory Auto Insurance </li></ul><ul><li>Required assumption of non Standard risk under Assigned Risk Plans </li></ul><ul><li>Prop 103 in CA </li></ul><ul><li>Insurance Co’s were regulated </li></ul><ul><li>Increased Business from The Non Standard Segment </li></ul><ul><li>Limit on the Profits </li></ul><ul><li>Competition from Allstate </li></ul><ul><li>1950 – Focus on Emerging “Non Standard Segment” </li></ul><ul><li>Moved out of California </li></ul>Economic Change <ul><li>Rise in Consumer Standard of Living </li></ul><ul><li>Automobile demand rose steadily </li></ul><ul><li>Tapping Customers by giving them incentives </li></ul><ul><li>Growing competitors into Non Standard Segment </li></ul><ul><li>Reduced premiums for customers meeting special requirements </li></ul>
  3. 3. PEST ANALYSIS, cont. Nature of Change Impact of Change Opportunities Threats Strategic Response Social Change <ul><li>Increased Automobile Ownership </li></ul><ul><li>Rising demand for “Drive Through” approach for purchasing Auto Insurance </li></ul><ul><li>More insurance policies to be written every year </li></ul><ul><li>Get business through New Product Development & Product Reengineering </li></ul><ul><li>Opened “Walk – in” Customer Service centers </li></ul>Technological Change <ul><li>1970 onwards : Birth of Modern Computing & development in technology sector </li></ul><ul><li>Data Could be stored and used as needed </li></ul><ul><li>Use of Computers and systems to store, organize, send and receive information and data </li></ul><ul><li>Built databases on Accidents to capture the lower risk portion of the Non Standard segment </li></ul><ul><li>Using Express Quote Service in California, Texas, Florida etc. </li></ul>
  4. 4. PEST ANALYSIS, cont. Nature of Change Impact of Change Opportunities Threats Strategic Response Technological change <ul><li>Use of Differential Pricing on the basis of age, driving record etc.(14000 premiums)‏ </li></ul><ul><li>Installation of Computer system and nation wide voice/data system for faster communication helped reduce Costs associated with false pricing and delayed claims processing </li></ul><ul><li>Use of 1-800 number and Immediate Response System </li></ul>
  5. 5. INDUSTRY ANALYSIS 524: The Insurance Carriers and Related Activities Industry 2002 NAICS Code 1987 SIC Code NAICS Industry Definition 524 Insurance Carriers and Related Activities – Industries in the Insurance Carriers and Related Activities subsector group establishments that are primarily engaged in one of the following: (1) underwriting (assuming the risk, assigning premiums, and so forth) annuities and insurance policies or (2) facilitating such underwriting by selling insurance policies, and by providing other insurance and employee-benefit related services. 5241 Insurance Carriers – This industry group comprises establishments primarily engaged in underwriting (assuming the risk, assigning premiums, and so forth) annuities and insurance policies and investing premiums to build up a portfolio of financial assets to be used against future claims. Direct insurance carriers are establishments that are primarily engaged in initially underwriting and assuming the risk of annuities and insurance policies. Reinsurance carriers are establishments that are primarily engaged in assuming all or part of the risk associated with an existing insurance policy (or set of policies) originally underwritten by another insurance carrier. Industries are defined in terms of the type of risk being insured against, such as death, loss of employment because of age or disability, and/or property damage. Contributions and premiums are set on the basis of actuarial calculations of probable payouts based on risk factors from experience tables and expected investment returns on reserves. 52412 Direct Insurance (except Life, Health, and Medical) Carriers – This industry comprises establishments primarily engaged in initially underwriting (i.e., assuming the risk and assigning premiums) various types of insurance policies (except life, disability income, accidental death and dismemberment, and health and medical insurance policies) 524126 6331, 6351 Direct Property and Casualty Insurance Carriers – This U.S. industry comprises establishments primarily engaged in initially underwriting (i.e., assuming the risk and assigning premiums) insurance policies that protect policyholders against losses that may occur as a result of property damage or liability.
  6. 6. <ul><li>A.M. Best estimated the size of the Auto Insurance Market to be </li></ul><ul><ul><li>$21B in 1975 </li></ul></ul><ul><ul><li>$109B in 1993 </li></ul></ul><ul><li>In 1993, approximately 300 companies compete in the industry </li></ul>INDUSTRY ANALYSIS Automobile Insurance Industry Size and Growth
  7. 7. INDUSTRY ANALYSIS Progressive Corp. and Industry Profitability, 1984-93 * Industry underwriting profitability refers to the entire automobile insurance market ** Industry ROE refers to the entire Property-Casualty insurance industry All data from the case 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 PROGRESSIVE Underwriting Profit -2.4% 0.0% 4.3% 5.6% 2.9% -1.2% 1.0% -3.7% 3.5% 10.7% Return on Average Equity 18.0% 36.9% 26.9% 24.7% 25.9% 17.4% 21.5% 6.7% 34.7% 36.0% INDUSTRY Underwriting Profit* -17.4% -17.0% -8.6% -4.7% -5.4% -10.4% -9.8% -9.0% -3.0% -2.0% Return on Equity** 1.9% 4.0% 13.6% 15.8% 13.2% 9.9% 8.6% 9.2% 4.4% 9.8%
  8. 8. INDUSTRY ANALYSIS Progressive Corp. vs. Industry Performance, 1984-93 Data from from 1986 -1993 plotted against S&P500 <ul><li>Progressive had an annual growth rate of 22% over 1984-1993 </li></ul><ul><ul><li>Industry had only 8.7% </li></ul></ul><ul><li>Progressive was able to squeeze a profit of 6.4% from their underwriting </li></ul><ul><ul><li>Industry treated auto insurance as a loss leader, and typically lost 6.4% </li></ul></ul><ul><li>Progressive boasted returns of 28.7% </li></ul><ul><ul><li>S&P performed at 14.9% over the same period </li></ul></ul>Data taken from the case
  9. 9. INDUSTRY ANALYSIS HH Index, 1993 Data taken from the case <ul><li>Assumptions: </li></ul><ul><li>300 companies operating </li></ul><ul><li>Since ARPs are distributed amongst operating companies according to market share in the state, we assume nationwide distribution of ARPs based on nationwide market share </li></ul><ul><li>This leads to an HH Index of: </li></ul><ul><li>1016.167 </li></ul>Insurer Net Premiums Written Market Share w/o ARPs Market Share w/ ARPs State Farm $ 2,430,000 13.50% 19.16% Allstate Indemnity $ 2,192,836 12.18% 17.29% Progressive $ 1,819,000 10.11% 14.35% Mid-Century $ 1,000,000 5.56% 7.89% American Premier $ 935,525 5.20% 7.38% Hartford $ 372,311 2.07% 2.94% Colonial Insurance Company $ 335,635 1.86% 2.65% Integon $ 246,393 1.37% 1.94% Guaranty International $ 236,804 1.32% 1.87% Dairyland (Sentry Insurance Corp.) $ 207,223 1.15% 1.63% Assigned Risk Plans $ 5,320,000 29.56% N/A Others (approx. 290)‏ $ 2,904,000 16.13% 22.90% total $ 17,999,727     total w/o ARPs $ 12,679,727    
  10. 10. VALUE CHAIN Progressive Corporation *Taken from the case **Assumption Progressive Consumers 100% Underwriters Revenue 10.7%* Underwriters OpEx 25.4%* Other/After Sales OpEx 48.9%** Legal 15%*
  11. 11. INDUSTRY SUPPLY/VALUE CHAIN Non-Standard Insurance Industry Independent Agency Forces Non-Standard Insurers Progressive Agent Progressive Two main chains in the non-standard insurance industry: 1. Insurance companies worked with an independent agent, who procured clients for them. 2. Progressive worked with their own agents who were an important part of matching clients to claims and pricing claims fairly.
  12. 12. VALUE CHAIN Progressive Corporation Margin Inbound Logistics Operations Outbound Logistics Marketing & Sales After-Sale Service Data Gathering Rating Underwriting Investing Policy Issues Billing and Collections New Sales Policy Renewal Policy Re-pricing Agent Mgmt. Advertising Claims response Loss Control Loss Settlement Financial Accounting / Legal Counsel / Regulatory Compliance Personnel Training Research and Development (Product/sales practices/Settlement procedures)‏ IT & Communications
  13. 13. VALUE-ADDED ACTIVITIES Human Resources After-Sales Services Marketing & Sales Info. & Comm. Tech. Inbound Logistics Service Non-Standard Sector
  14. 14. VALUE-ADDED ACTIVITIES Human Resources <ul><li>Extensive Training Seminars: </li></ul><ul><li>Newer Employees attended classes for 6-weeks a year </li></ul><ul><li>Invested $9MM in Managerial training </li></ul><ul><li>1,000 Progressive employees graduated from their adjuster training centers each year </li></ul><ul><li>Trained in the art of negotiations and grief counseling </li></ul>
  15. 15. <ul><li>H/R brought value add to the end consumer </li></ul><ul><li>because Progressive employees received </li></ul><ul><li>authority to attend to consumer cases without </li></ul><ul><li>having to go through different people. </li></ul>VALUE-ADDED ACTIVITIES Value added by Human Resources
  16. 16. VALUE-ADDED ACTIVITIES After-Sales Services <ul><li>Executed an “Immediate Response” System </li></ul><ul><li>Set up a toll-free number accessible 24/7 </li></ul><ul><li>Allowed adjusters to write checks at the scene of accident for coverage </li></ul><ul><li>Started tracking “loss report lag-time” </li></ul><ul><li>Introduced the service of “Office on Wheels” </li></ul><ul><li>Offered roll back premiums if policy holders agreed to pre-selected repair shops and medical providers </li></ul>
  17. 17. <ul><li>The after-sales services brought value to </li></ul><ul><li>Progressive’s consumers in regards to getting </li></ul><ul><li>higher and quicker settlements, response time </li></ul><ul><li>to a claim was within hours either at the consumers </li></ul><ul><li>home or scene of accident . Compared to a traditional </li></ul><ul><li>insurer, where the adjuster would not meet the policy </li></ul><ul><li>holder until days or weeks. </li></ul>VALUE-ADDED ACTIVITIES Value added by After-Sales Services
  18. 18. VALUE-ADDED ACTIVITIES Marketing & Sales <ul><li>Introduced Express Quote Service in CA </li></ul><ul><li>Expanded to TX, FL, OH with a toll free number 1-800-AUTOPRO </li></ul><ul><li>Progressive could offer policies directly at a lower cost </li></ul><ul><li>Opened up “Walk-In” customer service centers </li></ul><ul><li>Progressive employees inspected cars for safety and discussed reduced coverage and policies </li></ul>
  19. 19. VALUE-ADDED ACTIVITIES Value added by Marketing & Sales <ul><li>Progressive’s marketing & sales provided a “one-stop shop” for consumers to compare competitor pricing and receive safety inspection. </li></ul><ul><li>Progressive’s lower 5% commission structure on AutoPro (15% competitors) direclty benefited consumers with lower prices </li></ul>
  20. 20. VALUE-ADDED ACTIVITIES Information & Communication Technology <ul><li>Installed a $28MM computer system and nationwide voice/data system </li></ul><ul><li>Allowed faster communication between agents and headquarters & shorter processing times </li></ul>
  21. 21. VALUE-ADDED ACTIVITIES Value added by Info. & Comm. Tech. <ul><li>Having a solid information & communication infrastructure added value by allowing local adjusters to process 30% more claims in a much more efficient manner. The ability to process more claims leads to shorter turn around times for deciding on consumer claims. </li></ul>
  22. 22. VALUE-ADDED ACTIVITIES Inbound Logistics and Operations <ul><li>Progressive invested much more heavily than competitors in collecting and analyzing data </li></ul><ul><li>Progressive classified 11 different age categories </li></ul><ul><li>In any given community Progessive offered 14,000 different premiums based on drivng records </li></ul>
  23. 23. VALUE-ADDED ACTIVITIES Value-Added by Inbound Logistics and Ops <ul><li>Having access to consumer data and information allowed Progressive to add value by developing premiums based on: lifestyles, driving habits, age, gender, distant from work, and classified them in different high-risk groups. It allowed them to “personalize” insurance coverage based on specific characteristic traits. </li></ul>
  24. 24. VALUE-ADDED ACTIVITIES Servicing Non-Standard Sector <ul><li>Progressive offered insurance to “blue collar” workers, people with poor driving records, drivers older than 65, non-speaking English drivers, drivers of high-performance cars, and young first time drivers with no insurance history. </li></ul>