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Progressive is losing on its competitive advantage as its loss ratio has increased over a short span of 5 years. Customer Input vs. Product Knowledge: The company should primarily rely on product knowledge rather than customer input in order to create innovative offerings. This is because the insurance industry is highly technical and requires a lot of data mining and data analysis. The customers simply cannot determine accurately what impact individual factors may have on the likelihood of accidents, the premiums to be charged, etc. So customers input will be subject to perceptive forces.
Customers can at best provide intuitive insights which may not reflect the reality. Progressive, with its extensive data mining, need only to look to the customers to better package and market its products and should take strategic and technical decisions driving innovations on its own. Moreover, PI has developed one of the most extensive and accurate data analytics unit in the industry. Thus, their internal processes are robust and deep enough to provide better insights than customers.
Loss Ratio
Loss Ratio = Losses and Loss adjustments/Premiums Earned
We can divide the customers into three segments: 1) Very high premium due to high risk(not served by competitors) 2) High-to-medium premium due to high-to-medium risk (PI may or may not offer lower quotes) 3) Low risk and lower premium (PI offers lower quote compared to competitors)
PI has a monopoly over the first segment and this increases their premium collections vis--vis competitors as these customers are high premium paying customers. Second segment may or may not go to PI depending on the quotes offered to the customers. While the segment will go primarily to PI as the quotes at PI for these customers are often low compared to quotes from competitors. And with the Comparative quotes service they also ensure that customers get to know that PIs quotes are the lowest. So, PI is bound to have a higher share of low risk-low premium customer pie. Low risk customers are the standard customers and constitute about 46% of premiums for PI. As these are the customers with low probability of doing accidents and claiming, PIs losses are lower compared to the competitors. 2
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Implementing Pay-As-You-Drive Vehicle Insurance Policy Options -Todd Alexander (Litman Victoria Transport Policy Institute) http://www.ippr.org/uploadedFiles/projects/ToddLitman.pdf, Accessed 18/07/2012
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The 5 year average data was calculated (using Exhibit 5). The premiums earned through Autograph should be 25% less than the regular system but would increase because of a greater number of subscribers. The claims ratio will also decrease from the regular one by a certain amount. 5 year average data ($ million) Premiums Earned Loss and Loss Adjustment Underwriting Expenses Net Underwriting Income (NUI) Net Investment Income (NII) NUI-NII Regular 4118 2945 1076 97 211 307 Autograph 5250 3806 1390 55 269 323
The Autograph system is preferable to the regular system if the increase in investment income offsets the increase in claims losses by an amount greater than what the regular system achieved. Difference (Autograph - Regular) 16
We used MS-Excels Goal Seek to calculate the above cutoff figure of 24% decrease in claims and 70% increase in subscribers for the Autograph system to be preferable to the regular system. Additionally, a data table was created to learn the benefit of the Autograph system at different reduction in claims and increase in subscribers. Difference Regular) (Autograph - Claims Decrease 5% 10% 10% -938.475 -717.298 20% -995.86 -754.576 30% -1053.25 -791.855 40% -1110.63 -829.133 50% -1168.02 -866.412 60% -1225.4 -903.69 70% -1282.79 -940.969 80% -1340.17 -978.248 90% -1397.56 -1015.53 100% -1454.95 -1052.8
Premium Increase
15% -496.12 -513.292 -530.463 -547.635 -564.807 -581.978 -599.15 -616.321 -633.493 -650.664
20% -274.943 -272.008 -269.072 -266.137 -263.201 -260.266 -257.33 -254.395 -251.459 -248.524
25% -53.7658 -30.7233 -7.68083 15.36167 38.40417 61.44668 84.48918 107.5317 130.5742 153.6167
Thus, we see that only a radical increase in subscribers and a major decrease in claims can make the Autograph system preferable to the current system. Competencies necessary to implement Autograph The Autograph system is a derivative new product with some design innovation incorporated (GPS technology) into a robust data analysis process. According to a study by Scott Edgett and Steven Parkinson quoted in our textbook, the factors that contribute to the success of a new service development are market synergy, organizational factors and market research factors. The competencies required would come under the organizational factors. Since the companys forte is data processing, the wealth of customer information that Autograph will provide will lead to actuarial accuracy and the company is capable of doing that. Apart from the data processing capabilities upgrade, there would be new billing system.
Level of customer acceptance required to make Autograph profitable Customer acceptance would be based on the market synergies. As explained earlier, low mileage users would prefer this system to others. And even for others who are not aware of their exact usage and thus cannot determine whether the Autograph system will result in guaranteed savings can rest assured that the system is fair and equitable. What is required is that customer acceptance is huge enough to offset the decrease in premiums earned per customer. Key barriers to customer acceptance of Autograph Again, as explained earlier, the customer who will shy away from this scheme would be the heavy usage person who may also commute during odd hours of the night (e.g. transporters). Also, privacy may be an important concern for many. Importance of Autograph to Progressive Autograph is a reflection of the risk taking and innovative culture prevalent at Progressive. However, it should be ensured that this system makes financial sense to the business too. As we saw from calculations earlier that only a dramatic increase in new subscribers and a large decrease in claims will prove this system to be beneficial to the company. Should Progressive test this concept more? The company should test the system with a more nationally representative sample as the current pilot mainly focuses on problems peculiar to a single state. The privacy issue should be explored as the current users of the pilot have been assured of the confidentiality of their data whereas they intend to use this information for marketing purposes, etc.
By a quick response when the customer may not actually need the money immediately, and when such huge sums are involved, the company loses investment income which is a major source of revenue, which is not a valid proposition for both the customer and the company. In spite of the lack of operational synergy, market synergy is still present for Progressive to launch their homeowners insurance. The case fact mentions that many customers sought the convenience of bundling their auto and homeowners insurance than dealing with separate companies for each policy. One challenge which Progressive would face is to update their competencies by training their independent agents and updating their software to tailor the needs of customers seeking homeowners insurance. The key barrier that Progressive would find is the customer perception that they are niche players/specialists in the auto market. Another hindrance would be that their auto customers might already have had homeowners insurance with another company.