Innovation at Progressive: Pay As You Go Insurance

Service Operations Management

1. How does Progressives performance compare to that of typical insurance company?

They have completely integrated modern technologies into their business process and in their interactions
within the company, the clients and their employees. Also, thanks to their sophisticated software for extensive
analysis of data, they are very good price segmenters and they are always looking for new ways to use the
information they have at their disposal, whether to segment prices or to innovate the business.

The main elements that have differentiated Progressive are:

a) They were one of the first insurers to enter the high-risk market, in which they quickly became a
dominant player by out-segmenting their competition.
b) Their price segmentation consists of data mining and extensive statistical analysis of consumer
behavior.
c) The software they have developed looks for correlations between multiple and different kinds of
variables and factors (typical and atypical), which allows them to set rates at finer levels that its
competition.
d) Innovation and pioneering is deep-rooted in the companys culture and history through lunching
innovative products and services that gave them competitive advantage, outstand them from their
competitors and secure their position in the industry.
- They were the first to implemented a fast service (IR1) with a high capacity of response, by
attending any client involved in a car accident, immediately and in person, anywhere and anytime
(24/7 service).
- They have a creative approach when it comes to implement changes that affects directly their
customers.
- They actively embrace new technologies and incorporate them into their business process.
- They were the first to install a politic of open books by creating a toll-free number for their 1
clients, to which they could obtain and compare rates from Progressive and up to three
competitors. This was done in total transparency, even if their competitors quote was lower than
theirs.
- They were one of the first in the industry to launch a web site.
e) They are fully aware of the importance of their customers service and they act accordingly. They hire
the best people to work as claim representatives and they are generously paid.
f) After proposition 103 was passed, they adapted and changed by centering their decision-making in the
consumers best interest and their level of satisfaction.
g) Their underwriting process is highly automated with a seamless flow of input information and data from
third parties.

On the other hand, the typical insurance companies prices are determined by measuring their customers risks
through historical and traditional data. In addition to this, the typical insurance companies are less willing to
explore new ways to do business.

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 Innovation at Progressive: Pay As You Go Insurance
Service Operations Management

2. Customers are very price sensitive, how problematic is that for Progressive?

The automobile insurance sector is highly price oriented since the industry is extremely competitive and the
presence of many suppliers increases the negotiating power of the consumers. Considering the fact that: a) the
primary source of revenue in the insurance business is the earned premiums and; b) that they had historically
found difficulties to make money on the insurance side of the business, but maintained profitability by investing
premiums; we can assume that this sector relies more on substitutes sources of revenue rather than on their
revenues of premiums. Therefore, all the players are forced to lower their prices as much as possible to stay
competitive while, at the same time, they need to develop a distinguishing service to stand out.

At first sight, this could seem highly problematic for Progressive, but their sophisticated software allows them
to obtain more detailed and accurate risk estimation that enables them to offer a better rate to certain
segments of the industry, which not only creates earnings for volume of sales, but also customers loyalty.
Additionally, the company has been proven eager to take advantage of the technology easily available and
integrate it into their business process. This not only represents a competitive edge and helps them to improve
the efficiency of their business process; also allows them to expand their market and acquiring new clients by
attracting specific segments of the population with the same predisposition to embrace modern technologies.

Finally, the company has shown over the time a high capacity to grow and to identify unexploited and profitable
business opportunities.

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 Innovation at Progressive: Pay As You Go Insurance
Service Operations Management

3. Assess the viability of Autograph system.

It is too soon to assess accurately the national viability of Autograph.

At first sight, it appears to be economically appealing to customers with low risk profile, which will increase the
customer base of the company. In addition to this, since is a voluntary program for the time being, it wont
affect the prices for customers with high risk; consequently, there is no immediate threat to lose this segment
of the market.

Additionally, we cannot deny the fact that by being the first company to offer this type of insurance policy, they
have created a new market in which they are pioneers and leaders. This is indubitably a very advantageous
position, even more if we think that they have already a market position and a reputation that endorses them.
As we mentioned before, this could attract specific segments of the population with the same predisposition to
embrace modern technologies.

Finally, Autograph has the potential to generate additional cross sales revenues as well, thanks to the data
mining and the additional set of services offered and unrelated to assurance.

However, Autograph has been tested in a very particular area (Texas) which have with a lot of specific
geographic and sociodemographic characteristics, that are not transferrable and do not reflect other states.
Therefore, a successful pilot in Texas wont necessarily translates into a successful business plan nation-wide.

The company has already done a huge investment in R&D to develop this product and to introduce it in Texas
and we can only assume that there have not been enough direct earnings to pay for this venture. If Progressive
wants to launch Autograph coast-to-coast, the company would have to ensure a heavy investment in marketing
to promote and consolidate this new product in the market. 3

In addition to all these expenses, we should not forget that the system has been tested only for eighteen months
in a limited geographical area. Therefore, Autograph has not been fully tested and it still can show several and
unexpected technical failures due to numerous factors (such as geography, weather, lack of IT infrastructure,
etc.); which eventually will cost more money in R&D, additional marketing costs and they even open the
possibility to legal liabilities. Finally, the company should consider the federal and states guidelines regarding
the insurance regulations and limitations, and that also cost money.

Taking all this circumstances in consideration, the risk of failure is very concrete.

To address this situation, it would be wise to avoid expanding Autograph nationally. Instead, we suggest that
the company enlarge the pilot to be able to measure more precisely and objectively a) the rate of acceptance,
tolerance and rejection and; b) the factors and criteria that influenced these decisions. To accomplish this goal,
Autograph should be launched in three more states where Progressive has already a strong presence. These
states should have different/opposites sociodemographic and geographical characteristics between them to
extrapolate the data obtained. Also, to guarantee that the sample is wide enough, it would be desirable that
the combined population of this states represents at least 10% of the US population.

Autograph has the potential to reestablish Progressive to his former industry underwriting record. However, it
would irresponsible to expanding Autograph nationally right away without further testing.