Image source: Progressive

How Progressive Becomes the Rise of An Innovator in Insurance Industry

Progressive is great at underwriting insurance because of tight control over its combined ratio and less reliance on investment income, eventually leading to higher profit margins.
By Sue Mai | 8 min read
on October 3, 2020
Image source: Progressive

The Progressive Group of Insurance Companies (Progressive) is one of the most popular insurance brands in the US. The insurance juggernaut claims to be the third largest auto insurer and the number one motorcycle, specialty RV insurer in the country. Progressive rubs shoulders with firms like State Farm, Allstate, GEICO, and Farmers Insurance Group, and writes more than 13 million auto policies per year.

True to its name, Progressive is all about finding innovative ways to improve the auto insurance industry. It became the first auto insurer to offer drive-in claims service, and later the first company to allow clients to pay premiums in installments as opposed to annual payments.

Progressive Insurance: The Long-standing Empire

The company was founded in 1937, when Joseph Lewis and Jack Green set up Progressive Mutual Insurance Company to provide vehicle owners with security and protection. The pair were both lawyers and thought starting an insurance company might be a good investment. Fast forward 80 years and their bet seems to have paid off.

In the 1950s, successful growth prompted a move to brand new offices in downtown Cleveland. Following the death of Joseph Lewis in 1955, Jack Green became Progressive CEO and Joseph’s son Peter began the start of a fruitful career with the firm. He immediately looked for ways to further differentiate Progressive in the marketplace. His efforts led to the establishment of Progressive Casualty Company in 1956, a unit formed to write auto insurance for high-risk drivers.

corporate staff in Progressive headquarters
Image source: Statesman

Further growth and expansion in the early 1960s resulted in the formation of The Progressive Corporation in 1965. Peter Lewis was named CEO in the same year, and he held the top position for 35-years until Glenn Renwick took over in 2000. Renwick was succeeded by current CEO and president Tricia Griffith in 2016.

Progressive was the first major auto insurer in the world to launch a website. In a revolutionary move, the site was born in 1995, and by 1996 consumers could obtain comparison rates online. Just one year later, consumers were able to buy Progressive auto insurance policies online in real time.

Since 2018, the insurer has developed a thriving direct-to-consumer business, which is supported by a number of 24/7 digital tools, including: online policy service and management, online claims reporting, rate ticker (a comparison tool), independent agent locator, chatbots, and an instant quoting service.

Though best known for driving innovation in the personal auto market, Progressive also writes commercial auto and a number of other personal lines risks, including homeowners’ insurance. The firm sells insurance directly to the consumer or via independent agents. Progressive’s Agency business sells through more than 30,000 independent insurance agencies across the US.

One of the Strongest Insurance Franchises

Less Reliance on Investment Income

Progressive is a leader in the insurance industry, which shows in profit margins that have hovered between 6% and 10% in recent years. The company doesn't rely on investment income as much as its competitors -- and this is critical in the current economic environment, with the Federal Reserve recently announcing it will keep interest rates near zero through 2023.

In the trailing 12 months, Progressive has generated 2.5% of its total income from investment income. This compares favorably against fellow publicly traded property and casualty insurers Allstate, Chubb, and Travelers, which generated 5.5%, 9.9% and 6.7% of their income from investments, respectively.

Less reliance on investment income helps bolster Progressive's profit margins against these industry competitors as well. In the past 12 months, Progressive has a 10.9% profit margin, outpacing Allstate, Chubb, and Travelers, which have seen profit margins come in at 10.3%, 6.3%, and 5.8%, respectively.

Franchise agent from Progressive
Image source: Head & Malesis

Progressive and Allstate seem to have an edge on Chubb and Travelers, and that's for a good reason. Chubb and Travelers offer a wide array of insurance options, while Progressive and Allstate focus primarily on auto insurance. The auto insurance industry has benefited greatly from a drastic reduction in the number of vehicle miles driven due to COVID-19 restrictions, resulting in fewer claims -- and boosting the bottom line for these companies.

However, Progressive still has an edge on Allstate because it has proven to be more effective at the core of its business -- underwriting good insurance policies. So, what is it that Progressive does to generate high profit margins and rely less on investment income?

Tight Control Over the Combined Ratio

Combined ratio is a key insurance metric that measures a company's profitability and operating performance. Many insurance companies believe that the combined ratio is the best measure of success because it does not include investment income -- instead, it only includes profits earned through efficient management.

To calculate the combined ratio, add operating costs to insurance claims, and then divide that by the total premiums. A ratio below 100% means that the company is making an underwriting profit, while a ratio over 100% means that the company is spending more on claims and operating expenses.

Progressive has always targeted a combined ratio of 96% on new business, and its continuing business shows a combined ratio much lower than this.

In the second quarter, Progressive turned in a combined ratio of 87.7%, down from 90.4% from one year ago. The drop was helped by fewer claims due to a reduction in vehicle miles driven, as mentioned earlier. This is important, because fewer miles driven means that fewer claims are paid out -- which suggests that the current drop in the combined ratio may be temporary, providing a temporary boost to the company's bottom line.

But let's look at Progressive's fellow auto insurer, Allstate. While Progressive's combined ratio was 87.7% in the most recent quarter, Allstate posted a combined ratio of 89.8%, also down from the same quarter last year, when it was 95.8%. This shows that even with the drastic reduction in miles driven during the quarter, Progressive continues to lead.

One reason why Progressive has performed so well is its early investments in telematics – or electronic logging technology that helps it write better policies by using driver data. Progressive adopted telematics in its commercial auto policies initially through Snapshot, and the company has expanded this into its commercial insurance policies -- offering discounts to companies that share their driving data with the company. The company's early investments in telematics has paid off, which shows in its stellar combined ratio.

According to S&P Global Market Intelligence, Progressive hasn't had an annual combined ratio over 100 since 2000. Meanwhile, Allstate last saw a combined ratio over 100 in 2011. Progressive has also kept this ratio below 95 since 2016, which has helped top- and bottom-line growth. Over the past five years, the company has seen revenue grow 15% annually while earnings per share grew 25.5% annually. This has made investors very happy, as the stock price has grown at a compounded rate of 26% over five years.

Innovation: The Keys to Progressive’s Success

Progressive Insurance is a great example of a company that has truly aligned its business model and operating model to achieve true “operational innovation”. It goes beyond reducing defects or making processes more efficient within a company by completely reinventing the way a company fundamentally does its work. Similar to other great companies such as Toyota and Dell, operational innovation was at the core of what set Progressive apart from its competitors.

Key #2: Business Model

Like most other insurance companies, Progressive makes its revenues from premiums of insurance policy coverage and then reinvestments of those premiums in interest-generating assets. It has established itself as a pioneer in the auto insurance space and differentiates itself from high competition through:

Progressive vehicle on the road
Image source: Progressive

Pay-as-you-drive: Progressive is a big proponent of the pay-as-you-drive (PAYD) revenue model, where technology is used to track car mileage and driving habits. Promoted through Snapshot, their voluntary discount program, drivers are given the opportunity to save money on their car insurance by opting in. Please see the image to the right for PAYD service benefits.

Consumer convenience: Progressive is also known for providing easy access to car insurance “so consumers can reach it whenever, wherever and however it’s most convenient” according to their website.

Personalized consumer engagement through data analytics: Progressive has long been a superior underwriter and more recently has established advanced analytics capabilities to better understand and engage with their customers.

Key #1: Operating Model

In the 1990s, Progressive realized that the key to growth was finding the right customers and retaining them because the cost of acquiring them was so high. As a result of this new goal, they looked to how they could achieve it by innovating on their operations and completely changing the way they do business. The following initiatives have truly solidified this goal and place them at the forefront of the insurance industry:

Claims processing re-engineering: Within their operating model, Progressive focused on streamlining claims and improving the customer experience by introducing a new approach called the Immediate Response Claims Handling. This approach allowed claimants to get faster, hassle-free service 24 hours a day. Instead of the usual seven to ten days of wait time for an adjuster to check out your vehicle, Progressive aimed to reach customers within nine hours to examine their vehicles, prepare a damage estimate and at times write a check on the spot. This drastically improved claims customer satisfaction and reduced costs internally at Progressive. Cost reductions included removing the costs of renting a replacement vehicle for a day ($28 for over 10K claims each day), detecting accident fraud, reducing claim payouts since they were handed out earlier, and lowering operating costs due to less individuals handling claims. A few years later, Progressive installed a Concierge program that allowed customers to drop-off vehicles at a Concierge facility that handles the repair and provides a loaner vehicle to the customer. This has allowed Progressive to reduce claim values and remove the burden for the customer to deal with body shops.

Underwriting improvements: With the changes in their claims services, Progressive, who throughout history focused on high-risk drivers shifted its strategy to low-risk drivers by looking at credit ratings during the underwriting process to better segment and price risk their customers than competitors.

Progressive website
Courtesy: Progressive

Big data and analytics: Within the recent years, Progressive has made a big investment in their data and technology. Early on they installed Hadoop and have over time installed sophisticated analytics algorithms. With this, they are looking to understand the data from their Snapshot program and digital advertising in order to capture driving behavior and improve their advertising capabilities.

The operating model truly supports the business model of customer retention, satisfaction, and convenience:

  • The new claims processing services drastically improve the customer satisfaction and convenience while reducing costs.
  • The underwriting improvements position progressive to best provide exceptional service by truly understanding and targeting those that fit their low-risk profile.
  • The investment in big data and analytics fits in with the pay-as-you-drive model as it focuses and extracting value from their Snapshot device.

Progressive has been a true operations innovator through these initiatives that have driven cost and customer price reductions, and ultimately enabled them to be a leader in the auto insurance world.

Coping with The Pandemic Crisis

In the near term, though, the coronavirus will disrupt this process, as quarantine efforts have led to a stark decline in miles driven and claims. Progressive is offering rebates to customers as a result, and they expect most of the benefit to be ultimately given back to customers, but Progressive will still likely see a short-term boost to underwriting margins while social distancing efforts are in effect. Ultimately, though, they believe there is potential for the coronavirus crisis to restart the pricing cycle at a less attractive point, if gas prices remain low as the economy opens back up.

Kansas association of insurance agents
Image source: Press associate

Progressive’s second-quarter results were distorted by the impact of the coronavirus, which has had a net positive impact on the company’s underwriting profitability. Further, the investment losses the company endured earlier this year have mostly reversed. Still, nothing in the industry’s current situation alters its long-term view. There are signs that the pricing environment is growing more competitive.

From a top-line perspective, the second quarter looks good. Policy in force growth continues to slow in the agent channel but remained solid at 9% year over year for the quarter. The company is still benefiting from its ability to bundle and move upmarket, but there is a limit to the market share the company can take in this channel and expect growth to slow over time. Progressive did see policy in force growth in the direct channel pick up slightly from recent quarters to 13%.

However, there are signs in Progressive’s results that the pricing environment is growing more competitive. Competition is going to heat up over time, given the unusually high level of industry underwriting profitability in recent years. While the coronavirus will likely disrupt this process in the near term, it could ultimately act as an accelerant when conditions normalize.

For the quarter, the combined ratio for personal auto lines improved to 85.1% from 89.7% last year. The quarantine efforts associated with the coronavirus have materially reduced miles driven and accidents. While Progressive is offering rebates to customers, it appears the company is maintaining a significant portion of this benefit.

Bottom Lines

The auto industry had seen an uptick in costs in previous years, as a multitude of factors ranging from low gas prices to distracted driving pushed up claims. This compressed the underwriting margins, but Progressive and the industry have executed a more than sufficient pricing response. Progressive has fully moved past the issue, and underwriting margins are now at the high end of its historical range. However, they view this as a cyclical phenomenon and expect mean reversion over time. Pricing increases appear to be stalling, which would be the first stage of this process.

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