Progressive Strategy Paper

Progressive and Industry Analysis: As a fourth largest auto insurer in a highly concentrated industry, Progressive wrote majority of its premium through its independent agents even though direct sales increased from 5% in 1996 to 17% in 1999, possibly because of its technological innovation and launching of their website in 1993. Performing a 5+1 analysis of Auto insurance industry (Exhibit 1), the attractiveness of industry was found to be low. The basis of competition was price, as evident from the comparison quotes. Progressive intended to offer superior customer service and faster handling of claims than its competitors and established some competitive advantages through technological innovation. Given the maturity of industry, what firms could do all was to optimize and innovate their processes for better and faster service delivery while minimizing the price of their services. As observed in Exhibit 2, the most lucrative business segment for the firms was not the insurance but the investment. All top four insurance firms' total income has been contributed by the proceeds on investment they made. While the majority of the profit for all companies including Progressive came from investment income, their ability to invest was a function of their ability to write more policies. Upon doing a more granular analysis, we observe that Progressive's competitive advantage rested on its capacity to underwrite more policies and collect more premiums by offering flexible rates.

Despite being a concentrated industry, the competition was intense in the auto insurance industry. In order for a firm to establish competitive advantage, it needed to offer something extra at the lowest cost possible. Progressive's material capabilities lies in five major areas: 1) Ability to price risks precisely, 2) Ability to service better and process claims faster, 3) Offer customers comparison quotes, 4) Write pay per mile policies and 5) Make investments.

Loss ratio trends from 1995 to 1999 gives us compelling evidence that Progressive had the lowest loss ratio (Exhibit 2) with the exception of year 1999 (All companies' loss ratio has gone up in 1999) meaning the efficient handling of its claim substantiates the competitive advantage. The claim handling efficiency is further supported by the fact that by 1997, 57 % of time Progressive's claims handling was done in just 9 hours, up from 15% of the time in 1990 (Footnote 20, page 6 of the case). Low loss ratio can also be contributed to the ability of Progressive to price the risks more precisely than its competitors. Progressive's ability to factor diversity of risks leads us to believe that Progressive underwrote policies literally for every driver boosting its net premium as evident from its net growth of 53%( Exhibit 3) from 1995 to 1999. Designed to offer information transparency, Progressive seemed to benefit from its AUTOPRO service by bringing prospective consumers'