Progressive Insurance: Flo is an Operational Genius
Progressive Insurance is a great example of a company that has truly aligned its business model and operating model to achieve true “operational innovation”. Operational innovation, 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. With increased competition in the mature U.S. auto insurance space in the 1990s, Progressive was able to improve its revenues from $1.3 billion in 1991 to $9.5 billion in 2002 through operational enhancements in its claims and underwriting areas that cut costs and allowed them to offer lower prices and better service.
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:
- 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.
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.
- 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.
Business and Operating Model Alignment
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 the auto insurance world.
Sources:
- https://www.progressive.com/newsroom/article/2014/april/informationweek/
- https://hbr.org/2004/04/deep-change-how-operational-innovation-can-transform-your-company
- http://www.valueinvestorsclub.com/idea/Progressive_Corporation/2738
- https://www.turn.com/blog/progressive-insurance-taps-turn-to-manage-their-flo-of-data
- https://www.pillsburylaw.com/siteFiles/Practices/4F0F2B338FD45F4A6263526F2758E654.pdf
- http://www.cio.com/article/2686835/data-analytics/progressive-insurance-uses-data-analytics-to-fine-tune-ad-strategy.html
Interesting post! I was not familiar with Progressive’s unique value proposition to clients as a car insurance company. What I found most surprising was the creation of the Immediate Response Claims Handling, which aims to help customers within 9 hours. The potential challenge I see with this feature of their operating model is scalability. In the event of a natural disaster, for example, how can the insurer keeps its promise of getting to every customer within a short time period? Having less individuals working in the claims department could exacerbate the problem.
On the other hand, a great benefit to this program is that replacement vehicles are used for smaller periods of time since customers have their cars fixed much quicker- this higher “churn rate” probably reduces the amount of car inventory they need to have in each of their offices and the costs to carry it.
Great post, Vanessa! Seems like Progressive has done a great job aligning its business and operating models. Your post made me think of a few questions:
1) Progressive is clearly at the forefront of improving the customer service experience (i.e., the claims re-engineering you mentioned above) – I also know that Progressive is pioneering the idea of insurance premium transparency by letting customers see (through Progressive’s platform), how Progressive’s quotes compare to those of other leading companies. The hope, I imagine, is that i) Progressive’s quotes are lower or ii) that the customer appreciates Progressive’s honesty. I’d be curious as to whether this customer service idea is actually helping Progressive gain market share, or whether they’re sending business to competitors
2) Are there any privacy concerns with the pay-as-you drive model? I imagine some people might be wary of letting Progressive track their travel data all the time
3) Safer drivers command lower premiums (and thus lower revenue for Progressive), so I’d be curious to see whether the decrease in payouts from accidents actually outweighs the higher premiums that Progressive left behind with its more risky drivers
No need to respond to any of these! Very thought provoking idea!