{"id":14897,"date":"2016-11-16T13:53:41","date_gmt":"2016-11-16T18:53:41","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/getting-smart-how-progressive-is-deploying-data-to-win-in-auto-insurance\/"},"modified":"2016-11-16T14:22:38","modified_gmt":"2016-11-16T19:22:38","slug":"getting-smart-how-progressive-is-deploying-data-to-win-in-auto-insurance","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/getting-smart-how-progressive-is-deploying-data-to-win-in-auto-insurance\/","title":{"rendered":"Getting Smart: How Progressive Is Deploying Data To Win in Auto Insurance"},"content":{"rendered":"

\u00ad<\/strong><\/p>\n

On October 6 2016, John Sauerland, VP and Chief Financial Officer of The Progressive Corporation, explained how, less than three years ago, his teams were dealing with a \u201cdata explosion.\u201d So what did they do? \u201cWe literally had analysts trying to create mini server farms in the closets near their workspaces\u201d[1]<\/a> Since then, he told Wall Street analysts, \u201cwe got smart. We brought in the right technology. We’ve developed the talents internally.\u201d[2]<\/a><\/p>\n

Why did Progressive, one of the nation\u2019s largest car insurers, suddenly have too much data to process?[3]<\/a> The answer lies in a rapidly evolving technology that is changing the automotive insurance landscape: telematics.<\/p>\n

Auto Insurance Business Model<\/strong><\/p>\n

Automotive insurance provides drivers protection against financial liability that may result from property \/ physical damage. Such protection is purchased for a monthly fee, called \u201cpremiums\u201d). Successful models are driven by insurers\u2019 ability to:<\/p>\n

    \n
  1. Price risk accurately<\/em> \u2013 Insurance policy premiums are driven by the probability of a claim (an event upon which the insurer needs to refund drivers for damages). Assessing this probability accurately therefore allows insurers to price premiums at the lowest possible cost of coverage (and hence attract more customers through such cost competitiveness). Historically, insurers relied on factors such as demographics, age, past driving record (if any), residence location, and credit history, as proxies for driving prowess.[4]<\/a><\/li>\n
  2. Minimize policy acquisition expense <\/em>\u2013 After claims, advertising \/ channel fees (e.g. to agents) add about 20-30% of premiums to insurers\u2019 cost structure. The best insurers can acquire customers for lower costs, as well as reduce churn within their customer base (and hence extend premiums for free or with minor retention discounts. Increasing retention should increase customer lifetime values.<\/li>\n
  3. Minimize overhead per customer<\/em> \u2013 Premiums also cover administrative expenses, including customer support, claims management, and headquarter costs. Such costs typically experience scale economics. Larger insurers, therefore, exhibit lower overhead per customer due to this operating leverage.<\/li>\n
  4. Generate investment income<\/em> \u2013 A time-lag exists between receiving premium cash and dispensing cash for claims. Auto insurers can also generate a small percentage of income by investing this cash during the period.<\/li>\n<\/ol>\n
    \"Source:<\/a>
    Source: The Progressive Corporation, 2015 Annual Report<\/em><\/figcaption><\/figure>\n

    The Impact of Telematics<\/strong><\/p>\n

    Telematics uses digital technologies to analyze individual driving abilities and price risk accordingly. By leveraging driver data, insurers become more competitive by passing the savings to customers. Such technologies include GPS-tracking in mobile phones, as well as on-board device (OBD) dongles that plug into cars.[5]<\/a> In addition to the data for individual drivers, insurers can add to their overall data set to identify loss trend correlations with other proxy factors. Doing so helps to refine pricing across the entire customer base, rather than just the telematics penetrated base.<\/p>\n

    \"Source:<\/a>
    Source: Verisk Analytics<\/em><\/figcaption><\/figure>\n

    Introduction of Snapshot<\/strong><\/p>\n

    Snapshot is Progressive\u2019s response to telematics. Since first launching the program in 2011, it has \u2013 as of October 2016 \u2013 reached \u201c2 million policies rated using Snapshot fundamentals.\u201d[6]<\/a> Customers can achieve up to 30% in discounts.[7]<\/a> Using an average annual auto insurance premium of $1000 \/ policy suggests $2 billion of premiums benefit from the program: roughly 15% of Progressive\u2019s roughly $14 billion personal auto policy portfolio.[8]<\/a> [9]<\/a><\/p>\n

    Looking ahead, Snapshot appears to represent an important component of Progressive\u2019s futurel. In a March 2016 conference call, Chairman Glenn Renwick told analysts \u201cSnapshot\u2026continues to be something very important to us.\u201d[10]<\/a> Renwick also set a reference for Progressive\u2019s penetration, stating \u201cultimately, when we start talking about penetration numbers\u2026in the range of that 40%, perhaps even 50%.\u201d[11]<\/a><\/p>\n

    https:\/\/www.youtube.com\/watch?v=o_yezl1U39g<\/a><\/p>\n

     <\/p>\n

    Can Progressive reach its goal?<\/strong><\/p>\n

     <\/p>\n

    \"Source:<\/a>
    Source: The Progressive Corporation, 2015 Annual Report and Results Conference Call<\/em><\/figcaption><\/figure>\n

    Despite Progressive\u2019s ambitious targets, challenges to adoption exist. The following additional steps are positive; they will, however, require further evolutions in the future.<\/p>\n

      \n
    1. Device usage<\/em> \u2013 Historically, Progressive has asked customers to plug-in a dongle into their car for 90 days to evaluate their driving. Once the time expires, customers send the device back, so Progressive can re-use with other customers. This cumbersome processes has lowered adoption.[12]<\/a> Looking ahead, however, Progressive has announced two measures. First, it will launch a mobile version of the system, titled \u201cSnapshot 3.0\u201d later in 2016. Second, it has partnered with General Motors, whose new vehicles have built-in devices, reducing the hassle of an additional dongle.[13]<\/a><\/li>\n
    2. Privacy concerns<\/em> \u2013 Customers have traditionally been reluctant to share their driving and location information. At an industry level, customer awareness is growing.[14]<\/a> As Progressive launches its mobile version of Snapshot, which will leverage location just as a range of apps do (e.g. Uber, Google Maps), the insurer expects this concern to wane.[15]<\/a><\/li>\n
    3. Competition<\/em> \u2013 While Progressive is regarded as an industry pioneer, most other major insurers have launched their own telematics platforms. Examples include Allstate\u2019s Drivewise, State Farm\u2019s Drive Safe and Save, and Nationwide\u2019s SmartRide.[16]<\/a> Progressive\u2019s customer acquisition efforts, such as new product roll-outs and partnership with auto OEMs, should influence its ability to remain a leader.<\/li>\n<\/ol>\n

      Do you think Progressive can reach its goal…?<\/em><\/strong><\/p>\n

       <\/p>\n

       <\/p>\n

       <\/p>\n

      Word count: 798<\/p>\n

      [1]<\/a> The Progressive Corporation Investor Day Materials, October 06, 2016.<\/p>\n

      [2]<\/a> The Progressive Corporation Investor Day Materials, October 06, 2016.<\/p>\n

      [3]<\/a> The Progressive Corporation, 2015 Annual Report.<\/p>\n

      [4]<\/a> Dwight Hakim, \u201cInsurance telematics? What is it? Why we should care.,\u201d\u00a0Verisk Analytics, http:\/\/www.verisk.com\/visualize\/insurance-telematics-what-is-it-and-why-we-should-care.html<\/a>, accessed November 2016.<\/p>\n

      [5]<\/a> The Progressive Corporation Investor Day Materials, October 06, 2016.<\/p>\n

      [6]<\/a> The Progressive Corporation, FY2016Q1 Results Conference Call, May 06, 2016.<\/p>\n

      [7]<\/a> Barbara Marquand, \u201cComparing Drivewise, Snapshot and Other Usage-Based Insurance Plans,\u201d Nerdwallet, February 8, 2016, https:\/\/www.nerdwallet.com\/blog\/insurance\/comparing-drivewise-snapshot-usage-based-insurance\/<\/a>, accessed November 2016.<\/p>\n

      [8]<\/a> Value Penguin, \u201cAverage Cost of Insurance: Car, Home, Renters, Health, and Pet (2016),\u201d https:\/\/www.valuepenguin.com\/average-cost-of-insurance<\/a>, accessed November 2016.<\/p>\n

      [9]<\/a> The Progressive Corporation, 2015 Annual Report.<\/p>\n

      [10]<\/a> The Progressive Corporation, FY2015Q4 Results Conference Call, March 02, 2016.<\/p>\n

      [11]<\/a> The Progressive Corporation, FY2015Q4 Results Conference Call, March 02, 2016.<\/p>\n

      [12]<\/a> Nathan Golia, \u201cUsage-Based Insurance: 5 Reasons This Is the Year,\u201d Drive Factor, http:\/\/www.drivefactor.com\/usage-based-insurance-5-reasons-this-is-the-year\/<\/a>, accessed November 2016.<\/p>\n

      [13]<\/a> The Progressive Corporation Investor Day Materials, October 06, 2016.<\/p>\n

      [14]<\/a> \u201c2016 Usage-based insurance (UBI) research results for the U.S. consumer market,\u201d LexisNexis, <\/em>August 2016, http:\/\/www.lexisnexis.com\/risk\/insights\/insurance-telematics.aspx<\/a>, accessed November 2016.<\/p>\n

      [15]<\/a> The Progressive Corporation Investor Day Materials, October 06, 2016.<\/p>\n

      [16]<\/a> Barbara Marquand, \u201cComparing Drivewise, Snapshot and Other Usage-Based Insurance Plans,\u201d Nerdwallet, February 8, 2016, https:\/\/www.nerdwallet.com\/blog\/insurance\/comparing-drivewise-snapshot-usage-based-insurance\/<\/a>, accessed November 2016.<\/p>\n","protected":false},"excerpt":{"rendered":"

      Progressive wants to use digital data to lower your car insurance rates and transform the auto insurance industry.<\/p>\n","protected":false},"author":2646,"featured_media":14914,"comment_status":"open","ping_status":"closed","template":"","categories":[217,513,730],"class_list":["post-14897","hck-submission","type-hck-submission","status-publish","has-post-thumbnail","hentry","category-auto","category-car","category-insurance"],"connected_submission_link":"https:\/\/d3.harvard.edu\/platform-rctom\/assignment\/digitization-challenge-2016\/","yoast_head":"\nGetting Smart: How Progressive Is Deploying Data To Win in Auto Insurance - Technology and Operations Management<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/getting-smart-how-progressive-is-deploying-data-to-win-in-auto-insurance\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Getting Smart: How Progressive Is Deploying Data To Win in Auto Insurance - 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