INSURANCE OPERATIONS RMI 4700
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7 Harvard Business School 9797109 WI Rev May 14 1998 Progressive Corporation Peter Lewis felt a sense of relief Bruce Marlow Progressive39s COO had just handed him the preliminary fourthquarter results and 1993 looked like a turnaround year Lewis who in 1965 had become head of the auto insurance company his father had founded in a Cleveland garage in 1937 had seen ups and downs during his 38 years at Progressive However 1991 and 1992 had been two of the roughest years ever In 1991 pro ts had dropped precipitously from 121 million to 57 million causing return on equity to plunge from 278 to 117 Recovery in 1992 had only been modest net income climbed to 846 million its weakest result behind 1991 in the last six years Exhibit 1 Analysts quipped that Progressive had become similar to its target customers high risk With revenues of 18 billion Progressive had grown from being the 48th largest auto insurer in the US in 1980 to the ninth largest in 1993 With an annual growth rate of 22 over the last ten years Progressive had greatly outpaced the industry39s annual growth of 87 Progressive had de ed the conventional wisdom that automobile coverage was the quotwasteland of the insurance industry quot Moreover while most carriers shunned drivers with a bad driving record Progressive eagerly embraced them Progressive s clients in the insurance parlance the quotnonstandardquot segment were drivers who could not get insurance with another carrier Until recently Progressive s growth had been highly profitable Over the last ten years Progressive had achieved an average underwriting profit for its core automobile business of 64 when most other insurers had considered auto insurance to be a profit drain The industry average underwriting profit over the period had been 64 Progressive had earned an average return on equity of 253 over the past decade and Progressive39s shareholders had been remunerated handsomely Over the last ten years Progressive39s stock had generated a return assuming dividend reinvestment of 287 as compared to an SampP 500 performance of 149 Exhibits 2 3 Changes in the automobile insurance industry however were threatening Progressive s historical position The large standard automobile insurers such as State Farm and Allstate had traditionally avoided the nonstandard segment In the mid19805 however Allstate had started to move aggressively into the non standard segment by underwriting more non standard clients Lewis wondered how he should respond The Automobile Insurance Industry Under state law most drivers of motorvehicles in the US were required to have insurance An automobile insurance policy consisted generally of three parts liability coverage which protected the policy holder against bodily injury and property damages to third parties in an accident caused by the policy holder collision coverage which paid for the damages to the policyholder s car and PhD Candidate Nicolaj Siggelkow prepared this case under the supervision of Professor Michael E Porter as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation Copyright 1997 by the President and Fellows of Harvard College To order copies or request permission to reproduce materials call l8005457685 or write Harvard Business School Publishing Boston MA 02163 No part of this publication may be reproduced stored in a retrieval system used in a spreadsheet or transmitted in any form or by any means electronic mechanical photocopying recording or otherw ise without the permission of Harvard Business School 797109 Progressive Corporation medical coverage which paid for the policy holder39s medical expenses stemming from accidents while driving his her own or other vehicles Each state had issued regulations specifying minimum liability coverages and other mandatory coverages such as uninsured motorists coverage which paid for damages caused by drivers with no auto insurance At the same time insurers offered many different options with respect to levels of liability coverage the amount of collision coverage and the size of deductibles In 1975 AM Best Co had estimated the total size of the auto insurance market to be 21 billion By 1993 the market size had increased to 109 billion Approximately 300 insurance companies were competing in the automobile insurance industry Exhibit 4 In most years industry average operating and claims expenses exceeded premiums Over the period 1984 1993 for every 100 that property and casualty insurers had earned in premiums they had spent 1064 on claims and operations Hence industry profits were due solely to investment income which resulted in an average industry return on equity of 9 over the last ten years In general broaderline insurance companies often offered automobile insurance as a loss leader to win customers to whom they could sell more profitable policies such as homeowners39 coverage Two segments had emerged in the automobile insurance industry during the 19505 a time in which the market had grown rapidly due to the general rise in living standards and automobile ownership Many insurance companies such as State Farm and Farmers Insurance had realized that 80 90 of all customers were easy to price based on only a few standard criteria such as gender age and miles driven to work This group became known as the standard segment To deliver a consistent message to their agents with respect to underwriting procedures and to reap scale economies in policy processing standard insurers avoided the remaining fringe of 1020 the nonstandard segment This segment comprised not only drivers with poor driving records but also drivers older than 65 drivers who did not speak English drivers of highperformance cars and young rsttime drivers with no insurance history The Standard Segment Competition in the two market segments was quite different Since the large standard writers considered their auto lines to be loss leaders competition in the standard segment was fierce Exhibit 5 Moreover since pricing was relatively easy competition in the standard segment focused mainly on reducing cost Besides automobile insurance many standard insurers offered other lines of coverages such as life and homeowners insurance Once a customer had signed up for a whole insurance package standard insurers generated their profits through customer retention Thus the pricing of automobile policies took renewal streams into account because customers tended to remain with each provider for a long time Automobile insurers had to choose the channels through which they sold their policies Some insurers the socalled direct writers relied on an internal sales force eg State Farm and Allstate others on a network of independent agents eg IT39I Hartford A third lowcost way was to dispense with sales agents altogether and offer policies mainly via remote selling methods such as mail or phone eg GEICO and USAA One could observe that the leading standard insurers each focused on one distribution channel In general insurance agents had the authority to offer insurance coverages subject to companymandated underwriting guidelines These guidelines prescribed the kinds and amounts of coverage that could be written and the premium rates that were to be charged for specified categories of risk Independent agents worked on a straight commission basis while internal agents were paid a salary coupled with a lower commission Total compensation for internal agents tended to be lower than for independents Tellingly in the last years independent agency writers had been on the retreat Over the period 19891993 agency writers had increased their premiums by a compounded annual rate of only 04 while the direct writers had increased their premiums by an annual 71 Exhibit 5 Progressive Corporation 797109 The NonStandard Segment In terms of growth the nonstandard segment had outpaced the standard market by a considerable margin Over the period 19881993 the nonstandard segment had grown at a compounded annual 108 while the private passenger market as whole had grown at an annual 60 Exhibit 5 The sizerof the nonstandard market was strongly in uenced by two factors which subjected the market to large uctuations the pricing of Assigned Risk Plans and the risktaking behavior of standard insurers The unwillingness of the large carriers to offer insurance to nonstandard clients coupled with legal requirements to have insurance in order to operate a vehicle had led state governments to take action starting in the early 19505 State governments under whose jurisdiction insurance regulation fell required standard carriers to underwrite nonstandard risks under the socalled Assigned Risk Plans later called Automobile Insurance Plans State regulators set premiums for non standard risk applicants and assigned applicants to standard insurers in proportion to the insurers standard underwriting For instance when a standard insurer wrote 20 of a state39s policies it had to take 20 of all nonstandard applicants which the standard insurers called their Residual Businessquot1 The general template adopted by Automobile Insurance Plans to determine premiums reflected the underwriting style of standard insurers since it utilized only a few criteria The pricing of insurance in Assigned Risk Plans ARPs remained a contentious issue Social advocates frequently endorsed subsidized rates eg for innercity markets while insurance companies opposed any subsidies In general ARPs did not pose a great competitive threat to non standard providers Since ARPs had to insure practically everyone their rates were considerably higher than providers who had the ability to pick and choose Moreover those customers who found ARPs to offer a lower premium were very likely to generate big losses for the Risk Plans As a result Risk Plan s members39 underwriting losses on the order of 20 30 were not uncommon Whenever rates in ARPs were adjusted the attractive market for nonstandard suppliers expanded or contracted In the 19805 for example the California ARP wrote policies in excess of 2 billion it had shrunk to 500 million by the mid 19905 Similarly 78 of all vehicles nationwide were insured under an ARP in 1978 in 1992 this number had dropped to 64 yielding a total Assigned Risk Pool size residual market of 6035 million One year later the total residual market had again shrunk by 12 to 5320 million Exhibit 6 The size of the nonstandard market also fluctuated as standard insurers decided to take on more or less risk on the fringe of their traditional market Consequently estimates of the non standard market varied from 12 to 19 of the total automobile insurance market For 1993 industry observers had gauged the nonstandard market size to be 18 billion Industry structure was very fragmented In 1993 about 125 independent specialty companies and more than 25 subsidiaries of large insurance companies operated in the nonstandard market Of these approximately 40 operated on a nationwide basis Unlike standard insurers nonstandards focused almost exclusively on automobile lines and were not engaged in homeowner or life insurance By the mid 19805 the nonstandard automobile insurance industry had acquired a somewhat sleazy reputation It was dominated by small local operations whose reputation for not settling claims often put them at the top of consumer complaint lists The high premiums and modest entry costs in this segment low fixed costs had traditionally attracted numerous competitors Some independent agents were willing to represent providers even if they had weak financial ratings such 1 Assigned Risk Plans as described above existed in 42 states Seven states had Reinsurance Pools or Joint Underwriting Associations which essentially pooled all nonstandard applicants who bought a policy with a standard insurer The standard insurers shared all revenues and costs of these customers while prices were set by state insurancecommissioners In Maryland nonstandard insurance was available39to all applicants through a stateoperated fund 3 797109 Progressive Corporation as a B from AM Best the industry s leading rating agencyz Unreasonably low premiums could allow a company to garner quickly volume with pricesensitive customers Since payouts due to accidents always trailed incoming cash from premiums especially larger claim payments that could be dragged out for some time uneconomic pricing was only apparent with a delay Many small non standard insurers eventually became insolvent however because they had not set aside sufficient reserves to cover losses All nonstandard insurers relied on independent agency forces to sell their policies Hence their underwriting costs tended to be higher than those of standard insurers who either employed internal agency forces or underwrote policies over the phone Exhibit 4 At the same time the typical nonstandard insurer did not try to build up a brand name but relied on the efforts of its independent agents to promote its services Nonstandard drivers had higher accident risk and generated a larger number of claims They tended to miss payments more frequently moved more frequently and canceled their policies more often Policy duration was under 18 months on average and often only half a year Since premiums were much higher than in the standard market customers also normally chose lower liability levels often the legal minimum than in the standard segment Thus liability coverage levels of 25000 were common in the nonstandard segment while standard customers usually chose a coverage of 300000 Lastly the nonstandard customers differed in selfperception Until the actual contact with an agent a customer frequently did not realize that he she was a nonstandard risk Furthermore experience had shown that in shopping for automobile insurance customers seldom solicited more than three bids from different companies Hence it was important for an insurer to get onto the mental bid listquot of customers who were searching for a new insurance carrier Activities of a Typical Automobile Insurer The set of activities involved in competing in automobile insurance is shown in Exhibit 7 The most important activity in the category of inbound logistics was the gathering of information about customers their risk characteristics and other factors that correlated with the likelihood of accidents This data served as input for the pricing decisions and the new product development processes described below The operations category encompassed three main groups of activities rating underwriting and not directly related to the insurance function investing First the gathered data had to be analyzed and converted into rating schemes These rating schemes allowed the matching of a particular customer profile with a premium It was the job of the actuaries to find which of the collected data variables best predicted the likelihood of future accidents and to establish a commensurate premium for each possible customer pro le The actual matching process ie the evaluation classification and pricing of an application was called the underwriting process Lastly since insurance companies received premiums before they had to pay out loss redemptions for any given polity they were able to invest the premiums in the interim For most auto insurers the investment income was a crucial element of profitability as noted above Support activities for the operational side of the business included the training of actuaries the establishment of actuarial methods how to elicit the best predictions from the collected data and investment practices that would frequently determine the pro tability of the entire business 2 AM Best rated insurance companies on a scale from A to F 4 Progressive Corporation 797109 Outbound logistics consisted of two main sets of activities policy issuing and billing and collections Once the underwriting process had been completed ie the correct premium computed the actual policy had to be printed and sent to the insured party a further copy was usually sent to the originating sales agent and a copy was retained in a branch or central office Billing and collections was concerned not only with collecting monthly premiums but also with keeping track of payments which would arise from deductibles that were part of policies The marketing and sales category spanned activities dealing with new policy sales policy renewals and advertising As noted before there were different channels through which policies were sold internal agents independent agents and direct selling via the telephone Since independent agents usually offered policies from many carriers agent management was a vital undertaking for agency writers Once a customer had been obtained customer retention became a crucial factor Thus shortly before policies expired customers had to be informed and policy renewals initiated Similarly whenever the risk characteristics of the customer changed eg the customer bought a new car the policy needed to be repriced Finally this category included advertising activities which raised brand awareness with customers The sales activities were supported by agent training that familiarized agents with the insurers underwriting guidelines and rating procedures To speed up the application process communication links between the agent and the insurers underwriting departments became critical Moreover in order to compare premiums with competitors many insurers had build up considerable market research capabilities Lastly expertise had to be developed for new product introductions New products included the underwriting in new geographic areas and of new customer groups The activities in the aftersale service category brought the insurance company in close contact with the customer In the eyes of the customer the processes of claims response and loss settlement were the most important functions of the insurance carrier Each insurance company had to establish a system of claim reporting by the customer It had to be determined whom the customer was supposed to call eg the agent or the insurance company The role of the contacted party had to be specified for instance was the contacted person authorized to send a tow truck a rental car or an adjuster the person who would put a value on the damage In addition the nature of the next response of the insurance company had to be determined eg over the phone or faceto face Finally the process and speed of settling claims had to be managed and control mechanisms put into place Support activities in the service category included the recruiting and training of adjusters In addition company procedures had to specify the role and the competencies of the adjusters eg whether the adjuster was authorized to write a check on the scene of the accident On the level of the firm infrastructure several activities spanned the entire value chain As the insurance industry was highly regulated regulatory compliance played an important role eg premium increases had to be submitted and approved by state insurance commissioners Similarly since many insurance claims involved lawsuits every insurance carrier had built up an elaborate legal support system that would for instance negotiate outofcourt settlements Lastly each insurance company had to decide on a particular organizational form eg organized along geographic lines or strictly along functional lines and on contractual arrangements for its employees and top managers eg incentive contracts that would emphasize growth or pro tability Competitors State Farm State Farm was by far the biggest player in the automobile insurance industry with a market share of almost 20 Exhibit 4 The State Farm Group led by State Farm Mutual Automobile Insurance Company offered multiple lines of property casualty life and health insurance throughout the US and Canada through a costefficient inhouse agency force3 The 3 Information on State Farm Group based on 1995 Best 395 Insurance Reports PropertyCasualty 797109 Progressive Corporation company enjoyed an A superior rating by AM Best which re ected State Farm39s high capitalization and its conservative operating strategies State Farm s exclusive agency force numbered about 17500 Agents were capable of crossselling all products including commercial lines for small to mediumsized accounts Business with policy holders was handled via regional offices that were located throughout the US In addition approximately 1000 claims offices had been established in the principal cities throughout the country Almost 28000 fulltime salaried claims employees and supervisors were working out of the claims and regional offices As a mutual company State Farm did not pay stockholder dividends which had helped considerably in generating policy holder39s surplus the insuranceindustry s equivalent to equity Over the period 19901993 State Farm had been able to increase surplus from 179 billion to 213 billion A frequently used measure of capitalization of insurance companies was the premium leverage premiums surplus State Farm s premium leverage had increased only slightly from its very low level of 137 in 1990 to 142 in 1993 With a highly liquid 13 billion stock portfolio and strong operating cash ows averaging 25 billion annually State Farm s liquidity position was excellent as well Allstate The Allstate Insurance Group led by Allstate Insurance Company was primarily engaged in property casualty and life insurance These two business segments made up 85 and 13 of total revenues Allstate Insurance Company had been established in 1931 by Sears Roebuck and Co and developed into the second largest propertyliability insurer and the 20th largest life insurer in the US In preparation for an eventual spinoff by Sears Allstate was incorporated in 1992 In June 1993 Allstate sold 199 of its outstanding common stock in the largest recorded initial public offering The IPO provided net proceeds of 229 billion Sears continued to hold the remaining 801 of the stock which it planned to sell by mid1995 Allstate was rated A re ecting its strengthened balance sheet after the IPO capital infusion which helped to offset the 25 billion loss that was incurred in the wake of Hurricane Andrew in 1992 Its policy holders39 surplus increased from 47 billion in 1990 to 71 billion in 1993 The capital infusion also helped to reduce the traditionally aggressive premium leverage from 300 in 1990 to 225 in 1993 Like many other propertycasualty insurers Allstate recorded underwriting losses in most years and relied on its investment income to generate profits In 1993 Allstate39s total underwriting losses summed up to 239 billion Yet due to its investment income of 354 billion Allstate achieved a total aftertax operating income of 115 billion In its 1993 Annual Report Allstate identified as its core competenciesquot its brandname its exclusive sales force its experience with other distribution channels and its proprietary data base Allstate had more than 20 million customers and enjoyed high recognition for both its brand name and its slogan You39re in Good Handsquot Products were marketed through a variety of distribution channels with the core of its distribution system being a broad based network of approximately 14600 fulltime Allstate agents in 9300 locations in the US and Canada The agents operated out of neighborhood of ces and 130 sales of ces located in Sears retail stores In addition to its full time exclusive sales force Allstate39s policies were sold by some 1900 independent agencies in rural areas Allstate wrote 93 of its business through its own agency force which was characterized by a low turnover of 5 in 1992 and an average tenure of 13 years In 1993 Allstate increased its spending on education for its agents stressing in its training programs the need to move towards longterm customeragent relationships Agents were capable of cross selling other products to policy holders including homeowners insurance commercial lines and life insurance Allstate39s life insurance policies were also distributed by financial institutions specialized brokers and direct marketing techniques Its proprietary database of 58 million SearsAllstate households enabled Allstate to profile and market directly to additional potential customers GEICO The Government Employees Insurance Company GEICO was founded in 1936 by Leo Goodwin based on two insights First federal state and municipal employees had fewer accidents than the general population in addition to having a stable income Second by cutting out the middle man ie the policyselling agent one could sell auto insurance at a significant discount Hence Goodwin started selling policies directly to his target customers via mail and telephone The concept proved to be successful and GEICO grew rapidly In 1976 however because of 6 Progressive Corporation 797109 miscalculations of its claims and weak cost accounting leading to persistent mispricing GEICO was on the brink of insolvency Learning of GEICO39s woes and believing that its basic business concept was still sound Warren Buffett began investing 50 million Over the years Buffett s Berkshire Hathaway increased its stake in GEICO to 484 GEICO continued to grow and achieved excellent operating results For instance its 1993 pretax return on revenue of 11 was more than 25 times better than the comparable industry return As a result GEICO s stock appreciated greatly In 1993 Berkshire39s stake in GEICO was worth more than 15 billion By 1993 the GEICO Group had set up four companies GEICO which was still selling policies only to quotpreferredquot ie lowrisk government employees and military personnel 70 of all premiums GEICO General Insurance Co which sold to preferredrisk applicants other than government employee and military personnel 25 GEICO Indemnity Co which wrote standard risk private passenger automobile and motorcycle insurance and finally GEICO Casualty Company a subsidiary of GEICO Indemnity which wrote nonstandard private passenger automobile insurance GEICO still relied primarily on its directresponse marketing methods through which customers could buy policies directly through the mail or by calling a tollfree number Military and militarybase civilian personnel were served primarily through 94 commissioned contract agents These agents were a major source of new business for GEICO Indemnity and GEICO Casualty acquiring nearly 64 of new auto business for these divisions In total these few agents generated 13 of GEICO39s new auto business While GEICO s growth as a whole had stalled from 1992 to 1993 it actually saw its total volume of premiums shrink GEICO Indemnity s including GEICO Casualty39s net premiums had grown in both years by 143 and 151 respectively Moreover in GEICO39s 1993 Annual Report CEO OM Nicely singled out these two divisions as future engines for growth He promised to invest in training and information systems so that new business for these divisions could be handled on the phone and not only by its commissioned contract agents Since its direct response channels gave GEICO underwriting expenses which were among the lowest in the industry GEICO had become a feared competitor in every market Exhibit 4 Progressive Corp Early History5 The Progressive Insurance Company was founded on March 10 1937 by Joseph M Lewis and Jack H Green The company originally focused on offering automobile insurance to bluecollar workers and property insurance on cars financed by local finance companies Between 1945 and 1955 Progressive39s net premiums written increased from 300000 to 4500000 By that time Progressive had developed into a broader underwriter relying on a small network of independent agents An apocryphal story has it that in the mid19505 Peter Lewis and some of his colleagues discussed several times over lunch the many calls they received from customers whose policies had been canceled and who were looking for a new insurer It was decided to focus exclusively on this emerging nonstandardquot segment In 1965 Lewis discovered that the president Jack Green was trying to sell the company Lewis organized a group which eventually bought the company for 4 4 In 1996 Buffett acquired the remaining outstanding shares of GEICO thus increasing his staketo 100 5 This section is partially based on Progressive Corporation Aquot Harvard Business School case no 9381088 revised 281 797109 Progressive Corporation million In the re named Progressive Corporation Lewis became president CEO and main equity holder with a 26 stake in the company Progressive s Activity System6 How was Progressive able to achieve consistently an underwriting pro t with its highcost highrisk customer group that no standard insurer dared to underwrite7 Clearly premiums with surcharges of 50300 over the standard premiums were part of the story yet premiums were bounded by the default choice of the staterun assignedrisk insurance pools For the effects of higher premiums on the cost and revenue structures of typical nonstandard and standard policies see Exhibit 8 Inbound Logistics and Operations Progressive had realized that if it were able to pick quotbetterquot risks out of the nonstandard market it would be able to offer a lower premium than rivals attract the particular driver and yet still incur lower losses Since the 19505 the company had invested far more heavily than its competitors in collecting and analyzing accident data With the help of a database which it had developed on the personalities lifestyles and driving habits of high risk groups Progressive was able to price policies to match the underwriting risk Progressive separated drivers into far more risk categories than did its competitors and set a wider variety of premiums For instance in motorcycle insurance most insurers considered only the size of the motorcycle but did not consider the age of the rider Progressive began with two age categories under and over 25 years and subsequently expanded it to 11 age categories COO Bruce Marlow a Harvard MBA elaborated quotWe know how this zip code is different from that zip code how a fourcylinder Ford is different from an eightcylinder Ford what39s the difference between a 38year old single married widowed We39re looking for opportunities where the market price is by some degree above where the cost structure isquot8 In a typical community Progressive offered more than 14000 different premiums based on driving record vehicle year make and model driver age sex marital status residence and other factors Not surprisingly in 1992 Fortune magazine called Progressive The Prince of Smart Pricingquot9 In addition to using a finergrained pricing system Progressive also sought to offer a wider array of payment plans limits of liabilities and deductibles than its competitors With respect to its investment practices Progressive pursued a very conservative investment strategy According to analysts Progressive possessed the most liquid portfolio of all major automobile insurance companies Its 1993 portfolio consisted mainly of short term and intermediate term investmentgrade fixedincome securities 766 A relatively small portion was invested in preferred and common equity securities 163 The remainder of the portfolio was invested in long term investment grade fixedincome securities 28 and noninvestment grade xedincome securities 43 see Exhibit 9 Information and Communication Technology The problem of agents39 mispricing policies was identi ed as a major cost driver Once an incorrect premium was quoted large costs could ensue One way to decrease these costs was to focus on quicker application processing at headquarters where policies were doublechecked In 1989 Progressive began to install a 28 million computer system and nationwide voice data system which allowed faster communication between 6 For reference see Exhibit 7 7 The only drivers Progressive rejected were recidivist drunken drivers motorists who had lied on insurance applications and people who had staged accidents to collect claims 8 Financial World 112790 39 9 Fortune 32392 8 Progressive Corporation 797109 agents and headquarters and shorter processing times for both applications and claims Moreover it decreased operating expenses For instance by speeding up the claims processing the new system enabled local adjusters to process 30 more claims The claims processing network dubbed Progressive Automated Claims Management PACMan allowed local agents to download information into the central computer from their terminals Previously agents had to mail reports between offices and corporate or divisional headquarters which had been a slow and cumbersome process Marketing and Sales Progressive relied on a large network of independent agents over 30000 which provided broad coverage without the large fixed costs of running an internal sales force With respect to agent management Progressive stood out from the rest of the nonstandard segment The company used its own sales force to call on agents a strategy which management believed was unique in the industry Sixty sales representatives called on independent agents to explain the company39s complex rating systems10 During the discussions around California s Proposition 103 in the late 19805 see below Lewis had vehemently defended the free market arguing that insurance markets were characterized by tough competition As a response he frequently heard that even though in every market there were many insurers the pricing was often so opaque that consumers faced high search costs when they tried to shop for the best offer Taking this criticism to heart and realizing a market opportunity Progressive introduced the Express Quote Service in California in October 1992 The customer could call a tollfree number and was interviewed for about 10 minutes to tailor the insurance pro le A list of companies and rates was then mailed to the customer for 25 Even though independent agents performed a similar service they were not able to quote premiums from companies that used exclusive agents or dealt directly with customers eg Allstate and State Farm The system received widespread praise from consumer rights advocates For instance Ralph Nader a Princeton classmate of Lewis comparing the timely and tailored consumer price comparison with the available technology of books written on shopping for car insurance pronounced It s the difference between a tricycle and a Boeing 747quot11 The Express Quote Service in California was supposed to pay for itself since at the time Progressive did not write any new policies in the state In subsequent years however Progressive expanded the program to other states namely Texas Florida and Ohio in which it was actively underwriting policies Similar to Express Quote the consumer could call a tollfree number 1800 AUTOPRO and Progressive personnel on the line performed a sales pitch about the carrier quoted a premium and provided a free comparison with the rates of other carriers in the state For instance in Florida premiums for Allstate State Farm Nationwide and Progressive would be quoted Despite heavy regulation premium differences could be tremendous A study conducted in Florida which compared rates quoted by State Farm Allstate GEICO Nationwide Progressive and Prudential found average price ranges for a year s worth of insurance in excess of 90012 If the prospect decided to switch to Progressive he or she was offered the option of opening the account with a local independent Progressive agent or directly with the company over the phone Through this program Progressive hoped to write more business directly in order to reduce underwriting costs Progressive was able to write the policies directly at lower cost because agents received only 5 commission on AutoPro referrals compared to 15 commissions when agents wrote business on their own After the initial underwriting agents owned the business and received their regular renewal commissions Despite this agents were upset with Progressive s foray into direct underwriting The ensuing 10 Progressive Corporation A p 10 11 New York Times 10492 12 This price variation could be found in many other states as well A study performed by the Ohio Department of Insurance revealed for instance a 3100 difference between the Insurance Cos of Ohio 843 and Allstate Indemnity 3964 for a 22 yearold single male living in Cleveland The Plain Dealer 112893
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