Automobile Insurance Industry Analysis

Chace Estes, Benjamin Fieman, Greg Holt, Anthony Kohrs, Jasmine Olkh, Natalie-Rosanna Rebot

Car Ownership Growth

Number of registered vehicles increasing at stead rate, translating into growth of auto insurance industry.

PEST Analysis

NoneIncreased EfficiencyAllowed for faster communication between agents and headquarters & shorter claims processing times

Installed $28 million computer system

TechnologyChange

NoneAllowed for a more refined pricing system

Smart pricingPicking “better risks”Social Change

CompetitionGreater demand for auto insurance

Led to increased car ownership

Purchasing power increased steadily

EconomicChange

Long Haul Truck Insurance industry was a risky market

Forced Progressive to attack other markets.

Retroactive price roll-back of 20% and profit-cap. Caused Progressive to move partially out of CA market

Prop. 103 &Long Haul Truck Insurance

Political Change

ThreatsOpportunitiesImpact of Change

Nature of Change

Auto-Insurance Industry Analysis

• NAICS 52412: Direct Insurance (except Life, Health, and Medical) Carriers

• This industry comprises establishments primarily engaged in initially underwriting (i.e., assuming the risk and assigning premiums) various types of insurance policies (except life, disability income, accidental death and dismemberment, and health and medical insurance policies).

Auto-Insurance Industry Analysis

IndustryDetail

NAICScode

NAICS Title(and link to definition)

Establishments Revenue ($1,000)

Annualpayroll($1,000)

Paidemployees

52 Finance & insurance 395,203 2,197,771,283 264,551,401 5,835,214

524 Insurance carriers & related activities

172,299 1,072,784,074 92,230,010 2,327,306

5241 Insurance carriers 38,739 995,511,823 65,858,315 1,588,015

52412 Other direct insurance carriers

23,561 307,694,978 30,374,111 683,119

  524126 Direct property & casualty insurance carriers

20,903 299,236,173 28,655,057 639,751

Auto-Insurance Industry Analysis

Auto-Insurance Industry Analysis

Auto-Insurance Industry Analysis

DescriptionMarket

Cap P/E ROE %Div. Yield

%Price to

BookNet Profit

Margin (mrq)

Price To Free Cash Flow

(mrq)

Financial 5367.76B 6.503 16.284 6.888 1.372 13.259 3.116

Property & Casualty Insurance 320.34B 2.3 13.2 2.958 0.91 10.8 4.8

Allstate Corp. 11.54B 56.958 1.089 7.5 0.913 -17.187 NA

Hartford Financial Services Gr 3.77B NA -8.557 1.5 0.3 NA 2.471

Mercer Insurance Group Inc. 90.16M 8.492 8.013 2.1 0.713 4.496 -10.947

Mercury General Corp. 1.83B NA -1.648 7.1 1.082 -30.616 19.896

ProAssurance Corporation 1.69B 11.288 12.074 NA 1.265 18.531 -2179.25

Progressive Corp. 8.89B NA -1.53 0 2.109 4.545 NA

State Auto Financial Corp. 888.05M 79.61 1.328 2.7 1.126 -4.89 -45.136

21st Century Holding Co. 31.49M 3.739 10.555 18.1 0.395 -9.537 -2.916

General Flow of Automobile Insurance Industry

Channel of Policy Sold Underwriter

Internal sales forceIndependent agentsRemote selling methods

Background checkPremium determinedPolicy writtenPremium paid

Invest

ROE of 9%

Liability Coverage

Claims and OperationsImmediate Response System

$100

$9

$6.40 {File Claim

Call 1-800Fault

Action

Tow truckRental carAppraiser

Repair

EstimateBody shop

Return

Return carAdjust premium

Channel SalesAnd Service Rate/Quote Underwriting

Policy Issuance

Claims Processing

General Flow of Automobile Insurance Industry

Channel of Policy Sold Underwriter

Internal sales forceIndependent agentsRemote selling methods

Automobile Insurance Industry Value Chain

Background checkPremium determinedPolicy writtenPremium paid

Invest

ROE of 9%

Liability Coverage

Claims andOperationsImmediate Response System

$100

$9

$6.40 {File Claim

Call 1-800Fault

Action

Tow truckRental carAppraiser

Repair

EstimateBody shop

Return

Return carAdjust premium

Channel SalesAnd Service Rate/Quote Underwriting

Policy Issuance

Claims Processing

Progressive Value Chain

Inbound Logistics Operations Outbound Logistics Marketing and Sales After-Sale Service Customer

Premium paid by customer

Data Gathering

Customer satisfaction

Profit

Value Added

Better Bets

Rating, Underwriting and Investing

Competitive Premium

Policy issuing, billing and collections

New policy sales, policy renewals, advertising

Increased awareness and direct sales

Time value of money

Claims, train, recruiting, immediate response system

Inbound Logistics

After-Sale Service

Marketing and Sales

Outbound Logistics

Operations

Value Creating ActivitiesGeneral Flow of Progressive’s Value Creating Activities

Inbound Logistics Operations Outbound Logistics

Marketing and Sales

After Sales Service

Satisfied Customers!

Number Crunching

Billing andCollections

DataGathering

Value Creating Activities

• Inbound Logistics:

– Data gathering.

– Collecting and analyzing accident data.

– Personalities, lifestyles, and driving habits of risk groups.

– Extensive data gathering resulted in 11 age categories and 14,000 different premium options.

– Conservative investment strategy: most liquid portfolio of all major auto insurance companies.

Value Creating Activities

Operations

• Actuary Training

• Actuarial Methods & Investment Practices.

• Information Technology

• Rating, Underwriting, & Investing

Value Creating Activities

Outbound Logistics

• Policy Issuing

• Billing & Collections

Value Creating Activities

Immediate Response System

• Personal contact was made within 24 hours with over 75% of claimants.

• 56% of all claims were settled within 7 days.

• A toll-free 24 hour number was set up.

• Claim adjusters could write checks at the scene of the accident.

Value Creating Activities

Marketing and Sales:• Agent Training

• New Product Development & Market Research

• Communication Technology

• New Policy Sales

• Policy Renewal

• Policy Repricing

• Create Network of Independent Agents/ Build up Internal Sales Force

• Agent Management

• Advertising

• Introduction of the Express Quote Service in California in 1992

Value Creating Activities

After-Sale Service

• Adjuster Training

• Settlement Procedures

• Claims Response

• Loss Settlement

• Loss Control

Value Creating Activities

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

Loss ratio Underwriting expense Salaries and feesexpense

Net income/surplus

Progressive

0.00%10.00%20.00%30.00%40.00%

50.00%60.00%70.00%

Loss ratio Underwritingexpense

Salaries and feesexpense

Average netincome/surplus

Industry