Case Analysis

MBAM619.11Hongchul Jun, Yokesh Kumar,

Samantha Tang, Kenny Toop, & Ali Yazdi

PEST Analysis- Political• Proposition 103 (California)• Prior to the passage of Proposition 103 on November 8, 1988, the

California Department of Insurance operated under the McBride-Grunsky Insurance Regulatory Act. Under this Act, insurance companies were not required to file rates for approval except for health and life. California was considered an "open competition" state in which competition regulated the marketplace.

• Prop 103 changed landscape of how insurance companies compete and brought clarity to consumers

• State laws required most drivers of motor-vehicles to have auto insurance– Each state issues regulations specifying minimum liability coverages and other mandatory coverages

• State governments required standard carriers to underwrite non-standard risks under the Assigned Risk Plans (later called Automonile Insurance Plans)– State regulators set premiums for non-standard risk applicatns

PEST Analysis- Economic

• Car insurance premiums based on age, gender, marital status, vehicle information

PEST Analysis- Economic

• Unleaded Gas Prices, (Cents per gallon, NSA)

http://www.economy.com/freelunch/protected/cht/default.aspx?task=chart&s=XCPMGASUW%2EUS

PEST Analysis- Economic

• Total Auto Sales (Ths., NSA)

http://www.economy.com/freelunch/protected/cht/default.aspx?task=chart&s=XRVEH%2EUS

PEST Analysis- Social

• Progressive strived to reverse reputation of the car insurance industry

• Transform the human experience of dealing with customers providing low cost and high service

PEST Analysis- Technology

• “Prince of Smart Pricing”- using data to analyze risk more efficiently resulting in better pricing

• Express Quote Service- provided pricing clarity to customers in California

• Track metrics such as “loss report lag time” to track how efficient Progressive was in their policies

Industry Chain

Insurance Companies

Internal Agencies

Independent Agencies

GovernmentsRegulations

RemoteSelling

Drivers

Non-standard

Standard

Standard

Value Chain• Where can an insurer gain an edge?

M A R G I N

- Financial Policy - Legal - Organizational Form- Regulatory Compliance - Accounting - Incentive Systems

- Actual Training

- Actual Methods- Investment Practices

- Information Technology

- Actual Training

- New Product Development- Market Research

- Communication Technology

- Adjuster Training

- Settlement Procedures

- Data Gathering

- Rating- Underwriting- Investment

- Policy Issuing- Billing and Collections

- Claims Response- Loss Settlement- Loss Control

- New Policy Sales- Policy Renewal- Policy Re-pricing- Create Network of Independent Agents/Build up Internal sales force- Agent MGMT.- Advertising

FIRM INFRASTRUCTURE

HUMAN RESOURCE MGMT.

TECHNOLOGY DEVELOPMENT

PROCUREMENT

INBOUNDLOGISTICS

OPERATIONSOUTBOUNDLOGISTICS

AFTER-SALE SERVICE

MARKETING AND SALES

Industry Analysis

Source: http://www.census.gov/econ/census02/data/industry/E524126.HTM

This industry comprises establishments primarily engaged in initially underwriting insurance policies that protect policyholders against losses that may occur as a result of property damage or liability.

SIC Code - 6331Establishments primarily engaged in underwriting fire, marine, and casualty insurance.

Source: http://www.osha.gov/pls/imis/sic_manual.display?id=260&tab=description

Industry Analysis

Year

$

bil

lio

n

Market size grew from $21 billion in 1975 to $109 billion in 1993

The top 10 underwriters accounted for approximately 51% of the total market

Industry Analysis

Source: http://www.naic.org/documents/research_premium_by_LOB.pdf

Industry Analysis

Source: http://finance.yahoo.com/q/ae?s=PGR

Over the next 5 years (from current) the industry and sector growths are forecasted to be 10.8% and 9.1%, respectively

Industry Analysis

Standard Segment Nonstandard Segment

• Lower risk– Excellent driving record– Typically between the age of

20 and 70

• Higher risk– Previous accidents and/or

violations– First time drivers– Elderly– License previously suspended

The auto insurance industry generally breaks down their customers into two segments:

Data GatheringData Gathering

Inbound Logistics Operations Outbound Logistics Marketing & Sales After Sales Service

Rating

UnderwritingBiling & CollectionsPolicy Issuing

AdvertsingPolicy RenewalsNew Policy Sales

Claims ResponseLoss Settlement & Control

Traditional Auto Insurance Industry Value Chain

Underwriting margin : 2%

Immediate Response System•Quick settlement of claims (56% settled within 7 days)

•Attorney involvement reduced by 20%

•Reduced costs (e.g rental car,storage of damaged car etc.,)

•Satisfied customer promotes the company

Marketing & Sales

• Express Quote Service-compare price with other insurers

• AutoPro-Reduced underwriting costs through direct calling (15% to 5%)

• Walk-in service center

Data GatheringData Gathering

Inbound Logistics Operations Outbound Logistics Marketing & Sales After Sales Service

Rating

UnderwritingBiling & CollectionsPolicy Issuing

AdvertsingPolicy RenewalsNew Policy Sales

Claims ResponseLoss Settlement & Control

Progressive Auto Insurance Value Chain

Immediate response System

Process 30% more claims

Underwriting Margin : 7.4%*

*as of 2007 - Progressive annual report