Progressive Insurance: An innovative force in American auto insurance

Ten-year 10 times stock series advance insurance(Progressive Insurance): An innovative force in American auto insurance

Progressive Insurance(PGR), may be relatively unfamiliar to most readers in China, But the company has a reputation in the industry as Berkshire’s biggest competitor. As Buffett’s favorite – Geico is already the most profitable company in the field of auto insurance, But PGR is the fastest-growing company in the industry in terms of premiums and profits. As of the end of 2019, The scale of forward insurance has entered the top three, Although still a long way from Geico, no doubt, It’s still a great company that deserves your attention.

Advance Insurance is an American auto insurance company founded in 1927. At the beginning of the company, Its business scope is mainly auto insurance business for blue-collar workers and property insurance business for car rental companies, The company relies on continuous innovation, Deepen cultivation in the auto insurance business, the past hundred years, Makes its auto insurance business grow gradually in the development. According to US SNL Financial data, Advance Insurance ranked third in market share of personal auto insurance business in 2019, Its premium scale has reached more than 30 billion US dollars, At the same time, the company’s market value has exceeded 55 billion US dollars., Generated nearly 8.2x returns for shareholders over the past decade.

Corporate business – an insurance company specializing in auto insurance

The auto insurance business has always been the core business of Advance Insurance, It is an important part of the company’s premium income, Although the company has begun to deploy property insurance business in recent years, however, the overall contribution of the property line business to premium income is still low. During 2015-2019, The premium income of the auto insurance business has remained above 95%; In terms of business growth, The compound growth rate of premium income over the past 5 years is 13%, Among them, the commercial auto insurance business has the fastest growth rate among all businesses, reached 17%.

 Build a moat – unique differentiated pricing power

In the U.S, According to the risk profile of the insured, the Personal auto insurance market is divided into the standard market and the non-standard market; in the standard market, mainly from, Composition of low-risk insured, Its user behavior characteristics are relatively good(If the driving violation rate is low, low risk); in non-standard markets, Mainly composed of high-risk insureds, This customer group consists of high-risk insureds(such as drivers with higher violation rates); Since in the standard market, Relatively low risk to the insured, Many insurance companies prefer to underwrite policies in this market. Non-standard markets due to excessive risk to the insured, Pricing is difficult, As a result, many insurance companies will not underwrite policies in this market, for a long time, No one cares about the insurance policy business in this market.

20 years after the company was founded, The company has completed a certain degree of capital accumulation mainly through the auto insurance business for blue-collar workers and the property insurance business for car rental.; With the addition of Peter Lewis in 1956, The company has transformed strategically, Gradually enter the non-standard market. Advance Insurance accumulates data by investing more capital and manpower, And gradually increase investment in technology and actuarial capabilities, Plus a long-term in-depth study of high-risk businesses, The company has gradually established a set of pricing strategies in high-risk market areas, And can accurately find low-risk groups in this market, Therefore, the company only needs to take relatively low risk in this market, to achieve higher profit returns. Advance Insurance has gradually established its core competitiveness in this market through unique pricing power, To ensure the continued growth of the company’s business for many years to come. Outstanding pricing power in the industry. And the rapid growth of the company is inseparable from the company’s former CEO-Peter Lewis: Peter Lewis during his tenure, Special focused on the power of technology, especially on data, The vast majority of the company’s innovative projects are before going live, require strict data validation, And the data-based business philosophy has been used to this day. It has also become an integral part of the company culture.

 Develop the standard market – further expand the business territory

in the late 1980s, As a large number of auto insurers enter the non-standard market, The originally small non-standard market is facing huge long-term competitive pressure, Advance Insurance targets standard markets. Due to the long-term accumulation of technology in the property insurance business, To ensure that the company’s comprehensive expense ratio has been maintained at a stable and reasonable level, And with excellent pricing power, The company quickly grabbed the market when it first entered the market, Promoted the rapid development of the standard market business. By 1994, Due to the lack of transparency of premiums at the time, Advance Insurance to Enhance Customer Experience, was the first in the auto insurance industry to launch an inquiry, Price comparison service, Users can inquire by using Advance Insurance, Price Comparison Service Get quotes from Advance Insurance and its competitors, Although in a short time, The insurance company will give some of the profits to the policyholder, in the long run, If a company can have excellent and accurate pricing power, Great benefits for long-term development, And Advance Insurance is one such company.

State Farm Insurance, one of Advance Insurance’s main competitors(State Farm), has High brand awareness and customer loyalty in the US, Although State Farm Insurance has maintained the highest market share in the auto insurance business, However, its pricing power is significantly different from that of Advance Insurance., We can see from the figure below, State Farm Insurance for the period 2014-2019, Only the comprehensive expense ratio in 2018 was lower than 100%, In other years, the comprehensive expense ratio exceeded 100%, This means that in the past 4 years, State Farm’s underwriting profit is in the red, Companies rely more on investment income to make profits; while forward insurance, During 2014-2019, Due to its excellent pricing power, The company’s comprehensive expense ratio has been maintained between 93%-97%, That is, the underwriting profit has always been profitable.

 Difficulty first and then easy in sales method – gradually build a diversified ecosystem

Before Advance Insurance entered the standard market for auto insurance, This field is already a relatively red ocean market, But with stable and reliable pricing power, Advance Insurance or Smooth Entry into Standard Auto Insurance Market, the company is in no rush to expand the market share, The company first decided to establish its own direct sales channel; in the next two years, The company has established telephone direct sales channels, Online direct sales channels. Through direct sales, Continuously improving the company’s pricing model for different customers, After the pricing model was perfected, it began to gradually expand the market through agents. Advance Insurance relies on long-term accumulated technological advantages, Achieved rapid growth in premiums for direct sales channels, By 2017, The premium income of personal auto insurance in the direct sales channel is the same as that of the agent, The proportion reaches 50%.

 Improve customer loyalty – further expand the product line

The competitiveness of Advance Insurance is not only reflected in its pricing power, but It is also reflected in the cultivation of customer loyalty, The company discovered through data research, Customers who hold multiple insurance products from a single company will have lower payout ratios and higher loyalty; Advance Insurance targets such customers, Also designed a corresponding customer acquisition strategy: Companies are not in a hurry to quickly grab the market, It also did not use the high-quality customers of competitors as the main source of customer acquisition, Because it usually costs more to acquire customers this way; The company manages the customer life cycle through, And tap potential customers in the market, especially for young customers, Deeply cultivating young customers. As the age of the potential customer group increases, The needs of these customers will also expand from single auto insurance to other types of insurance products.

To be able to provide customers with more types of insurance products, Advance Insurance has already started to deploy the home property insurance business as early as 1994. In the beginning, the company sold home property insurance as an agent, But sales stopped in 2002 for various reasons, until 2008, With Advance Insurance, launched Home Advantage Program, The company has entered a stage of rapid development in the home insurance business, By 2014, The company has accumulated more than 1 million customers through this project; in 2015, Advance Insurance made major acquisition decisions in 2015, Acquired property insurance company ARX for $890 million, With the completion of the acquisition, The company officially started self-operated property insurance business. With the customer and sales experience accumulated in the previous Home Advantage Program, the Home insurance business ushered in further expansion, Annual premium income for home insurance also increased from $610 million in 2015 to $1.55 billion in 2019.

long term, Advance Insurance Every Important Business Decision, Whether it is from the non-standard market to the standard market, Or increase customer loyalty by expanding product lines, The company continues to increase market share and retain customers in the highly competitive auto insurance industry, It is not a simple strategy of expanding market share through low premiums, Instead, rely on the company’s own long-term accumulated technical capabilities, Precise positioning of customers and excellent pricing power.

 Some thoughts on the insurance industry – don’t blindly grab the market

Compare the insurance industry, Unlike many other industries that rely heavily on market size, The core competence of the insurance industry lies in its ability to price risks. In the traditional and highly competitive industry of auto insurance, Under normal circumstances, it is difficult to have new entrants, However, PGR provides a more competitive pricing model for high-risk non-standard groups, Acquired its market in a very competitive field. Many insurers are pursuing customer growth, Blindly grabbing the market by driving down policy prices, But the company itself ignores the unsustainability of this way of acquiring customers. on the one hand, a Relatively low-quality customer base is obtained through low-priced policies. Customer loyalty is not high and easy to lose; on the other hand, Rapid customer growth due to low price strategy, To ensure the quality of claims service. Corresponding claims resource allocation also needs to be increased, Costs for insurance companies will further increase, The result is likely to be higher premium income, The company loses more, Shareholders lose more, And such losses will not be exchanged for continued competitiveness because of the size of the market.The growth history of Advance Insurance, is a very good example for fintech companies to gain a foothold in the traditionally competitive field; especially for insurance companies, Companies should focus more on pricing power, Building your competitive advantage, Deepen your field, Expanding your market with a competitive pricing model

By Cary Grant

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