MARKETING
Progressive's careful blend of strategic "ingredients"
is key to profitable growth
By Elisabeth Boone, CPCU
Glenn M. Renwick became Progressive Insurance's president/CEO in January 2001.
It's long been a mantra of American business that if you're not growing, you're standing still--easy prey for your wilier and more aggressive competitors. Growth for growth's sake, however, has produced some spectacular failures, from the dot.com flameout of 2000 to the crash of energy giant Enron late last year. The relentless drive for growth likewise has taken out some big players in the property/casualty insurance industry, or at least has forced them to stand still long enough to figure out what they're doing.
At Progressive Insurance, the country's largest writer of private passenger auto insurance through independent agents, a period of stock taking has shaped a renewed focus on growth that is measured and sustainable rather than aggressive and potentially perilous.
In an exclusive interview with Rough Notes, Glenn Renwick, who became Progressive's president/chief executive officer in January of last year, shared the key ingredients in his company's new "recipe for success"--its blueprint for profitable growth.
The longest soft market in modern history began to harden in late 1999, at just about the same time as the country's longest peacetime economic expansion started to slide toward recession. It became unpleasantly clear that in more ways than one, the long party was just about over.
Steering a new course
"By late 1999, we had started to experience very rapid increases in loss costs, and we also were beginning to see the impact of some of the decisions we had made in pricing and in our individual management of both our direct and agency businesses," Renwick says. "We could see that things were coming to a head and that we were facing some tough challenges." To address those challenges, Progressive's management focused on three key areas: organizational structure, pricing, and claims handling.
"In terms of our organizational structure, we recognized the need for clearer lines of authority in the management of our agency and our direct businesses," Renwick explains. "We believed a great deal more accountability would be appropriate. So the people responsible for the agency business were given a very clear set of objectives, and they focused 100% of their energy on how to make that the best possible business they could, and the same approach was followed for the direct business."
Heading up the agency operation is agent business group Vice President Bob Williams, a 22-year Progressive veteran. "His charge is to make our products and services as valuable as possible to the more than 30,000 independent agencies who represent us, and I think he's done a tremendous job of communicating to agents what we stand for, how we can help them, and our commitment to bringing them technology that makes it easier for them to do business," Renwick notes. "From an agent's perspective, I think technology has changed a great deal over the last two years. We feel very strongly about being a leader in technology and allowing our agents to have as much meaningful information as possible. I think that distinguishes Progressive in the marketplace, and I believe commitment to technology is starting to separate companies like ours from the pack."
Matching rates to risks
Like many insurers, Progressive had to face the fact that its rates were no longer adequate to support the mounting costs of handling and paying claims. "We found ourselves underpriced relative to what we saw as rapidly emerging trends," Renwick comments. "I like to think we were among the first companies to recognize these trends, and I take pride in the fact that we were willing to call it the way we saw it. We have systems in place to identify trends early, and a culture that encourages an almost fanatical focus on measurement."
Progressive's rate adjustments, Renwick says, produced predictable results. "Obviously our actions were a damper on growth, at least from a unit count standpoint. We struggled with that through 2000, and as 2001 came to a close we saw many more companies take action on rates in response to the same trends we identified," he remarks. "Now the whole market is moving in the same direction."
Another key action Progressive took was to shift its auto policies from a 12-month term to six months. "I strongly believe that we should try to make our rates as accurate as possible at all points in time," Renwick says. "When losses and loss costs take off the way they did from late 1999 into 2000, you're in a difficult position. You've sold a contract based on one set of assumptions, and now all your underlying costs are changing but you're unable to do anything about it. Obviously, going to a six-month policy gives us more flexibility to change. Using a shorter policy period increases our likelihood of making our rates accurate over as much of the policy term as possible."
Among the negative effects of offering six-month policies are higher transaction costs and customer dissatisfaction, Renwick notes. Further, "There's data to support the assertion that retention rates are higher for 12-month policies. Our challenge is to find the right balance between maintaining accurate rates and giving customers what they want, which is continuity of care and relatively few transactions such as renewal."
To a considerable extent, Renwick believes, auto rates over the last two years have been driven by trends in some of the large no-fault states, specifically Florida and New York. "Unfortunately, we have to point to fraud as one of the drivers of loss trends," he remarks. "There was nothing else to account for the growth in underlying medical costs we were seeing. We were successful in achieving meaningful PIP reform in Florida, but thus far we haven't seen the same kind of meaningful reform in New York."
Another troublesome issue for private passenger auto carriers is the concept of diminished value. A recent ruling by the supreme court of Georgia, Renwick explains, states essentially that a vehicle that has been damaged in an accident and is subsequently returned to its pre-accident condition may still have a claim that is not fully satisfied; that is, it has a diminished value. Such claims are difficult both to identify and to adjust, Renwick comments, "but it's really an issue of coverage. We have to know what we're covering. If the motorists of Georgia will have diminished value coverage as a result of the supreme court ruling, then ultimately we need to price for it."
Raising the bar in claims
Progressive's management next turned its attention to the company's claims handling operation. "We've always believed that our approach to claims is a distinguishing characteristic of our company," Renwick says. "We took a long, hard, penetrating look, and we decided we could do even better. Over the last two years we've performed an intensive diagnostic check on our claims procedures and training so we can produce files that are models of quality. When you realize that we deal with 8,500 adjusters, achieving that level of quality is a very demanding management challenge, and we may never achieve it 100%. But we've launched an unprecedented effort to implement that standard and to create what we call the virtually perfect customer experience. That means our claims handling is fair and fast, and that the customer is comfortable and satisfied with it."
Being where consumers want to buy
Of Progressive's total book of business, 71% is written through the independent agency business and 29% on a direct basis via phone or the Internet. Progressive recently entered into a marketing arrangement with credit card giant Capital One. "What we realized around 1994 was that people were buying products differently, from cars to car insurance," Renwick says. "We wanted to make sure our products were available to consumers in whatever way they wanted to buy, whether from an agent or by other means. That was the thinking behind our establishment of the direct business." The issue, Renwick emphasizes, has much less to do with cost than with purchasing preference.
"I don't know all the ways people will choose to make their insurance buying decisions," he says. "We certainly know the major ones, and the independent agent clearly is our leading source of customers. But people are showing some interest in responding to offers that are made to them from affinity groups and credit card companies, and that gives us another avenue of distribution. I'd love to make Progressive's products available to all drivers in America, in whatever way they choose to buy."
"Our challenge is to find the right balance between maintaining accurate rates and giving customers what they want."
-- Glenn Renwick
Progressive's direct distribution business not only gives more prospects access to its products, Renwick points out. "It's particularly important because it has given us the opportunity to develop a brand. We've done business with the independent agency system for many years, and it's very hard to develop a strong consumer brand. Since we launched our direct writing initiative in 1994, we've been able to develop a brand that has real consumer appeal, and we invite independent agents to take advantage of that brand. It's primarily supported by television advertising, and now agents around the country are putting up Progressive signs and advertising in the Yellow Pages. As people begin to recognize Progressive as a leader in private passenger auto, they're more likely to call an independent agent and say, 'I've seen Progressive's ads; I know what they're about, and I feel comfortable buying that product from you.' The customer has a level of comfort with both the agent and the company. I think that's a great combination."
Homeowners initiative
Introduced in March 2000, Progressive's homeowners product was conceived and developed to strengthen the company's position as one of the nation's leading auto insurers. By offering a competitive homeowners insurance product, Progressive hoped to attract and retain more preferred auto consumers who prefer to package their auto and home insurance policies. Unfortunately, Renwick says, the company wrote very little packaged or preferred auto business.
"More important," he comments, "the homeowners insurance market has deteriorated significantly from when we first entered it. Standard and Poor's estimates combined ratios for the industry at 125 points and climbing.
"Two years after its initial introduction, we are at a point where we must make a decision on whether or not to significantly increase our investment in the homeowners product in terms of systems infrastructure and personnel. Since we have not met our goals, and given the exceedingly poor performance of the homeowners insurance industry as a whole, we have decided to discontinue writing homeowners insurance. We did not make this decision lightly. We are disappointed that the product did not achieve its stated objective, and we regret the inconvenience that discontinuing the homeowners product will cause our agents and consumers. But continuing to support it would take valuable resources away from our efforts to continue to provide agents innovative technology and the best combination of price and service for their auto insurance customers.
"We continue to see outstanding opportunities to capture more of the 125 billion-dollar auto insurance market. We are convinced that a very large segment of consumers will place their auto coverage with a different company than their home when the value received is clearly understood. We'll continue to rely on independent agents to sell that value. Progressive agents represent consumers' best choice for finding the right insurance combination because they represent multiple companies," Renwick concludes.
Standing out from the crowd
What does Renwick believe distinguishes his company from competitors? "It's really an issue of who we are, not what our competitors are doing," he responds. "With the exception of GEICO, probably no one is more focused on auto insurance than Progressive; it's everything we do. What we have tried to do is convert what seems like a relatively simple set of goals--creating a 4% underwriting profit every year and growing as fast as we can--into actions and strategies at every level of the organization. That sounds like something you'd write in an annual report--it's straightforward and positive, so go ahead and do it.
"It sounds simple, but it's very difficult to do when you sell in multiple ways and have a full spectrum of products for all drivers, plus books of new business and books of renewal business," Renwick continues. "Think about it as a recipe. If you over-weight any of the ingredients, you won't get the result you wanted. Think what a disaster it would be to realize you messed up only one ingredient, but it was four times as much as you should have put in. So the fact that we are disciplined in our commitment to achieve a 96% combined ratio means we have to be disciplined in every segment of our business. It means we say that we'd rather be a consistently growing, vibrant market for our agents than be hot for one year and gone the next. I know what it's like when we have to correct mistakes. It takes a long time. We went through that in 2000. So the better we can manage our business, and the more intensity we can bring to measuring results, the clearer will be our messages to agents and customers about consistency and product quality."
By any measure, Renwick points out, Progressive has grown significantly faster than the industry. "In any consecutive five-year or 10-year period, I don't think there's any doubt that Progressive has grown at a pace that has been somewhat remarkable relative to the private passenger auto marketplace. Rapid growth in new business produces higher transaction loads and sometimes higher claim loads; it brings in a set of experiences that change our established data. We stay alert to understand what's driving new trends. We watch to make sure we don't degrade the service to existing customers by growing too quickly. It's very hard to preserve quality and consistency while growing rapidly, so I devote a great deal of my attention to making sure we have that recipe correctly proportioned. We don't get virtually perfect customer experiences by hoping for them. We need to stay ahead of the curve in finding and training people who can consistently deliver the kind of service our customers deserve."
Investing in the future
Where would Renwick spend Progressive's future investment dollars?
"First on technology and our interfaces with agents," he replies. "We've done a lot over the past year on a Web site we call For Agents Only, which allows agents to access all of their customer and policy data on line. The independent agent in many respects is a technological extension of our headquarters. So the traditional model of the insurance company being central and the agent having to send paper in and get paper back, make phone calls and get calls back, that model changes a great deal in a high-speed Internet world where the customer records available to agents are in effect a mirror image of what we have, and agents are able to do the same kinds of transactions we do. The agents I talk to appreciate the fact that they can respond to customers' needs in real time, at the same speed as we conduct any other kind of financial transaction. They're doing it themselves; it's efficient; they know it's been done and that feels good to them. And we intend to keep moving that way: our ideal world is to have each piece of business written completely in an agent's office. It's underwritten; all data validation is done in real time, at the point of sale; all information the insured needs is provided at the point of sale, and the agent then has full access to that information for as long as that customer is with us and with the agency. That's a very powerful model, and I think it's empowering to the agent. We envision a paper-free world with agents, and in a lot of ways that's already happening."
Another area Renwick considers worthy of investment is ongoing development of a brand. "We're working to create a brand for Progressive that's not necessarily specific to one way of selling," he says. "Ultimately it will be a brand that appeals to consumers and tells them what they can expect from Progressive. We feel very good about the steps we've taken so far, and we look forward to more and more agents leveraging that brand. The more people start asking for Progressive by name, which I believe is going to happen, the more everyone benefits."
Finally, Renwick says, he wants to continue investing resources in improving claims service. "We're going to take what we were able to achieve in claims service during the 1990s and truly create what we call Immediate Response Claims Service. Despite how much we've done, there's still room for improvement. I still think the consumer has a lot of hassle in a kind of unfamiliar environment where ultimately he has to get his vehicle repaired. It's not as comfortable for him to know whether everything was done satisfactorily or not. I think we as an insurer have to make even further improvements to try to create a virtually perfect customer experience at the time of a claim, and I think we'll have to continually re-engineer that process."
In sum, Renwick says, the key to Progressive's success in today's challenging market is focus. "We want to be truly a very valuable addition to any agent's roster of companies that write private passenger auto. We'll continue to innovate. Because we're so focused, we're always asking ourselves, 'How do we get growth?' It doesn't just come along. We have to continually find ways to make our products and service more attractive to the agent and ultimately to the consumer, so I think the things you can look for from Progressive are continued innovation and continued focus on auto insurance. The initiatives we're pursuing on technology, brand, and claims fit into that. Every day brings a new set of challenges, and those will be our driving strategies."
All of which, at the end of the day, adds up to a powerful recipe for success. *