Monday, June 06, 2011

Progessive: Usage-Based Car Insurance Pricing

Progressive has been a leading innovator in the auto insurance market for many years.  Twenty years ago, it made its mark by developing sophisticated algorithms to price policies more effectively for high risk drivers (think of it as the subprime segment of the car insurance market).   Progressive aimed to cull the best risks out of the high risk pool, leaving the worst risks to their rivals.  They became a very profitable company with a strategy focused on the higher risk drivers.   Since then, they have expanded their reach to a broader set of consumers, but they still aim to stay ahead of the competition by having finer-grained methods for evaluating and pricing risk.  

Progressive now has developed an onboard diagnostic device called Snapshot that can provide Progressive a real-time driving report, including the number and time of miles driven, incidents of hard braking or quick acceleration, and speed.   Progressive aims to use the data to provide discounts to those drivers with the best evidence on good driving practices from its Snapshot database.  Naturally, some people have expressed privacy concerns about such devices.  However, for Progressive, Snapshot provides them another way to price risk more accurately than the competition.   To this point, auto insurers have tried to estimate an individual's riskiness based on demographic characteristics, driving record, etc.   Now, Snapshot offers a way to personalize the pricing of risk in a way that has not been done previously.  Eventually, with enough data, Progressive will build even more sophisticated algorithms that connect the frequency rate of incidents such as "hard braking" or "quick acceleration" to the probability of an accident.  

For many companies, predictive algorithms have become a source of competitive advantage (think NetFlix and Amazon, to name a few).   For all these firms, the more personalized the predictive power, the more that they can derive a competitive advantage.   For NetFlix, it's been easier to personalize than for a firm like Progressive, but technology may be changing that now. 

12 comments:

John said...

Interesting area, Mike, have been looking at this for awhile, Liberty Mutual (Open Seas) and an Israeli company (Sensomatix?) also have solutions. Believe Progressive is ahead of the game, suing Libery Mutual.

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Unknown said...

This society is getting like Big Brother in too many ways. All one has to do is look at what the Federal Government is doing with their intrusive spying behavior. Now, the insurance industry wants to track where we drive, when we drive, whether we go too fast, stop too fast etc supposedly to get rid of a ticket or accident if we are good. Computer systems with companies are putting too many variables into the rating process and it is impossible to tell where they come up with their rates.
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