COMPETITION THROUGH INNOVATION IN PRICING VARIABLES: A PROGRESSIVE APPROACH

Open Access
Author:
Agostinone, Maria
Area of Honors:
Actuarial Science
Degree:
Bachelor of Science
Document Type:
Thesis
Thesis Supervisors:
  • David Arthur Cather, Thesis Supervisor
  • Lisa Lipowski Posey, Faculty Reader
  • David Arthur Cather, Honors Advisor
Keywords:
  • underwriting
  • pricing variables
  • insurance competition
  • The Progressive Corp.
Abstract:
Insurers often compete through innovation in pricing variables and underwriting techniques. By continually developing new pricing variables, insurance companies are able to better match a customer‟s risk of loss to their insurance premium. When a company is able to do this, they will attract the less risky customers, by being able to charge them less. This leaves their competition with the higher risk, undesirable customers. This thesis will provide examples of risk classification and will provide a model of insurance competition using utility theory. One company that has been particularly innovative over the years is Progressive. Often called the “Prince of Pricing,” Progressive has databases full of customer information that they use to price policies. In their Auto Insurance business, Progressive, over the years, has developed a pay-as-you-go rating system called MyRate. MyRate is the innovative rating variable on which this thesis will focus. MyRate uses telematics technology to record a customer‟s annual mileage, times of day driving, and hard breaking and quick acceleration patterns. Through this information, Progressive has been able to create individualized insurance premiums that can save its safe drivers considerable money in premiums. The Actuarial Standards Board has developed a list of standard and nonstandard (but desirable) characteristics of a rating variable. MyRate upholds most of those standards very well. One standard that the Actuarial Standards Board needs to add to their list is privacy. With the use of telematics technology, and possible GPS technology, there needs to be a standard of what is acceptable. The author of this thesis will explore what she deems as an acceptable standard of privacy. Finally, this thesis will review Progressive‟s Company results over the past decade. Competitors, stock prices, returns on investment, loss ratios, and growth will be examined in depth.