OSS Article 3 | Progressive Insurance

Will Self Driving Cars Be Regressive?

Author

Justin Abrams
July 09, 2024

OSS Article 3 | Progressive Insurance

Progressive Insurance is the third-largest auto insurance company in the US.[1] With self-driving cars rapidly expanding nationwide, Progressive will have to adjust its strategy sooner than later. What types of plans should they offer? At what price? Will insurance still be attributed to individuals in a world where they are not the ones driving the car? Let’s analyze how could this insurance giant adjust to the imminent wave of self-driving cars:

An Overview of Progressive[2]: 

- Founded: 1937

- Headquarters: Mayfield Village, Ohio

- Public Listing: 1971

- Employees: 42,000 nationwide[3]

- Market Share: Number one insurer by market share for the commercial auto segment (15,18%), and number two for the private passenger auto segment (15.24%).[4]

- Policies: More than 21 million policies in force, and 27 billion miles logged.

Industry Analysis: Where does the auto insurance industry stand?

The auto insurance industry in the US generates more than $418 billion in revenue across its two main segments: private passenger automobiles ($353 billion), and commercial automobiles ($65 billion).[5]

Although there are more than 1700 auto insurance companies in the country,[6] market share is concentrated. This is especially true for private passenger automobiles, where the biggest 4 insurers have 56% of the market share.[7]

Profit margins are around 12%, with commercial auto insurance having a more promising outlook: while revenue growth for the private passenger segment contracted by  0,9% respectively during the past 5 years, it grew by 4,1% for the commercial segment, where profit also rose by 3.8%

 

How is Progressive Positioned?

Progressive has been an innovator in the auto insurance industry since a long time ago. Some of its first on the industry benchmarks are: first drive-in claims office (1937), first to launch a fleet of immediate response vehicles (1994), and more importantly,  the Snapshot Program, which was the first usage-based insurance plug-in device (2008).[8]  

The Snapshot program personalizes insurance rates according to driving behavior, tracked by a device installed by Progressive. This is called usage-based insurance, and its adoption is projected to grow at a 26.2% CAGR for the next 8 years.[9]

Progressive is excellently positioned to leverage this growth, as it has logged more than 27 billion miles through Snapshot,[10] that is, 56,000 trips to the moon worth of driving data. This data is core for ensuring efficiency in pricing and for developing new data-driven solutions.

A look at Competitors

Self-Driving Cars: Where is the market going?

The auto insurance market will take a hit with the increasing adoption of driving automation. The Society of Automotive Engineers defines 6 levels of automation ranging from level 0 (no automation) to level 5 (full automation), and the frontier of deployed tech is currently at level 4 with pilots of robotaxis led by companies like Waymo and Cruise.

Level 4 (high automation) encompasses (almost) everything that you’d think of as a self-driving car. It means that the car can drive and stop on its own, without needing the attention of the driver, with the only caveat being that it is limited to specific regions.[11] Meanwhile, private passenger cars are starting to incorporate level 3 automation, which means that robots and AI will be increasingly taking over as drivers. It is happening for the commercial segment and will happen in the middle/long term for private consumers.

The adoption of self-driving cars is increasing

Companies like Waymo are thriving. The company gave 700,000 self-driving car rides in 2023, a 10x increase from 2022.[12] In consequence, projections show that the self-driving car industry will create up to $400 billion in revenue by 2035.[13]

Waymo and Swiss Re —one of the world’s largest insurance companies— showed that self-driving cars are outperforming human drivers in safety measures. There were zero bodily injury claims In over 3.8 million miles driven by Waymo’s tech, in contrast with 1.11 claims per million miles for a human driver.[14]

Self-driving cars are already here, and data shows that they will continue to expand. Consequentially, insuring those cars —both commercials and privates— is going to be a big, and very different deal.

How are we going to insure self-driving cars?

The answer is turning out to be more conventional than expected, at least for the near future: insurance treats the operating company as a driver and insures the vehicle, instead of the person riding it.

The head of risk and insurance at Waymo likens the insurance that Waymo has to that of a taxi fleet, because the company is the one who acts as the driver and thus, the one that is insured.[15]

Nonetheless, this shift comes with its own set of challenges:

- Regulation: each state has different regulations for car insurance. For example, while Florida is a no-fault state in which each driver files a claim regardless of who provoked the accident, California is an at-fault state, where the responsible for the accident is liable for damages. These differences would make it difficult to standardize insurance policies for self-driving cars

- Pricing a premium: currently, the pricing of a premium is determined by several individual-related factors such as health, and previous driving behavior. With tech taking charge of driving, different factors should prevail for pricing an insurance premium. Furthermore, Progressive currently believes that self-driving features will result in more expensive insurance given the increased repair costs.[16]

- Negotiations: negotiating an insurance plan with an individual is completely different from negotiating with a company like Waymo or a manufacturer like Tesla, which are the owners of the self-driving cars that we will see in the near future. Think about switching from a B2C to a B2B model. 

Recommendations: What Should Progressive do?

Progressive should think about a strategy for insuring self-driving cars. I see its core as a sum of two short/medium-term efforts that will build a good position for a future in which not only commercial but also private passenger cars have self-driving technology:

1. Continue expanding the Snapshot Program: usage-based insurance is growing as a more adopted and efficient insurance pricing strategy, and as a way of collecting data that will aid Progressive’s decisions as the shift to self-driving tech continues

2. Make partnerships with SaaS, manufacturers, and ride-sharing companies: because those companies are going to be the ones demanding insurance in a world of self-driving cars. McKinsey estimates that only by 2030, $5 billion of the car insurance market will switch from personal to commercial liability.[17]

Takeaways:

- Level 4 automation is shifting liability from individuals to companies operating the cars. Hence, the shift towards self-driving cars could result in insurance companies like Progressive turning towards B2B models with manufacturers, tech, and ride-sharing companies.

- Because the auto insurance industry is already heavily concentrated, it’s essential that Progressive maintains its position as an innovator and strong player, so it can be well-positioned for negotiating with companies as they begin to demand self-driving car insurance programs.

- There is still a long way to go for having private passenger self-driving cars. Until then, the best strategy for Progressive is to continue innovating its insurance pricing and collecting data that will inform future decisions by using technologies like the Snapshot program.

That’s it for today.

Stay Nimble,

Justin Abrams

 


Footnotes:

[5] Ibis report

[6] Ibis report