An Insurance Innovator Reflects on 40 Years in the Industry – Part 1
I was introduced to Alan by a McKinsey partner in 2007, my first year in the insurance business. Alan had just retired as Group President of Progressive Direct, where he grew the earned premium from under $1.3 billion in 2000 to over $4.3 billion in 2006. I was in awe and even more amazed when the first question he asked me was about baseball.
The following is a discussion about Alan’s insurance journey over the last 40 years – an inspiring reflection by an insurance visionary.
I only asked Alan three questions:
What did you do at Progressive?
What are your thoughts on auto insurance and the insurance industry?
How do you see property and casualty insurance evolving over the next decade?
We split the interview into three parts – Alan’s insightful response to each of these three questions.
Part I: Alan Bauer – Career at Progressive
David Schapiro: Alan, although we have spoken a lot over the years, I never had the chance to talk with you in depth about your journey in the insurance industry. I’m really honored by the chance you’ve given me and us at Planck to speak with you about this. Could you please start by sharing how you got into insurance and your career at Progressive?
Alan Bauer: My father grew up on a tenant farm in Southern Minnesota, and I always had a set of grandparents there whom I would visit. My father went to St. Olaf College for two years prior to World War II. When I got old enough to go to college, one of my choices was a college called Carleton College, which is a top ten liberal arts college but not well known. Carleton is in the same town as St. Olaf, so this was a way for me to tweak my father as well as get a good education.
After Carleton, I worked for four years and then went to graduate school at the University of Chicago for an MBA. When going to business school, you always want to get a good summer job because it’s a springboard to your first career.
My apartment was about a mile from the interview center, and I would try to do two or three interviews each time I went. I got dressed for an interview with some consulting firm or big-name company, but I never heard from them again. They evidently lost my resume or something. Instead, I found this little insurance company in Cleveland [Progressive Insurance], which was interviewing that day.
I had the interview and it was nothing special, but then they offered me a summer position and for a lot more money than my other offers. Cleveland can’t be that bad just for the summer. So I went to Progressive, which at that time had about a thousand employees, close to $100 million in premium and was almost entirely non-standard auto, motorcycle, and mobile home. These are the kinds of risks that the more standard carriers think twice about. I found it to be a fascinating place, ethical, very much focused on results and not on personality battles. Progressive was led by a fellow who I would later get to know: Peter Lewis, a real genius in his field.
During my second year in business school, I always had the Progressive alternative whenever I interviewed and ultimately that is where I went. I first managed their mobile home insurance, then moved into claims as the controller. This was a tiny organization, and Peter Lewis frequently changed the entire design of the organization. One day, you might be the HR manager and the next day, you might be the head of sales of a different geographic region.
I then became the controller for the Midwest division, and a couple of years later, Peter offered to move me to California to run the tiniest region Progressive had, the Northwest region, but it was a real management job. I thought that sounded great. I moved to Sacramento and my myth of California being all beautiful beaches turned out to not be represented by Sacramento. Nevertheless, I enjoyed my time there. While there, I did a few things that were quite successful, including a new agent compensation scheme that the entire company would adopt and the firm’s first pleasure boat program. Then the COO offered me the job to develop a new product that could compete in the standard market.
At this time, Progressive was known as a non-standard insurer. Even if it had competitive rates, an agent would usually be loyal to his or her standard carrier, which was not Progressive. My job was to come up with a better insurance product. At Progressive, that meant a product that had better pricing and that could predict the likelihood and/or severity of a claim better than what was being used at the time.
We looked at a lot of different inputs and/or recombinations of inputs, different algebra and/or additional rating variables. We had the chance to look at credit scoring as a rating variable. It turned out to be a hugely powerful rating variable and one with little correlation with other existing rating variables, although more recently it has been questioned by regulators as it may have unequal effects on different groups. But today credit scoring has been adopted in almost all of the US except a couple of states including California, where it’s illegal. It gave us the chance to write standard auto for some risks at a very competitive and profitable rate.
This put me on the map in the company, but I wasn’t that thrilled about living in Cleveland, having moved there from Sacramento to do this project. But then I was offered the responsibility for managing the whole west coast and moved back to Sacramento, loving the work I was doing. And while I was there, the internet took off.
Twenty years earlier, while a student at Carleton, I had attended a concert by a musician called Dan Hicks and fell in love with his work. Years later, I was geeky enough to get a CompuServe account, where you would dial up on a phone connected to a modem, and I joined a CompuServe mail list where you could follow Dan Hicks.
Soon after that, somebody on the Dan Hicks CompuServe mail list said, “We ought to have a website.” So I developed a Dan Hicks website. It was very simple, both in construction and in substance. And since then, other Dan Hicks websites have long since superseded my initial effort.
But my Dan Hicks website got more usage than I expected, and it made me think that we can do this at Progressive too. Neither my boss nor IT were enthusiastic. I went to Peter and I said, “Hey, this internet thing is going to be really big. We ought to do something about it.” He said, “Well, if you want to try, go ahead.”
I hired a couple of people and built a very basic website that just said something like, “This is Progressive. Aren’t we great?” But it evolved into taking payments, getting IT support, offering our competitors’ rates and ultimately in 1997 to become, as far as I know, the first website in the world to sell insurance online. This would become a key part of our direct business. Until the early 90s, Progressive had been selling almost entirely through independent agents, and direct was something very different and new. Since then, Progressive has managed to maintain both channels, and now the direct business is larger than the independent agent business.
Today, much of all insurance business is internet based, so I can’t claim credit for things like Esurance’s or GEICO’s internet success. And I think that we at Progressive were lucky to be early, particularly with a company that really didn’t have much of a reputation other than in non-standard.
After that, I came back one more time to Cleveland to work on the internet initiatives and manage a Canadian operation Progressive had at that time.Then I went to Peter and I said, “Listen, let me move back to the west coast. But this time, either to Marin county or San Mateo county.” He agreed as long as I came to Cleveland once a month and maintained a residence there. He wanted to have an organization with a Progressive Direct and a Progressive Agency and offered me the direct job. I agreed.
David Schapiro: Alan became Group President of Progressive Direct and during his tenure the company’s direct business earned premium grew from less than $1.3 billion in 2000 to over $4.3 billion in 2006, while consistently beating target margins. By the time Alan left Progressive, the company had become the nation’s third largest auto insurer.
Alan Bauer: That’s my Progressive career in a nutshell. When I left Progressive, it had tens of thousands of employees. It was a far different place than when I started, but I think much of the ethos of the company remained and likely remains today. I’m no longer a customer of Progressive, but I’m still a shareholder.
Alan Bauer – Bio:
Alan Bauer has played a substantial role in changing how automobile insurance is sold and underwritten. His work led to the industry’s first website, its first use of credit scoring in rating automobile insurance, and its first internet-only sale. His Progressive tenure included many positions, both line and staff, and assignments in both the agency and direct sides of the company.
While President of Progressive Direct, the company’s direct business earned premium grew from under $1.3 billion in 2000 to over $4.3 billion in 2006, while consistently beating target margins. By the time when Bauer left Progressive, the company had become the nation’s third largest auto insurer.
He was awarded some of the first patents for both internet insurance and for UBI. In 2011, he was named as one of the Top Ten Innovators of the Decade by Insurance and Technology Magazine.
Since leaving Progressive, Bauer has served on the Board of Trustees at Carleton College (2006–2014; 2017-present) and on the Wikimedia (parent of Wikipedia) audit committee (2007–2008). He has also been active as an investor and consultant, including as the External Senior Adviser on auto insurance to McKinsey and Co.
Read the second part of Alan Bauer’s interview where he shares his thoughts on auto insurance.