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February 15, 2011

How we got car insurance pricing based on credit scores

How did we get to the point where car insurance pricing is related to your credit score?  The answer: Now that’s Progressive!

While reading “Marketing Mavens”, a book that analyzes innovative companies, I came across the Progressive case. Since it began selling auto insurance in 1937, Progressive has served the riskiest group of drivers and has enjoyed a respectable market share in its industry.  However, 22 years ago a major regulatory challenge forced it to reinvent itself. 

In 1989, Progressive’s core business was threatened by government regulation in California, a huge market for the company.  The regulation called for a 20 percent reduction in insurance rates, making it virtually impossible for Progressive to survive with drastically smaller profit margins.  As a result, Dave Pratt, the company’s general manager for direct marketing, devised a strategy that would forever change the insurance industry. 

In short, Pratt discovered a strong correlation between credit scores and driving records.  Author of “Marketing Mavens”, Noel Capon, describes the evolution of Progressive’s strategic epiphany: “When Progressive analyzed its customers closely, it found that although they were all relatively high risk, they were by no means all the same size, shape, and cost to serve.  In particular, Progressive discovered that although all high-risk drivers tended to get into accidents, high-risk customers with good credit ratings had fewer accidents than high-risk customers with poor credit ratings.” 

Consequently, Progressive implemented a new business model, charging lower premiums for drivers with high credit ratings and higher premiums for drivers with low credit ratings. By doing this, they were able to attract customers that filed less claims and therefore were cheaper to serve.  Such a pricing hierarchy allowed Progressive to experience tremendous growth rapidly without reducing profit margins.

So, in brief, that’s the story of how we ended up with credit scores determining car insurance premiums, not to mention the recent, pricey ad campaign featuring the ever ebullient Flo.

Comments

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The insurance advantage is at a definite advantage. But for the lower bracket income owners like me who have a mediocre credit score, I would not be able to avail of those premium ones. Not that I could afford them long term.

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About Me

Greetings! I’m Kevin D. Johnson, a business owner who has recently assumed the role of consumer advocate and internet activist. Atlanta, Georgia is my home.

My Story

Upon returning from my wonderful honeymoon in Jamaica in October 2008, I received what I thought was an ordinary American Express bill, but to my surprise it was a disappointing letter informing me that my credit line was reduced by about 65% for a highly suspicious and discriminatory reason. Considering my excellent credit score and pristine payment history, it just didn’t make sense. However, what does make sense are the unfair and insidious policies that I have uncovered when asking why. It is time to change them.

Good Morning America tells my story.

The Goal

I created this web site to document and share my challenging journey to change what is wrong, unfair, and unjust in the credit card industry. The ultimate goal of this web site is to inform consumers of ways to stand up for themselves against treacherous business practices and to educate consumers about how to improve their credit. Finally, I hope to encourage a more open dialogue with credit card companies about their policies–good and bad.

Success

I am proud to say that this blog's unyielding demand for change led to an important amendment in the final Credit CARD Act signed by President Obama on May 22, 2009. Despite this major accomplishment, there is still more work to be done.

View video of bill hearing in Maryland

Testifying at a bill hearing in Annapolis, Maryland

Speaking Engagements

In an effort to educate as many people as possible about financial management, especially about how to manage the current credit crisis, I have begun to speak around the country at colleges, universities, corporations, chamber of commerce meetings, congressional hearings, trade organization meetings, etc. Having acquired a wealth of information that will help to empower people and to improve their financial future, I feel that sharing this information is the least I can do to make a positive impact. For information on my availability for speaking opportunities, please send an e-mail to Jennifer Silverman at [email protected].


Speaking at a university

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