Travelers' New Challenge: Luring Consumers

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Commission Savings, Marketing Costs: A Wash?

By switching part of its business to direct marketing, Progressive has avoided paying initial agent commissions of 10% to 15%, or renewal commissions when policies are extended. But it's hard to gauge exactly how much it's saving after its marketing expenditures, says Misquith at Credit Suisse.

Ten years ago, when its direct-channel business was small, Progressive's expense ratio was 20.7% in its agency business and 38.5% in its direct business, due to hefty spending on ads while in startup mode, he says. Last year, its expense ratio was 21.4% for its personal-line agency and just 20.5% for the direct channel.

"As you build scale, [direct marketing] is a much better business to be in, but of course you will be spending much more up front," says Misquith. Besides advertising, Travelers will have to spend money to build a servicing platform, based on a call center operation. Since the company already has a fairly good claims management system, that shouldn't be too hard to set up, he adds.

What may prove more tricky is the thin line the company has to walk in dealing with its independent agents so they don't feel slighted. "Agents don't want to be seen as secondary to the direct-channel [business]," says Misquith.

One advantage that Travelers has over Progressive is that Progressive sells only personal insurance products, and took a chance that its independent agents would drop the company when it added its direct-channel business, he says. Travelers is more insulated from that kind of threat because most of its business consists of its commercial product lines.

Travelers' personal insurance segment generated $154 million in operating income in the first quarter of 2009, vs. $547 million generated by its business insurance segment and $148 million by its financial, professional, and international insurance segment.

Direct Channel Has Room for Growth

Although market share in direct channel has grown fairly quickly, to 12% to 15% of the total personal insurance market, for some reason it hasn't caught on nearly as much as in other countries such as Britain, where it now accounts for most of the market, says Newsome.

But there's no question in Misquith's mind that it's the wave of the future and that Travelers is smart to move in that direction, however steep the initial climb to competitive scale will be.

The key will be building brand recognition, and that's more than just a logo, like a red umbrella. Progressive's new ads with Flo talking to motorcycle and boat enthusiasts are a hit. "People like Flo, therefore they'll buy the auto product for that reason," says Misquith.

Perhaps Travelers could leverage the name recognition of such bumbershoot-wielding characters as Mary Poppins, or even Batman's arch-foe, the Penguin.

Bogoslaw is a reporter for BusinessWeek's Investing channel.

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