Quick now, who sponsored the 1999 Super Bowl halftime show? If you drive a muscle car, have wrecked more than your share of vehicles, or have a glove compartment full of traffic tickets, you may well recognize the answer: Progressive, the auto insurer that specializes in motorists that most competitors shun.

For those with more sedate driving records, Progressive may be one of the biggest companies you've never heard of. But Progressive is working hard to change that.

The Evel Knievel of insurance companies, Progressive has thrived on risk since its founding during the Depression. Now, the company, which already generates more than $5 billion in annual revenue, is gambling that the Internet will let it make a huge leap forward.

While most insurance companies have found the Internet a confusing medium for a whole host of reasons, Progressive, characteristically, leaped into the unknown in the earliest days of electronic commerce. Almost three years ago, Progressive began offering consumers a quick, electronic way to locate an agent. Progressive was the first to offer customers on-line rate quotes—something most insurance companies still don't do. To add to its daredevil style, Progressive even began volunteering the rates quoted by its better-known rivals, so people could comparison-shop.

So far, the Internet has made minimal impact. Progressive apparently generates less than 1% of its sales via the Internet. The company is just the fifth-largest auto insurer, with roughly one-sixth the market share of industry leader State Farm, according to the latest figures available from research firm A.M. Best.

But the Internet opportunity could be huge. By 2003, Forrester Research estimates, on-line auto insurance sales will soar to $3.2 billion from $250 million this year. And Progressive has a clear lead in using the Internet.

"Progressive is on the cutting edge of all that it does," says Nancy Benacci, a securities analyst at McDonald Investments.

"If we are quicker to innovate, it is because our culture encourages risk-taking and experimentation," says Peter B. Lewis, who is the chairman of the company that his father co-founded in the 1930s and who carefully fosters the culture.

As visitors approach Progressive's leafy campus in suburban Cleveland, the headquarters buildings appear much like any other office complex. Inside, though, is a daring display of the experimentation that Lewis prizes. The company commissions innovative art from emerging artists to foster a spirit of creativity among its 15,000 employees. As an example, one objet combines chewing gum, thread, and several unrecognizable materials in an eye-popping pastiche.

Lewis himself set the tone for innovation by coming up with the idea of insuring "nonstandard" customers back in the mid-1950s. This was a startling idea at the time. Insurers almost universally shunned high-risk customers. But, just as Michael Milken's junk bonds in the 1980s showed that having the return justify the risk is the only thing that matters, Progressive built a thriving business around its ability to accurately price complicated categories of insurance risk.

Three decades later, Progressive remade itself again. This time, California's crackdown on rising auto insurance rates taught Lewis that he could no longer rely on rate increases to boost revenue. He realized he had to become a low-cost provider, and pass on savings in the form of lower premiums.

The company launched a program called "Immediate Response," to react to car crashes as soon as possible and cut the time it took for the company to handle claims. It may be true that, when it comes to car crashes, speed kills. But, in the claims process, speed reduces the money Progressive pays for car rentals and vehicle storage. As it turns out, speed also makes for happier customers. So, Progressive has expanded the Immediate Response program to the point that it has claims adjusters roaming the streets of major cities, waiting to be dispatched to accidents. When one arrives at the scene in his Ford Explorer, he may encourage the customer to come sit inside to relax and collect himself, have a cup of coffee, and make any necessary phone calls on the adjuster's cellular phone. Meanwhile, the adjuster is using a laptop with a wireless modem to check on the costs of car parts and repairs. The adjuster can write a check on the spot. Sometimes, the customer has his check even before the police arrive.

While many insurance companies focus on the fact that their broker networks or internal sales forces are key assets, Lewis recognized that dealing with an insurance agent might not be the highlight of a customer's day. So, he decided to offer a choice. He launched "1-800-AUTO-PRO" service, appealing to people who wanted to buy policies over the phone without doing a lot of legwork.

Progressive also added a twist—comparison-shopping. When would-be customers call to get price quotes on a car insurance policy, they get as many as three comparison rates. (Progressive bases the quotes on recent regulatory filings by its competitors. A limited test found that the quotes it supplies are, in fact, very similar to the actual prices that competitors provided.) Progressive is confident that it's so accurate about pricing risk that, if a competitor wants to undercut Progressive's price, that rival is welcome to what may be an unprofitable customer. Progressive estimates that it offers the lowest price 45% of the time when it supplies comparative quotes to prospective customers.

Because Progressive had focused on cost, on new ways of reaching customers, and on being innovative, the Internet was a completely natural avenue to explore when it came along. Selling policies on-line seemed like just another way to give customers the chance to shop "when, how, and where they want to," says Toby Alfred, general manager of Progressive's Internet site.

Progressive now has its site so tuned that, after a customer spends about 15 minutes filling out the standard application, it can take the site as little as 10 seconds to let a prospective customer know what Progressive—and competitors—would charge for a six-month policy. If people like what they see, they can buy the policy on the spot. "Customers are buying on-line," Alfred says. "It's very definitely a real business."

Despite its traditionally low profile, Progressive not only sponsored the halftime show at the Super Bowl but advertised its on-line capabilities with a hefty commercial-television and direct-mail campaign in 1998. A new breed of Web sites such as InsWeb also gives Progressive exposure. The InsWeb insurance-shopping site allows consumers to compare insurance prices for a raft of carriers. These services do the advertising that pulls customers in. In addition, Progressive actively pursues customers by hooking up with car-shopping Web sites, on-line classifieds, and related sites to peddle its policies in cyberspace. Indeed, if you're shopping for a car on the Web, you're likely to find Progressive there waiting to tell you how much insurance you'll need for the model you're considering.

Not that selling insurance on the Internet is easy. Many insurance companies have hesitated to move on-line because they can get into legal trouble if they sell in a state where they aren't licensed. On the Internet, where people can pretend to be Felix the Cat, or whatever else they like, it's hard for insurers to be certain where they're selling.

The Internet's culture of instantaneous response also causes problems, because it pretty much forces insurance companies to automate the underwriting process—a process that, at most companies, requires that humans make subtle decisions on risk factors.

Not everyone, of course, even has access to the Internet. And, many people do prefer to deal with a human. A recent study by the Independent Insurance Agents of America, a trade group, found that 60% of people surveyed wanted to have an insurance professional help them through the purchase process.

Those insurance professionals are the biggest obstacle to going on-line. Often, they are the primary contact with customers, and they could rebel at the first sign that an insurer is trying to sell directly to customers.

Progressive—which was well-positioned for the Internet because it was already licensed in most states and was highly automated—was certainly vulnerable to the agents problem. It has a network of 30,000 authorized independent agents, who also sell policies for other insurers and could easily suggest that Progressive's customers go elsewhere. If Progressive wasn't careful about how it approached its Internet-based business, it could lose its existing, far-larger base of customers.

So, Progressive decided to bring its agents on-line with it. When it provides quotes on-line, it gives customers the option of being hooked up with an agent. Progressive has also alerted agents that by the end of 2000 they will need to download policy information via the Internet.

"At first, [Progressive's Internet strategy] was certainly upsetting to many agents, but it has evolved into a workable relationship," says Madelyn Flannagan, director of research and information for the Independent Insurance Agents of America.

In addition to getting referrals from the Web site, Progressive's agents benefit from all the advertising that Progressive has been doing. Progressive "really has pushed people to agents," Flannagan says.

Other insurance companies have been slow to follow Progressive on-line. Prudential Insurance Co. of America's Web site started touting its own auto insurance quote service this spring. But, even at Prudential, a customer can spend the standard 15 minutes on a questionnaire and then wait as long as one business day to receive a quote by e-mail. The pilot project, going on in six states, requires that customers call a Prudential 800-number or an agent to purchase a policy.

"Other companies believe technology is important, but most have not made it a strategic priority," says Mark Lane, a securities analyst who tracks insurance companies for William Blair & Co. "Progressive has made it a priority."

While competitive pressures forced Progressive to cut prices 5.3% last year, revenue still rose 14% from the year before to nearly $5.3 billion—an increase that was more than three times the industry average rate. Because of its ability to make sure its rates match the risks, Progressive also maintained its industry-leading underwriting margins. Over the past five years, Progressive recorded underwriting profit of 8%. (Underwriting profit is total premiums, minus payouts and overhead. Interest income is not included.) In the same period, the industry as a whole ran an underwriting loss of 0.5%.

Meanwhile, Progressive kept making inroads with the big guys' customers—the people without a long history of accidents and traffic violations, whom the industry calls standard- and preferred-risk drivers. These drivers now account for nearly one-third of Progressive's revenue.

But, even though Progressive has positioned itself well for now, that doesn't mean the chairman won't reinvent the business again in a heartbeat if conditions change.

"The only advantage we have," Lewis says of the fact that he moved onto the Internet so early, "is that we are a little further along the learning curve."

A LITTLE SECRET

Despite the culture of discounting that seems to be taking over the Internet, a survey found that insurance companies and many financial firms charge full retail price on the Web. In fact, it can be more expensive to purchase a policy or financial service on-line.

A look at the nine major insurance Web sites that offer on-line quotes found that seven charge the same rates whether a policy is purchased through the site or through an agent. At the other two sites, it cost more to shop on-line. That's because agents for the two carriers offered to beat the rates posted on the Web site.

The results fly in the face of most economic assumptions about electronic commerce. Selling on-line is supposed to reduce the need for expensive real estate and for a sales force. The Internet now gives companies an easy way to exchange information with customers, making everyone more efficient. And letting customers do a lot of the work on-line—such as entering data to obtain a price quote—can significantly lower a company's costs.

But insurance agents, feeling threatened by the Internet, are fighting back by undercutting retail price, at least in the short term. It's not clear how long agents can do so. They will lose more and more income as the Internet becomes a bigger competitor and forces them to discount more transactions. Also, the big insurers may decide that they—like sellers of books, CDs, and travel services—can drive lots of people to cost-efficient Web sites by offering hefty discounts to those who buy on-line. Agents simply couldn't afford to sell policies at a 50% discount.

Of course, the majority of insurance carriers still don't sell policies—or even quote rates—on their Internet sites. A survey of 45 insurance companies (16 life insurance companies, 19 property and casualty insurers, and 10 health-care insurers) turned up only the nine that offer quotes electronically.

Banks, meanwhile, don't do much better in giving on-line customers a break. Of the banks that allow customers to establish and manage their accounts on-line, 13 out of 17 charge a fee that can run as high as $9.95 a month. (The major exceptions are Citibank and Wells Fargo.) Some banks limit the services available even to those who pay a set fee. The banks may, for instance, tack on extra charges for those who exceed a certain number of account inquiries or transactions. All of these charges come on top of the fees most banks already levy on customers that don't meet certain minimum criteria.

It is, in fact, much cheaper for banks to deal with customers on-line. Industry statistics show that when a customer visits a branch to handle a transaction, it costs the bank $1.07. By phone, the transaction costs 68 cents; by ATM, 27 cents. Over the Internet, the transaction costs less than 10 cents.

But banks, like many companies, may be reluctant to cut costs too quickly on-line because they are paying high-traffic "portal" sites like America Online and Yahoo! to send along potential customers. The payments can be so steep that the banks may be essentially giving the portals all the money they save from on-line efficiencies, rather than passing those savings along to customers.

The banks may, of course, simply be hoping that the Internet gives them another way to charge fees—something banks have been trying to do through every conceivable means over the past several years. The fees are a gamble not only that customers will value the convenience of banking on-line from home but also that fees won't chase customers to banks that don't charge.

The on-line securities brokers seem to be the only ones in the financial services industry that are passing along to their customers the superior economics of doing business electronically. Those who buy and sell securities on-line pay significantly less than they would if they called up a broker to place a trade. And on-line brokers certainly aren't charging monthly or per-session fees to the customers who are willing to take over a lot of the tasks once typically handled by customer-service representatives or other employees.

Perhaps it's no coincidence that the on-line brokers, like Charles Schwab and E*Trade, are showing the fastest revenue growth among financial-services companies—and the best stock-market valuations. Schwab is less than 10% of the size of Merrill Lynch, which has been slow to move on-line, but has a market capitalization that is 1 1/2 times as great ($44.65 billion for Schwab as of mid-May, vs. $29.35 billion for Merrill Lynch.) E*Trade is 1% the size of Merrill Lynch but carries a market valuation of $12.28 billion, almost half the size of its venerable rival.

—Jeffrey Schuchert