Why Is Progressive Interested in Auto Fuel Efficiency?

| About: Progressive Corporation (PGR)

Last week, Cleveland-based Progressive Insurance (NYSE:PGR) announced that it was sponsoring the Progressive Automotive X Prize: $10 million to develop a market-ready automobile that would achieve 100 miles per gallon fuel efficiency.

The Associated Press reports that 60 teams from nine countries have already signed up for the competition, which will occur in 2009 and 2010, involving cross-country and urban driving tests. It will be interesting to see the technologies, designs, and approaches employed by the teams to produce such the required breakthroughs.

What would cause an insurance company to offer so much money to improve auto fuel efficiency? Clearly, Progressive has concluded that increasing gasoline prices, and perhaps increasing scarcity of oil products generally, are a major threat to their auto insurance business. Unless auto efficiency improves significantly, auto ownership and mileage-driven will decline -- thus leading to lower insurance premiums paid to companies such as Progressive. Evidently, Progressive estimates the net present value of this threat to their company at many millions of dollars.

It's also quite telling that a major corporation in a highly competitive industry isn't putting much faith in the auto/energy markets to drive auto manufacturers to achieve the desired auto energy efficiency improvements on their own. Perhaps Progressive sees what many free-market advocates haven't: that the auto/energy markets are encumbered by so many barriers to competitive activity that the beneficial forces of Adam Smith's "invisible hand" can't and don't operate effectively.