Cunning Auto Insurance Policyholders Take Insurance Industry for 'Ride' to Tune of Nearly $17 Billion in 2006

Market Wire, December, 2007

Quality Planning Corporation (QPC), an ISO company, today released its annual Premium Rating Error report, which reveals how devious consumers continue to play a costly role in causing auto premium rating errors. QPC estimates that, in 2006, premium rating error resulted in the loss of $16.6 billion of premium revenues -- an increase over the 2005 figure.

The industry's combined $16.6 billion premium rating error represents nearly 10 percent of the $166 billion revenue recognized by personal auto insurance premiums industrywide. The report, The Auto Insurance Is Under Attack, aggregates and summarizes audit results from more than 18 million policies, representing 20 major carriers. The sample includes substandard to preferred books of business, all distribution channels, and national and regional carriers.(1)

The report can be found online at: www.qualityplanning.com .

"This report indicates that insurance companies are still missing opportunities to increase profit," said Raj Bhat, president of QPC. "Unfortunately, this revenue loss will continue to build, year after year, unless insurers establish modern and sophisticated premium leakage detection systems. The good news is that once such a system is established, insurers can easily reduce premium leakage by 60 percent in a single policy period."

Consumer fraud: a leading cause of premium rating error

The QPC report shows how different categories of rating errors contribute to overall premium rating error, and distinguishes between vehicle rating errors (mileage, usage, type of vehicle, and location) and driver rating errors such as driving experience and driving record. The report concludes that rating error is increasing for two primary reasons: consumer fraud and dynamic risk profiles.

The Internet has greatly contributed to an alarming rise in fraud by providing consumers with step-by-step instructions that outline exactly how they can reduce their automobile insurance, bilking the insurance industry of legitimate premium revenue. Such sites offer 'advice' that encourages policyholders to switch companies and coaches them on how to get the lowest quote from a competitor. Insurers need to adopt methodologies to safeguard themselves against these cunning co-conspirators.

The second major factor of premium leakage, according to the report, is the nature of America itself. Americans lead more dynamic lives than ever, turning risk profiles into moving targets.

"Insurance companies can recoup millions in lost revenue by applying more rigorous techniques to analyze their data," said Bhat. "Recognizing that rating variables fluctuate is the first step toward resolving this industrywide problem."

Every hour there are:

--  254 marriages and 124 divorces
--  25,608 vehicles registered of which 6,402 are new
--  163 drunk-driving arrests
--  5 traffic fatalities
--  More than 2,800 auto insurance claims paid
--  445 new drivers licenses issued
    

Policyholders change jobs, cars are acquired and sold, and kids get their drivers licenses and start to use the family car. On average, 52 percent of existing policies have a change in driver or vehicle every year, and 30 percent of households replace vehicles every year. These changes affect annual mileage, commute, and other rating factors.

In 2006, driver rating errors rose to $9.5 billion, up from $8.7 billion in 2005. The report reveals that flaws in vehicle rating factors such as rated commute distance, annual mileage, vehicle usage and rated territory were also major contributors to the $400 million increase over the 2005 figures.

"It's important that insurers understand how rating error is broken down, revealing where leakage can -- and should -- be prevented," said Bhat. "And, once the problem is understood, premium leakage is easily decreased through the consistent, ongoing collection, validation and maintenance of accurate rating data."

Industry should use sophisticated data analysis techniques to stop premium leakage

"The insurance industry can fight back against this leakage using the right analysis tools," said Bhat. "Let's face it. Some policyholders misrepresent facts and don't report lifestyle changes. Others just boldly commit fraud. Underwriting doesn't have to accept these trends as a cost of doing business, or, worse, as permission to cover leakage protection by inflating premiums for all policyholders."

The QPC report shows how auto insurers could better analyze rating data to identify and correct flawed information. This could improve industry profits. It could also prevent price inflation, which affects honest insureds.

"Honest people shouldn't be in the position of subsidizing dishonest, high-risk drivers," said Bhat. "In fact, some low-risk drivers could even see a reduction in their premium."

Auto insurer profits lie hidden in manageable data

A significant cause of premium leakage is under-reporting the number of miles driven. The QPC report shows that annual mileage contributes to a loss of $1.7 billion dollars. Interestingly, 17 percent of vehicles are driven more than 20,000 miles per year, yet only four percent are actually rated in this category.