take note of this trend? Because, if an
individual’s job changes, it’s likely to
be associated with changes in vehicle
usage, commute distance, and annual
mileage.”
SAN FRANCISCO—According to
a new report from Quality Planning
Corp., insurance companies are hem-
orrhaging billions of dollars in premi-
um but have the control to make it
stop with the correct information.
The report, “Auto Insurance Industry Leaves Billions on the Table,” considers the amount of money companies lose through mistakes in underwriting, either through direct premium loss, risk management costs, moral hazard costs and business management costs.
Moral hazard may be the most overlooked cost as individuals who purposefully misreport rating info — such as reporting yearly mileage of 5,000 when it is closer to 20,000 — tend to have higher losses than honest policyholders, and moral hazard can affect agents, as well.
“They intentionally misrepresent their circumstances and then rely on the fact that most companies are either in-
“The majority of agents
who work to determine
premium accurately have
a strong interest in rating
integrity. In the absence
of meaningful controls,
however, the honest agent
is placed at a competitive
disadvantage by the
minority of agents willing to
rate a policy inaccurately in
order to obtain a cheaper
quote and close a sale.”
different or incapable of deleting the
misrepresentations.”
It is important for insurance compa-
nies and agents to keep an eye out for
any changes, because consumers are
five times more likely to report chang-
es that reduce premium instead of
ones that could potentially raise pre-
miums, the study concludes.
Common examples of these are college graduates who use their parents’ addresses in the suburbs when they move into cities, or individuals who have extended their commutes and did not notify their insurance companies. In fact, commute rating errors account for 1% of all premium, which amounts to $1.6 billion industry wide in error cost, and mistakes in rated territory leads to losses of .82% of premium, which comes out to $1.3 billion in leakages. Overall, the study concludes that 9.77% of premium leaks away, costing the industry $15.9 billion overall.
“Similarly, the majority of agents who work to determine premium accurately have a strong interest in rating integrity,” the report says. “In the absence of meaningful controls, however, the honest agent is placed at a competitive disadvantage by the minority of agents willing to rate a policy inaccurately in order to obtain a cheaper quote and close a sale.” Compounding monetary losses from premium leakage is the fact that many business management costs, such as marketing, sales, financial and corporate planning, are based upon rating and underwriting data, so if the data is not accurate, neither are the business management costs.
The causes of rating errors and premium leakage are primarily consumer fraud and change of risk profiles.
Consumers who are well informed about how rates are determined are the ones who perpetrate auto insurance fraud, the study says.
The study warns that areas that are more open to misrepresentation are listed on the Internet, and with an easy Google search, consumers have access to such information and coaching on getting the lowest rate from another company.
“What is even more worrisome is that these websites often encourage policyholders to switch companies and even coach them on how to get the lowest quote from a competitor,” the report says. “Of course, those types of consumers aren’t necessarily ones that a carrier would like to acquire, so safeguarding against them is imperative.” Even when consumers are not lying about their situations in order to save money on their auto insurance, the report cites the fact that Americans often lead dynamic lives, with marriages, divorces, arrests, new vehicles registered, etc.
“Every hour 3,453 Americans move, and another 6,256 change jobs,” the study says. “Why would underwriters
Steps to Reduce Leakage Quality Planning advises insurers that by taking three small steps, the multi-billion dollar hemorrhaging can slow or stop. When a policyholder first buys a policy, companies should perform audit checks through agent or consumer representatives’ desks to verify factors like commute distance, unlisted drivers, business use, and accidents and violations. Questionable material can be flagged for further review. Secondly, even if rates are not perfect the first time around, at renewal, insurers are provided another chance to stay on top of any changes in risk profiles. The third step is to maintain the accurate information as a baseline and allow subsequent reviews to be done at a lower cost.
“The bottom line is that a great deal of time and effort goes into a one-year clean-up effort, but only minimal time and effort are require to keep an auto book clean,” the report says. “Smart companies realize this and have integrated rating integrity into their regular renewal processes.”
8 FEBRUARY 25, 2010 • THE INSURANCE RECORD
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