Auto Insurer Rating Errors Said To Cost Firms $15.9 Billion In ‘08 

NU Online News Service, Jan. 20, 3:39 p.m. EST

Auto insurers missed $15.9 billion in 2008 premiums because of rating errors primarily due to consumer fraud, a rating integrity solutions firm said.

San Francisco-based Quality Planning in its Premium Rating Error Report said based on nationwide audits it has conducted the rating error represented 9.8 percent of the total $161.7 billion in personal auto premium written.

Of the missed premium in 2008, the largest cause amounting to $2.6 billion was unrated drivers on the policy, the study found. It attributed Internet usage and questionable Web sites as premium leakage drivers.

According to QP, an individual driving 20,000 miles a year but reporting only 5,000 will, on average, have higher claim costs than drivers who honestly report driving 20,000 miles.

In addition to false report ratings causing honest policyholders to subsidize dishonest driver premiums, QP said that it puts honest agents at a competitive disadvantage against crooked ones who will inaccurately rate a policy “to obtain a cheaper quote and cause a sale.”

The report said that in addition to many Web sites that provide information on how to commit rating fraud, insurers ratings can be impacted by marriages and divorces, new vehicle registration, drunk driving arrests, traffic fatalities, new drivers, and customers who move or change jobs.

“The risk profile of auto policies is constantly changing, making personal auto insurance risk management a rapidly moving target,” the report said.

It reported that 52 percent of household auto policies experience a change of vehicles or drivers every year.

Policyholders, according to QP’s analysis, are more than five times more likely to report midterm mileage changes that lower annual premium than to report mileage changes that raise premium.

Premium leakage in 2008 was 0.18 percent less than the year before probably because gas prices meant people drove less and loss of jobs meant they commuted fewer miles, the report noted.

QP advised that to reduce leakage, insurers should get the rating right at point of sale by verifying 16 different points of data, make checks when renewing, and they should develop a long-term plan to avoid lapses.

The report concluded that insurers are increasingly “losing contact with their policyholders. Internet-based communication and mass-mailing techniques have replaced the direct contact that builds healthy customer relationships. From high turnover rates to adversarial relationships, there are hidden costs to this ever-increasing depersonalization.”

It warned, “In addition, the Internet itself is introducing policyholders to clever ways to commit fraud against carriers. Without detailed analytics and audits, this type of insurance leakage is virtually undetectable.”

Quality Planning is part of  Jersey City, N.J. -based Verisk Analytics company.

• • 1/22/2010 5:36:43 PM
  • Kathy Knopp
  • Consumer Fraud
  • I have been in the P&C insurance industry for 35 years and I am not so naive as to think that everyone is honest, and yet what I see happening is what I call "you make me lie". Consumers have had to become very savvy in order to protect themselves from rising insurance rates. Many of those increased rates have come in the last 10 years when insurers were convinced that Credit Scoring was a valid method of pre-determining the probability of claims. I said in the beginning and I say it again...HOG WASH!! It is simply a means to increase rates in a legal fashion and there is no actual proof of this being the case. I was the person in my small agency, one of hundreds in our town, that took first reports, and for 2 years I kept a log of claims and where the insured fell into the credit scoring pack. My results were the exact opposite of the rating claim in that it was the higher credit scoring insured who filed the most claims. This may vary from area to area around the US, but in my town it was the opposite. The state of WA is now re-thinking their stand on credit scoring and it is my fervent prayer that every state does the same. So, as consumers become more savvy and credit scoring has increased rates for most of us, it comes as no surprise to me that the general public sees no option but to lie in order to keep their state mandated insurance in force.

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