Premium Leakage Cost Auto Insurers $15.9 Billion in 2008

January 1, 2011 / 4 min read

Analysis by Analytics Expert Quality Planning Concludes Auto Insurers Could Stem Losses by Better Analysis and More Frequent Updates of Policyholder Information

SAN FRANCISCO, CA — January 20, 2010 Quality Planning (www.qualityplanning.com), a Verisk Analytics company that validates policyholder information for auto insurers, has released its annual premium rating error report. The report quantifies the errors and discrepancies that result in auto insurers undercharging policyholders. For 2008, Quality Planning estimates that the private passenger auto insurance industry missed $15.9 billion in revenue simply because of policyholder misinformation. In 2007, the company calculated $16.1 billion in missed auto insurance premium revenues. Although the 2008 figure is down slightly from the previous year, it is still almost 10 percent of the total $161.7 billion in personal auto premium written.

"The year 2008 saw a slight decrease in auto premium leakage over 2007. Most of this decrease is accounted for by a reduction in miles driven, which is attributable to the cumulative effects of a serious economic recession and sky-high gasoline prices — above $4.00 — in the summer of 2008," said Dr. Raj Bhat, president of Quality Planning. "Premium leakage happens. It's an undesirable, yet inevitable, aspect of auto underwriting. What insurers should understand, though, is that getting on top of the premium leakage problem is equivalent to reducing their combined ratio by three to five points."

Mileage, both annual and commute, was the most misrepresented rating factor again in 2008 and accounted for a loss of more than $3.0 billion in premium. Two other factors — unrated operators (household drivers not declared on the policy) and driver characteristics and discounts (which include inaccuracies such as driving experience, age, marital status, student discounts, affinity group membership, and misrepresentation of driver identity) — accounted for $2.6 billion and $2.3 billion, respectively.

Quality Planning recorded an upward trend in the misreporting of vehicle garaging address and of youthful drivers. The trend was most striking in large urban areas, where the actual location of where a vehicle is garaged overnight can substantially affect premium cost. Nationwide, 1 to 2 percent of all policies written include an unrated operator, who is most often a high-premium younger driver. Rated properly, those policies account for more than $2 billion of annual premium leakage.

The report, "Auto Insurance Industry Leaves Billions on the Table," can be found online at the company's website, www.qualityplanning.com. The report aggregates and summarizes audit results of more than four million policies from multiple carriers, and draws from business written in all states except Hawaii and Alaska. The sample includes substandard to preferred books of business, all distribution channels, and national and regional carriers (1). Sample results were weighted to reflect the total national private passenger auto line.

The 2008 report includes a detailed analysis that distinguishes between vehicle rating errors (mileage, usage, type of vehicle, and location) and driver rating errors (driving experience and driving record) and shows how different categories of rating error contribute to overall premium rating error. Quality Planning urges auto insurers to improve their analysis of policyholder-rating data to identify and correct flawed information — steps that could have a positive effect on overall corporate profitability.

Rating Integrity and Competitive Advantage
Quality Planning helps auto insurers minimize rating error. The San Francisco-based company processes auto insurance companies' books of policyholders through a battery of more than 150 proprietary tests, cross-reference checking, and pattern-matching algorithms to identify errors and discrepancies that suggest customer fraud, neglect, or misrepresentation. Quality Planning also provides insurers with additional underwriting services to discover missing drivers, verify garaging addresses, determine annual mileage, and access other key rating information. Over time, insurance companies with accurate rating information are more competitive and more profitable.

About Quality Planning
A Verisk Analytics company, Quality Planning is focused on providing rating integrity solutions to auto and home insurers. Quality Planning works with insurance companies to identify areas of significant rating errors using sophisticated database management, statistical analysis and modeling, customized survey design, and highly targeted customer interaction. Quality Planning helps clients work within their existing rating plans and charge fair prices to policyholders based on a true representation of risk. The company was founded in 1985 and is headquartered in San Francisco. For more information, visit www.qualityplanning.com.

(1) The sample was limited to audits for which Quality Planning maintains contractual rights to aggregate data for industry analysis.

Release: Immediate

Contact:
Tim Cox
Zing Public Relations
650-369-7784