Auto Insurance Industry Overlooked $16 Billion in Premium Losses
Premium Rating Error Report by Quality Planning Concludes Auto Insurers Could Boost Profits by Paying More Attention to Miles Driven by Customers
SAN FRANCISCO, CA, Dec 04, 2008 (MARKET WIRE via COMTEX) -- Quality Planning ( www.qualityplanning.com), the ISO company that validates policyholder information for auto insurers, today released its annual premium rating error report. Quality Planning estimates that these errors resulted in the loss of $16.1 billion of auto insurance premium revenues in 2007, slightly down from the 2006 figure of $16.6 billion -- but still almost 10 percent of the total $162 billion in personal auto premium written. Two primary reasons are identified for rating error: consumer fraud and the inability of insurers to keep track of key lifestyle and driving habits of their customers.
The report, titled "Auto Insurance Industry Continues to Hemorrhage Cash," can be found online here: http://tinyurl.com/6mtf3c.
"The year 2007 saw the first decrease in auto premium leakage since Quality Planning began issuing this industry report five years ago," said Dr. Raj Bhat, president of Quality Planning. "We believe this is likely the cumulative effect of several large insurers eliminating the mileage component from their rating plans."
"Seldom is there debate over whether or not people who drive more miles should pay higher premiums, yet over the past several years some companies have elected to forgo the use of annual mileage as a critical rating factor -- simply because it was difficult to validate," added Bhat. "Their decision may prove costly."
The report aggregates and summarizes audit results of more than 4 million policies from 16 major carriers. 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.
In this year's report, Quality Planning noted a small upward trend in the misreporting of garaging addresses and of youthful drivers. The trend was most striking in large urban areas where vehicle garaging location can dramatically affect premium. Nationwide, 1 to 2 percent of all policies written include an unrated operator, who is most often a high-premium younger driver. Policies that contain such rating errors account for more than $2 billion of annual premium leakage.
"The insurance industry can combat premium leakage by applying appropriate analytic tools," said Bhat. "Some policyholders misrepresent facts, and others don't report lifestyle changes. Others boldly commit fraud. Underwriting doesn't have to accept those trends as a cost of doing business or, worse, as justification to counterbalance leakage by inflating premiums for all policyholders."
The 2007 report includes a detailed analysis that shows how different categories of rating error contribute to overall premium rating error and distinguishes between vehicle rating errors (mileage, usage, type of vehicle, and location) and driver rating errors (driving experience and driving record). Quality Planning recommends auto insurers better analyze policyholder rating data to identify and correct flawed information -- steps which could have a positive effect on 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 might suggest customer fraud. Quality Planning also provides insurers with additional services, such as policyholder phone interviews to discover missing drivers, verify garaging addresses, determine annual mileage, and other key rating information. Over time, insurance companies with accurate rating information are better able to compete and are more financially stable.
About ISO
A leading source of information about risk, ISO provides data, analytics, and decision-support services to professionals in many fields, including insurance, finance, real estate, health services, government, human resources, and risk management. Using advanced technologies to collect, analyze, develop, and deliver information, ISO helps customers evaluate and manage risk. The company draws on vast expertise in actuarial science, insurance coverages, fire protection, fraud prevention, catastrophe and weather risk, predictive modeling, data management, economic forecasting, social and technological trends, and many other fields. To meet the needs of diverse clients, ISO employs an experienced staff of business and technical specialists, analysts, and certified professionals. In the United States and around the world, ISO helps customers protect people, property, and financial assets. For more information, visit www.iso.com.
About Quality Planning Corporation
An ISO business, Quality Planning is focused exclusively on providing rating integrity solutions to auto 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 retained contractual rights to aggregate data for industry analysis.
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SOURCE: Quality Planning Corp.
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