Insurance carriers are constantly looking for better ways tofight fraud.

As technologies become more advanced, new options are appearingon the market. Telematics and usage-based insurance are generatinga lot of interest, with the telematics market forecast to show a50% compound annual growth rate by 2020.

But could fraudsters (people knowingly committing acrime) be exposing a flaw in how carriers collect data to determine fraud?What is the likelihood that fraudsters will sign up for “pay as youdrive” insurance models? And, can insurance carriers afford to waitfor lengthy telematics installations and data collected over aperiod of time to properly quote and renew policies?

While auto carriers ramp up telematics and usage-based insurancemodels, a sizable number of policyholders continue to commit fraudbecause they can get away with it. Fortunately, there are alternateways to catch insurance fraud using “where” data.

A more effective way

One type of “where” data is the kind we all use and shareeveryday – checking into a restaurant from a social media app, orusing a map app to get driving directions from one's currentlocation.

But the type of “where data” carriers should care about the mostis vehicle location data. By law, every vehicle must display alicense plate. Vehicle location data captures license plateinformation to provide vehicle sightings and the associatedlocation data, including the date, time and location where thevehicle was sighted. Unlike telematics or “pay-as-you-drive” plans,the driver is not required or ever asked to opt in; if someonedrives a vehicle, he or she is automatically opted in to this typeof data.

Rather than hoping policyholders opt in to telematics or “pay asyou drive” programs, carriers can cut down on garaging fraud at thequote and renewal by using vehicle location data solutions to fillin the blanks. For example, your policyholder reports an address inGreenville, South Carolina, but the vehicle location data showsthat vehicle has never been seen at that address. It has, however,been seen 180 times at a location in the Bronx. That's the power of“where” or vehicle location data – the sightings don't lie, butpeople often do.

Related: The power of analytics for insurance: You ain'tseen nothin' yet

Industry estimates show that garaging fraud can beresponsible for up to $2 billion in premium leakage annually.(Photo: Shutterstock)

Taking on garaging fraud

Garaging fraud is such a commonly accepted behavior thatpolicyholders often brag about how much money they can save withit. The industry estimates that insurance premiums are one percenthigher than they would be without garaging fraud. For carriers,every one percent of a rating error left uncorrected causes a 20%profit loss. As a result, garaging fraud adds up to more than $2billion in annual premium leakage.

Garaging fraud can be committed in several ways. Forexample:

The unintentional fraudsters:

• Snowbirds: They fly both ways. They either comprise the 750,00people who temporarily move to warmer climates during cold wintersin other parts of the country, or the other 600,000 who can't takethe heat and get out of the South or Southwest during thesummer.

• College students: More than 2.5 million U.S. students arereturning students who live out of state, and take the old familytruckster with them when they drive back to school. Carriers missthe majority of these students who change where they keep theirvehicles.

• Movers: Carriers often change the billing address, but fail toverify and/or change the garaging address. With more than 7.5million people moving out of state each year, this is a demographicworth keeping an eye on.

Related:  How IoT is inviting insurers into smarthomes

Customers who lie about where they garage their vehicles maybe less than truthful about other factors involving their coverage.(Photo: Shutterstock)

The “Shame on You” Fraudsters:

• Agents: Carriers report some agent issues which usually occurwhen there is an unusual number of garaging issues with the agent'sbook.

• Consumers: Those who knowingly commit garaging fraud are lesslikely to be high-risk drivers, so their rates are already low andthey can fly under the radar on the garaging issue.

With cases like this all over the country, a $1,000 fraud hereand there really adds up to a hefty amount. In fact, sample booktests demonstrate millions in premium leakage.

For example, one carrier's customer listed the garaging addressin Baytown, Texas with an annual premium of $813. However, thevehicle sightings data showed 150-plus sightings in New York fromJune 2010 to June 2015, which added up to $1,085 in annual premiumleakage and $5,500 premium leakage to date. And that's just oneexample of a single customer from a single carrier.

“Where” data solves the garaging fraud problem by collectingdata on where the vehicle is frequently spotted, allowing carriersto “score” the policyholder's address against the vehicle locationdata and tell the carrier whether it needs to investigatefurther.

In addition to nabbing garaging fraudsters, intentionally ornot, the “where” data can also identify high-risk policies (e.g.,if the vehicle is actually being kept in a crime-ridden area withhigh vehicle theft risk, not in the safer neighborhood listed onthe policy).

Related: Using smart technology to combat insurancefraud

Evidence shows garaging fraud is predictive of loss

If policyholders are comfortable with committing garaging fraud,the question becomes: what else are they okay with? Chances are ifsomeone is willing to lie about where they live; use a P.O. Box,second address or a friend's address to avoid paying the correctpremium for the risk, they will lie about other things as well.Lies like, “existing damage was the result of a recent caraccident, the car was stolen even though it was recovered at myboyfriend's apartment, my injury is very severe, or I was onlyvisiting New York from Florida when my car was stolen.”

Attitudes about fraud are changing, yet too many people stillhave a Robin Hood complex when it comes to insurance carriers. Arecent Insurance Research Council survey found that 18% ofrespondents believe it is acceptable to make up for premiums paidin the past.

Carriers are beginning to take the position that liars lie, andthat these liars are inherently higher risks. In fact, an analysisshows that carriers can look at policies flagged for garaging, andpredict which of these will add up to higher losses down the road.These are the carriers who don't want liars on their books.

Carriers may still opt for telematics/pay-as-you-drive plans aspart of a comprehensive fraud-detection plan, but “where” data canprovide insights that telematics can't. Vehicle location data canimpact the bottom line, helping carriers get fraud off their booksmore quickly, saving them and law-abiding policyholdersmillions.

Alex Young ([email protected]) is vicepresident and general manager, insurance, for DRN.