It can be difficult to calculate the extent to whichdeficiencies in communication and the availability of credible dataundermine insurers' profitability. Auto insurers are acutely awareof this, as many drivers misrepresent annual mileage or fail to report life changes that affect the calculation ofpremium, and, by extension, the potential risk assumed by thecarrier writing the policy.

But when does misrepresentation meander into “fraud”territory? Moreover, what are these miscalculations really costingthe auto insurance industry? Quality Planning's answer to thelatter question is about $15 billion last year.

To arrive at that staggering number—or more specifically $15.4billion in lost revenue in 2010—the San Francisco, Calif.-basedmember of Verisk Insurance Solutions group at Verisk Analyticsanalyzed 5 million auto policies. It then aggregated and summarizedits audit results in an annual report intended to quantify ratingerrors and discrepancies that result in auto insurers undercharging policyholders.

Some of the more noteworthy statistics found in the report arelisted below:

• The year 2010 saw a slight decrease (0.41 percentage points) inauto premium leakage compared with 2008 (the last time this reportwas published) as a result of a combination of factors, yet stillrepresenting almost 10 percent of the total $164.10 billion inpersonal auto premium written in 2010.
• Flawed mileage reporting, both annual and commute, was thesingle largest contributor to rating factor error in 2010,representing a loss of more than $3 billion in premium.
• Two other factors—unreported drivers (household drivers notdeclared on the policy) and driver characteristics and discounts(which include driving experience, age, marital status, studentdiscounts, affinity group membership, and misrepresentation ofdriver identity)—accounted for $2.7 billion and $1.9 billion inlost premium, respectively.
• There was a sizeable decline in premium leakage because oferrors stemming from driver characteristics and discounts (0.27percent) as well as a decline in violations and accidents (0.20percent).

“[Last year] we saw a slight decrease in auto premium leakagecompared to 2008,” said Dr. Raj Bhat, president of QualityPlanning. “While there is ample evidence that people, on average,drove somewhat more in 2010, we believe that the overall mileageincrease in driving obscures the fact that there was a segment ofthe population whose driving was drastically reduced due to joblosses and tougher economic times.”

Dr. Bhat added that inaccurate mileage assessment is one of manyfactors that cause premium leakage. To recapture lost revenue andprevent further leakage, insurers will need better analysis andmore frequent updates to policyholders' life changes, behaviors,and circumstances.