Robust Rate Evasion Practices

The cost of rate evasion is a combination of the theft of premium revenue from insurers and increased claims for those insurers. Anything that increases the frequency or severity of claims has a negative impact on the claims side of the business, which represents the largest component of P&C insurers' performance metrics.

Rate evaders are often sophisticated in their approach and understand how thoroughly an insurer screens new businesses and handles subsequent claims. Insurers lacking rate evasion detection and verification capabilities at the point-of-sale, in conjunction with good rate evasion training for claim representatives, will be adversely selected. This may result in inadequate premium collection, increased claim frequency, and higher loss ratios.

Using rate evasion detection tools at the point-of-quote provides carriers with the ability to identify and resolve data discrepancies as quickly as possible. Additional premium capture and loss avoidance are the two most immediate and tangible benefits of rate evasion detection tools used during the point-of-sale process. However, new data captured about the insured(s) and the vehicle(s) — the policy characteristics — can be incredibly valuable during the first notice of loss (FNOL) process in claims, when fraud detection tools are often utilized.

For example, a major carrier that implemented a rate evasion detection tool at the point-of-sale subsequently noticed a decrease in first-term losses and improved loss ratios in states traditionally known for high-rate evasion exposure. As a consequence, the insurer was able to offer lower, more competitive premium rates to new customers. The carrier also integrated its rate evasion capabilities at the point-of-sale with its claim fraud detection tools during FNOL. This increased the carrier's ability to recognize material misrepresentation early in a claim investigation.

Connecting the Dots: Underwriting and Claims

Carriers that have been able to operationalize the integration of the data throughout the lifecycle of a policy and claim have seen tremendous value. Early recognition of material misrepresentations can result in the policy being rescinded and subsequent loss avoidance benefits.

Another key benefit is to identify suspicious claims as quickly as possible in the claim lifecycle and then route those claims to the most effective resources. Suspect claims are usually routed to a special investigations unit (SIU). The countrywide average for claims referred to an SIU is about 1.5 percent. Given that an estimated 10 percent of claims display some degree of fraud, carriers are not able to identify a large percentage of potentially fraudulent claims. However, rate evasion tools enable more effective utilization of scarce SIU resources to improve the consistency and objectivity in the evaluation process of a claim.

There are indicators that will alert the claim representative to possible rate evasion and other types of fraud. Ideally, the rate evasion tool resulting from the point-of-sale process should be evaluated in conjunction with the fraud detection tool during the FNOL process. For example, when an issued policy creates rate evasion alerts, and if that policy has a claim, then that policy is four times more likely to have a fraudulent claim associated with it.

Two of the more common rate evasion schemes that impact claims are illustrated in the following hypothetical situations:

Garaging Rate Evasion

Let's consider this scenario: The rate evasion tool used at point of sale identified personal attributes of the policy that indicated that the driver(s) did not live in the state where the policy was issued. Subsequently, an accident occurred in a large metropolitan area outside the policy state; all parties in the accident live in the large metropolitan area. The metropolitan area was identified in the rate evasion results, so the claim is routed to the SIU.

The SIU investigator would have access to the rate evasion results from point-of-sale and would evaluate these points:

• Are the vehicle's license plates out-of-state? Are parking stickers for out-of-state location(s) present on the vehicle?
• Is the driver's license of the insured from another state?
• Does the insured insist on contacting you via phone as opposed to providing a local number for contact?
• Does the insured want the car repaired at an out-of-state body shop?
• Is the insured providing a post office box for receiving mail instead of a physical address?
• Is the insured's work phone number a significant distance from the alleged garaging address? When the insured calls, caller ID may verify that the insured is calling outside of the policy state and from a location with higher premiums than the policy state.

Vehicle Rate Evasion

Scenario A – Good rate evasion solutions have the ability to identify vehicles that are not eligible for personal auto insurance coverage, such as dismantled vehicles, vehicles used in livery or for commercial use, or with a title of junk, salvage, or flood. Once verified, the carrier can deny or rescind coverage prior to any subsequent claims being filed, which will most likely be fraudulent.

Scenario B – The insured reports a loss shortly after policy inception, usually a comprehensive loss, to obtain coverage for preexisting damage. Consequently, inspections of the damages are inconsistent with the loss description or appear old.

Scenario C – The vehicle on a newly issued policy is a late model or an expensive vehicle; however, no comprehensive or physical damage coverage has been obtained. This is often a flag on bodily injury uninsured motorist (BIUM) claims. The vehicle may be a salvage vehicle that is just being used to perpetrate the BIUM fraud.

While the aforementioned examples are some of the most common, many more exist. Some of them may be more prevalent depending on your geography or the makeup of your portfolio. However, whatever scheme is used in rate evasion, it is important to note that the schemes will always evolve. Therefore, it is important to stay ahead of the game with tools and education to prevent and stop fraud early in the process.

Carriers with a robust rate evasion capability in all aspects of their auto insurance portfolio — from underwriting to claims — will be able to maximize their profitability and competitiveness in difficult markets.