Policyholder Ambiguities Cost Auto Insurers $15B

It can be difficult to calculate the extent to which deficiencies in communication and the availability of credible data undermine insurers’ profitability. Auto insurers are acutely aware of this, as many drivers misrepresent annual mileage or fail to report life changes that affect the calculation of premium, and, by extension, the potential risk assumed by the carrier writing the policy.

So when does misrepresentation meander into “fraud” territory? Moreover, what are these miscalculations really costing the auto insurance industry? Quality Planning’s answer to the latter question is about $15 billion last year.

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

Among the most noteworthy statistics found in the report were: a slight decrease in auto premium leakage in 2010 compared with 2008 (as a result of a combination of factors); and flawed mileage reporting, both annual and commute, as the single 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 not declared on the policy) and driver characteristics and discounts (which include driving experience, age, marital status, student discounts, affinity group membership, and misrepresentation of driver identity)—accounted for $2.7 billion and $1.9 billion in lost premium, respectively.

“[Last year] we saw a slight decrease in auto premium leakage compared to 2008,” says Dr. Raj Bhat, president of Quality Planning. “While there is ample evidence that people, on average, drove somewhat more in 2010, we believe that the overall mileage increase in driving obscures the fact that there was a segment of the population whose driving was drastically reduced due to job losses and tougher economic times.”

Dr. Bhat adds that inaccurate mileage assessment is one of many factors that cause premium leakage. To recapture lost revenue and prevent further leakage, insurers will need better analysis and more frequent updates to policyholders’ life changes, behaviors, and circumstances.