cost Auto Insurers $15b
It can be difficult to calculate the xtent to which deficiencies in communication and the avail- ability 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 Insur-
ance Solutions group at Verisk Analyt-
ics analyzed 5 million auto policies. It
then aggregated and summarized its
audit results in an annual report in-
tended to quantify rating errors and
discrepancies that result in auto insur-
ers 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 re- G VERISK ANALYTICS REPORTED THAT FLAWED MILEAGE REPORTING WAS THE SINGLE LARGEST CONTRIBUTOR TO RATING FACTOR ERROR IN 2010, REPRESENTING A LOSS OF MORE THAN $3 BILLION IN PREMIUM.
porting, 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,” said 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 seg-
ment of the population whose driving
was drastically reduced due to job losses
and tougher economic times.”
Dr. Bhat added that inaccurate mileage
assessment is one of many factors that
cause premium leakage. To recapture lost
revenue and prevent further leakage, in-
surers will need better analysis and more
frequent updates to policyholders’ life
changes, behaviors, and circumstances.
—By Christina Bramlet
SPeAKING OF FRAUD THROUGH THE YEARS
In the 44 years attorney Barry Zalma has been helping fight insurance
fraud, he has seen just a few modifications to the same ole schemes. What
has changed drastically, however, is the willingness of insurers to fight
and take fraud cases to trial. In addition to practicing law, Zalma has been
publishing an e-newsletter, Zalma’s Insurance Fraud Letter, twice a month
for more than 15 years. Claims Assistant Editor Melissa Stewart spoke with
Zalma about his experiences battling fraud, and he provided suggestions about how insurers can successfully conquer their contenders.
With barry Zalma, esq., Zalma Insurance
What sparked your interest in insurance, specifically fraud?
I was an Army intelligence agent in the 1960s and wanted to continue acting as an investigator. Fireman’s Fund American hired me
to work as an adjuster, and I quickly found that insurance fraud
seemed to be a regular occurrence. Since I was an investigator before I was an adjuster, I gathered more facts than most and worked
hard to establish a defense.
What is the most common type of
insurance fraud you come across?
The most common types of insurance fraud
are small and committed by honest people
with a real claim who add something to their
loss to cover their deductible. The state
Departments of Insurance call these “soft”
frauds, ignoring the fact that they are just as
criminal as a staged accident.
With the economy down, people with
leased vehicles who have exceeded the
agreed mileage and can’t afford to pay the
penalty are the most common types of fraud we see. The most expensive, on the other hand, are medical insurance, Medicare, and
Medicaid fraud, where doctors, chiropractors, and fake medical
clinics are collecting millions.
G Zalma has been working
in the insurance industry for