Study: Rating Errors Cause $15B Decrease in Revenue for Auto Insurers

Auto insurance companies are missing out on more than $15 billion of revenue because of policyholder misinformation, according to a new study of premium rating errors.

Quality Planning, a member of the Verisk Insurance Solutions group at Verisk Analytics, says its premium rating error report for 2010 estimates the private passenger auto insurance industry undercharged policyholders by $15.4 billion due to errors and discrepancies in information collected from insureds.

Report Highlights for 2010

• There was a slight decrease in 2010 — 0.41 percentage points — in auto premium leakage compared with 2008, the last time this report was published. The decrease resulted from a combination of factors, but represented almost 10 percent of the total $164.10 billion in personal auto premium written in 2010.
• Flawed mileage reporting, both annual and commute, was 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, such as 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 in 2010, respectively.
• Premium leakage from policyholders who use their vehicle in a business but report its use as strictly pleasure, declined slightly in 2010 compared to 2008, by 0.02 percent.
• Premium leakage due to errors stemming from driver characteristics and discounts declined by 0.27 percent and premium leakage due to violations and accidents declined by 0.20 percent in 2010, compared to 2008.

“The year 2010 saw a slight decrease in auto premium leakage compared to 2008. 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,” said Dr. Raj Bhat, president of Quality Planning. “Inaccurate mileage assessment is one of many factors that cause premium leakage. Addressing premium leakage across all rating factors can make a big difference.”

The report, “Auto Insurance Industry ‘Donates’ $15.4 Billion,” can be found at www.qualityplanning.com. The report aggregates and summarizes audit results of around 5 million policies from multiple carriers.

Source: Quality Planning, Verisk Analytics