Report: Auto Insurers Left $15.4 Billion on the Table in 2010

Private auto insurance companies did a slightly better job of limiting rating errors in 2010, but mistakes that resulted in policyholders being undercharged still cost the industry $15.4 billion, according to a new report from Quality Planning.

Those oversights were down 0.41 percent from the previous year, but nevertheless led to coverage providers missing out on nearly 10 percent of the industry’s combined $164.1 billion in premiums, according to the annual report from the San Francisco company, which verifies policyholder data for insurers.

Insurance premium leakageResearchers said the largest rating error was inaccurate mileage reporting, which accounted for more than $3 billion in “premium leakage,” followed by drivers who were not declared on policies and inaccurate motorist characteristics and discounts, including driving experience, age, marital status and other factors.

“Inaccurate mileage assessment is one of many factors that cause premium leakage,” said Raj Bhat, president of Quality Planning. “Addressing premium leakage across all rating factors can make a big difference.”

According to the report, rating errors can mean large amounts of uncompensated risk—and unrealized revenue—for insurers.

By way of example, the study’s authors say policies for households with 16-year-old male drivers who are not reported have an average loss ratio of more than 200 percent. Teenagers are considered a high risk auto insurance group because of their greater likelihood of being involved in vehicle crashes.

And motorists who report low mileage while driving far more miles have their greater risk subsidized by lower-risk drivers, according to Quality Planning.

Rating Errors Go Both Ways

The report does not address rating errors that benefit coverage providers at the expense of policyholders, but a Quality Planning spokesman said those mistakes generally take care of themselves.

“Consumers are quite good at correcting errors when they’re overpaying and not quite so good at correcting errors when they’re underpaying,” spokesman Tim Cox said in a telephone interview. “I think there’s just a natural tendency for people to be on top of that.”

Problems for insurers often arise because of agents who are anxious to close policy sales and neglect to verify policyholder information. And some coverage providers “just aren’t doing a good job of double-checking all the data points” on policyholder information, including major changes in customers’ driving habits, he said.

If, for example, a company does not update its information on a female policyholder who was a stay-at-home mother when she originally applied but has since become a real estate agent and drives frequently for work, it will miss out on premiums it is owed, he said.

“Those inaccuracies can creep in at the inception of the policy and never get corrected properly,” Cox said.

The Quality Planning analysis is based on audit results of about 5 million policies provided by multiple companies.

According to the report, 2010 saw a 0.02 percent decline in premium leakage due to policyholders using vehicles for business but reporting it as strictly for pleasure.

There was also a 0.27 percent decrease in errors related to driver discounts and characteristics and a 0.2 percent drop in mistakes involving accidents and traffic violations.

But Quality Planning points out that small losses can add up for business with narrow profit margins.

“Without action, insurers will continue to lose billions more over the coming years—all due to premium leakage that could be stemmed if appropriate action were taken,” the report states.

About John Pirro
John Pirro is a licensed fire and casualty insurance agent specializing in various aspects of the auto insurance industry. He worked in the auto body repair industry before taking a reporting position at Online Auto Insurance News.

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