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Evasive maneuvers: how to fight back against misrepresented auto insurance applications and claims.


With double-digit unemployment, mortgage delinquencies three times higher than at the beginning of 2007 and auto delinquencies expected to increase again in 201 O, it is apparent that many Americans are having difficulty making ends meet.

One potential downstream consequence is the higher likelihood that property/casualty insurance carriers will need to identify unprofitable risks and potential application misrepresentations as early in the policy life cycle as possible. These misrepresentations, in which applicants intentionally give carriers inaccurate personal, automobile or property information, are known as rate evasion.

Several recent studies have estimated that rate evasion costs personal lines auto carriers more than $16 billion a year--almost 10% of net premiums written. Fraud, in all forms, is estimated to account for 10% of the incurred losses and loss-adjustment expenses of the property/casualty insurance industry, or about $30 billion annually. It adds as much as $300 per year to the premiums for the average U.S. household and accounts for up to 30 cents of every insurance dollar paid.

Customers who have been identified at the point-of-sale as having committed rate evasion demonstrate that they are a moral hazard. They are willing to make misrepresentations for personal gain, and potentially will be more likely to inflate a claim should they ever have one. The tough economy is only exacerbating the problem. An increasing number of people seem willing to falsify the information on their application to lower their premiums dramatically. The financial incentive to give a false address that reduces their premium by over $1,500 may be too tempting for some people when they are going through other hardships.

Impact on Profits

The cost of rate evasion to insurers is a combination of the theft of premium revenue and increased claims. Loss ratio is increased on both sides of the equation: higher losses in the numerator and lower premium in the denominator.

Rate evaders are often sophisticated and know how thoroughly an insurer screens new business.

Why should carriers bother trying to find the rate evaders now? The argument goes that the cost of fraud is built into the system and rates are adjusted accordingly. Consumers are passed along the higher costs, but no insurance company has to bear the full cost.

The answer is that eliminating or reducing rate evasion provides a competitive advantage. As with any segmentation strategy, an effective detection tool will allow a company to charge an honest applicant a fair, accurate rate. Since carriers without a fraud detection tool will have to pass the rate evasion "surcharge" on to everyone, they won't be able to match the rates of the company with an effective tool. This will create a classic segmentation advantage for the first company--they write the good risks at an appropriate premium and the inadequately priced risks will go to the company without a good system.

Using rate-evasion detection tools at the point-of-quote gives carriers 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.

However, new data captured about the insureds and their vehicles--the policy characteristics--can be incredibly valuable during the first-notice-of-loss process in claims as well, when claims fraud detection tools are often used.

For example, a major carrier who implemented a rate evasion detection tool at the point-of-sale subsequently saw a decrease in first-term losses and improved loss ratios in states 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 claims fraud detection tools during the first notice of loss. This increased the insurer's ability to recognize material misrepresentation early in a claims investigation.

Rate Evasion Examples

The rate evasion tool used at the point of sale can identify misrepresentations or inconsistencies on the application that deserve further investigation. Examples include:

* An applicant provided a Rochester, N.Y., garaging address. The rate evasion tool returned a New York City location as the applicant's most current address. The correct address increased the premium to $2,720 from $899--a jump of more than 300%.

* Another applicant provided a Social Security number belonging to a deceased person to hide his identity and poor insurance score. The company elected to cancel the policy based on the misrepresentation and avoided a potential loss.

* An applicant with no prior insurance sought to cover a vehicle that was found to have been damaged in the last 30 days. An inspection was performed and the pre-existing damage was excluded from the policy, avoiding a loss of $4,200.

* The vehicle on the application was found to have a junk title brand. The applicant refused to have the vehicle inspected and thus the policy was not bound. As a result, $10,000 in losses on a fraudulent "total loss" claim was avoided.

Companies that have implemented a tool to eliminate these types of rate evasion have reported a combined benefit (additional premium capture plus loss avoidance) worth up to $132 per policy. While other companies may not experience benefits at this level, the economics of implementing a rate evasion detection tool are very compelling.

A full implementation will deliver the highest payback, but even a simplified approach that targets fewer than 3'/,, of new applications for specific rate evasion issues can be highly effective. One company began evaluating approximately 2,000 policies per day in the Northeast for potential rate evasion. Managers then decided they only had the resources to properly investigate 50 applications per day. They were able to implement a solution that prioritized the potential problems and focused on those policies with the highest amount of premium leakage.

By identifying and working on the 50 largest potential premium-dollar rate evasions per day, they were able to generate an additional $1.2 million in premium per month. A full solution would yield considerably more, but this limited trial allowed the insurer to get the solution in place and start seeing immediate benefits before developing a comprehensive point-of-sale strategy.

Carriers that have a robust rate-evasion capability in all aspects of their auto insurance portfolio, from underwriting through claims, will be able to maximize their profitability and compete more effectively in difficult markets.

* The Background: The recession has caused rate evasion on auto insurance applications and claims to rise.

* The Situation: Vigilant insurers that carefully screen application and claims can boost their bottom lines significantly.

* The Next Step: Auto insurers should adopt best practices in the application and first-notice-of-loss processes.

RELATED ARTICLE: Building and using a rate evasion detection tool.

The benefits of an efficient tool should always be to reduce losses and operating expenses; increase top-line growth by reducing rate evasion costs; and improve data integrity by allowing only verified information into your system.

To maximize these potential benefits, an efficient rate-evasion detection tool should have these elements:

Data: There must be multiple, autonomous and current data sources that allow the proper evaluation of the applicant-provided data. Sources could include credit header data; identity theft and fraud data; driver's license information; commercial phone and address information; Social Security Administration Files; vehicle history reports; and branded title information. The sources generally include the ability to verify:

1. Identity of the applicant. A false Social Security number could indicate fraud, as well as point to trying to force a no-hit when a credit-based insurance score is used for rating. Since no-hits must generally be rated at an average rate, this is another source of premium leakage. The date of birth of the individual can also be verified.

2. Garaging information. Check for the address for a mail drop, known commercial address and whether the applicant is associated with the address. The system should be able to give the current address known for the applicant.

3. Additional drivers in the household. Undisclosed youthful drivers could have a rate 400% higher than the average driver, so finding these omissions will have a big impact on premium capture.

4. Vehicle history. Determine if the vehicle has been in a recent accident so that the owner cannot submit a claim to pay for the damage soon after the inception date. Verify if the vehicle is used for commercial purposes or registered as such, and check the branding history to determine if the car is insurable.

Decisioning: The system must allow the insurer to identify inconsistencies in the input-versus-verified data, instantaneously generate a response and allow the insurer to set business rules depending on state, policy type and distribution channel.

Actionable Output: Specific and actionable messages must be delivered back to the agent or customer service representative at the point of sale. Efficient use of this resource will allow for more productive selling time while also ensuring that applications submitted are clean and will not require back-end review.
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Author:Reynolds, Jeff
Publication:Best's Review
Geographic Code:1USA
Date:Mar 1, 2010
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