New report from Quality Planning Corp. reveals unrated drivers, flawed mileage rating head up the list of risks that increase insurance companies� exposure
SAN FRANCISCO�April 25, 2003�Quality Planning Corporation (QPC), the Rating Integrity Solutions Company, today released its annual Premium Rating Error report, detailing just how much often-overlooked premium rating errors diminish the overall profits of auto insurance companies. The numbers are startling. QPC estimates that $13.7 billion of premium revenues were foregone in 2002. With underwriting profit averaging less than 5%, and investment revenues trending downwards, a revenue increase of nearly $14 billion in premium revenues would clearly make a significant difference to the financial fortunes of leading auto insurers.
The report can be found online at: http://www.qualityplanning.com/research.html.
In the life of an auto policy, many things can happen. Household make-up changes, policyholders change jobs, cars are added and deleted, kids grow up and get their driver licenses. And then there�s always a certain amount of fraud. So, it�s an accepted insurance industry fact that there is some premium �leakage.� Insurance companies know that not all consumers are entirely forthcoming with the facts, overtly or covertly, when they complete an insurance policy application. Consequently, insurers must build this risk into their calculations when they determine premium pricing.
QPC�s Premium Rating Error report, which presents the results of premium audit reviews of over thirteen million passenger auto policies from ten carriers, reveals the extent to which different categories of rating errors contribute to the overall premium rating error. The biggest culprits are unrated drivers (1.7%) and commute/annual mileage (1.6%). Not surprisingly, these are the rating factors over which insurance companies have little control.
To put $13.7 billion premium rating error into perspective, it represents about ten per cent of personal auto insurance premium revenues industry-wide. Daniel Finnegan, founder and CEO of QPC, goes even further in his assessment of just how important rating errors can be: �Our research shows that if an auto insurance company can cut its rating error by fifty per cent, it is likely that the company can more than double its profits.�
Dr. Finnegan sees the problem of rating error extending beyond industry profits: �Rating error introduces significant inequalities into auto insurance; honest people subsidize the dishonest, low risk drivers subsidize high risk drivers, those that use their vehicles little subsidize high mileage users.�
Auto insurer profits lie hidden in manageable data
Take unrated drivers. Policies with unrated (that is, unknown to the insurance company) 16-year-old male drivers in the household exhibit an total claim losses more than twice the national average..
A similar problem exists with annual mileage � the miles drivers state they will drive when they apply for coverage. Many carriers, aware of the high error in these mileage data, rate in only two categories such as zero to 75,00 miles, and over 7,500 miles. QPC�s analysis of the loss-histories of vehicles driven more than 30,000 miles found loss frequencies that were 31 per cent higher than those vehicles driven 16,000 to 20,000 miles. Failure to identify these higher risk vehicles and rate them accordingly represents a major source of unmanaged loss costs. And the corollary of this is that carriers that are able to build and maintain finely graduated rating plans can expect to enjoy significant competitive advantages over carriers with flat rating plans.
Rating integrity and competitive advantage
QPC (www.qualityplanning.com) assists auto insurers in their efforts to minimize rating error. Typically, QPC takes an auto insurance company�s book of policyholders and runs it through a battery of proprietary tests, cross-references and pattern-matching algorithms to identify likely rating error. QPC also provides insurers with additional services such as interviewing policyholders to verify various aspects of their policy. An example of these tests is the frequent, finding that some of the insurance companies� customers have appropriated the social security numbers of people long-ago deceased. Not surprisingly, these policies are associated with high claiming behavior � much of which is fraudulent. Insurance companies live on their information so those companies with better rating information are better able to compete and will be more financially stable in the long run.
�Sometimes we joke that dead people ought not to be allowed to drive,� adds Finnegan. �More to the point, dead people should not be insured to drive. What the report shows is that rating error leads directly to failures in risk management. And, since policy data provides key inputs to marketing, sales, business segmentation, financial planning, corporate planning and staff/agent compensation, rating error directly negatively impacts the overall health of an insurance company.�
About Quality Planning Corporation
Quality Planning Corporation, (QPC) the Rating Integrity Solutions Company, was founded in 1985 and is headquartered in San Francisco. QPC is focused exclusively on providing decision integrity solutions to the insurance industry. QPC works with insurance companies to identify areas of significant premium leakage using sophisticated database management, statistical analysis and modeling, customized survey design, and highly targeted customer interaction. QPC�s customers include the California State Automobile Association, the Automobile Club of Southern California, the Hartford Insurance Company, Nationwide Insurance Company, Progressive Insurance Company and USAA Insurance Company. For more information, visit www.qualityplanning.com.