Auto Premium Rating Error Cost U.S. Auto Insurers More Than $16 Billion In 2005

Annual Report From Quality Planning Corp. Concludes That Flawed Data Used to Rate Vehicles Could Be Minimized if Insurers Took Pains to Rectify Policyholder Records

SAN FRANCISCO, Oct. 3 -- Quality Planning Corporation (QPC), the rating integrity solutions company, today released its annual Premium Rating Error report, showing premium rating errors remain a drag on auto insurer profitability. QPC estimates $16.2 billion of premium revenues were foregone in 2005 by insurers that use inaccurate rating information to calculate premiums.

The report can be found online at: http://www.qualityplanning.com/ .

The industry's combined $16.2 billion premium rating error represents nearly 10 percent of the $163 billion revenue recognized by personal auto insurance premiums industrywide. Losses were essentially unchanged from the previous year and indicate insurance companies are still missing opportunities to capture this significant source of revenue, according to the QPC report.

Dr. Daniel Finnegan, founder and president of QPC, noted, "For the average auto insurer, each percent of rating error loss translates into a 20 percent reduction in profitability. An insurer that reins in these losses through stringent data integrity measures can increase profits significantly."

Driver rating errors: leading cause but easiest to fix

QPC's Premium Rating Error report is based on premium audit reviews of more than 18 million private passenger auto policies from 20 major carriers. The report shows how different categories of rating errors contribute to overall premium rating error, and distinguishes between vehicle rating errors (mileage, usage, type of vehicle and location) and driver rating errors, driving experience and driving record).

In 2005, driver rating errors rose to $8.7 billion from $8.5 billion in 2004, largely because of an increase in unrated operators. The report reveals that flaws in vehicle rating factors such as rated commute distance, annual mileage, vehicle usage and rated territory were also major contributors to the nearly $1 billion increase over the 2004 figures. "All of these rating errors can be controlled and reduced by insurers willing to adhere to fundamental principals of solid underwriting -- that is by gathering, validating and maintaining accurate rating data," Finnegan said.

Insurance companies could do better analysis of their data

"In the life of an auto policy change is a constant," said Finnegan. "Household composition fluctuates: policyholders change jobs, cars are acquired and sold, kids get their driver licenses and start to use the family car."

"On average, 52 percent of existing policies have a change in driver or vehicle every year, and 50 percent of the remaining policies have some other meaningful change. It is difficult for auto insurers to keep up with these changes," said QPC's president.

Finnegan noted it is an accepted insurance industry fact that premium "leakage" occurs in the underwriting process. That is, premium revenue is lost because of misrepresentation of facts, lifestyle changes or outright fraud by policyholders. Because not all consumers provide accurate rating information, intentionally or not, insurers build in factors to cover leakage in their pricing, inflating premiums for all policyholders. The QPC report shows how auto insurers could better analyze rating data to identify and correct flawed information.

"The rating error extends beyond just industry profits," noted Finnegan. "Rating error introduces significant inequalities into auto insurance. Honest people subsidize the dishonest, low-risk drivers subsidize high-risk drivers, low-mileage drivers subsidize high-mileage drivers," he said.

Auto insurer profits lie hidden in manageable data

Vehicle-garaging errors represent one area where better analysis can help control risks. Quality Planning Corporation has identified thousands of examples where young drivers keep their vehicles registered at their parents' homes long after they have moved to large cities such as New York or Los Angeles, where coverage costs tend to be higher.

Another significant cause of leakage is under-reporting the number of miles driven. The QPC report noted mileage under-reporting can occur because of "mileage bands" or groupings that rate many policyholders at lower mileage levels than they actually drive. Additionally, while 17 percent of vehicles are driven more than 20,000 miles per year, only 4 percent are actually rated in this category. "Failure to identify these higher risk vehicles and rate them accordingly represents a major source of unmanaged loss costs," the report says.

QPC's research shows that by building and maintaining finely graduated rating plans, insurers achieve a significant competitive advantage over carriers with flat rating plans.

Rating integrity and competitive advantage

QPC helps auto insurers minimize rating error. QPC processes auto insurance companies' book of policyholders through a battery of more than 150 proprietary tests, cross-reference checking and pattern-matching algorithms to identify errors and discrepancies that might suggest customer fraud.

QPC also provides insurers with additional services, such as policyholder phone interviews to discover missing drivers, verify garaging addresses, determine annual mileage, and other key rating information. Over time, insurance companies with accurate rating information are better able to compete and are more financially stable.

About ISO

ISO is a leading provider of products and services that help measure, manage and reduce risk. ISO provides data, analytics and decision-support solutions to professionals in many fields, including insurance, finance, real estate, health services, government and human resources. Clients use ISO's databases and services to classify and evaluate a variety of risks and detect potential fraud. In the U.S. and around the world, ISO's services help customers protect people, property and financial assets. For more information, visit http://www.iso.com/ .

About Quality Planning Corporation

An ISO business, 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. Quality Planning Corporation (QPC), the rating integrity solutions company, was founded in 1985 and is headquartered in San Francisco. For more information, visit http://www.qualityplanning.com/ .