Verisk: $29B Personal Auto Premium Leakage a Problem for Insurers

Auto claims frequency and severity dipped considerably during the economic downturn that began in 2008. As the economy recovers it carries a downside for road safety, according to Dorothy Kelly, director of Product Development for Verisk Insurance Solutions.

A recovering economy means more cars on the road and the potential for more accidents.

In light of Verisk’s finding that there is $29 billion in annual premium leakage, personal auto insurers are tightening their underwriting belts. The amount equals 14 percent of personal auto premiums collected, she said in a webinar on the subject last week. She said leakage is a “major driver of challenge to the auto market.”

Kelly said insurers are getting worse data from applications and that is flowing through to underwriting results.

Some major trends that impact leakage include deteriorating data used during underwriting. Some reasons for missing or invalid data could be due to deliberate misrepresentation, less person to person interaction to assist in completing a policy application and an increased tolerance for application information gaps, she said.

“Insurance companies have really faced…a market where growth for growth sake has been acceptable,” she added.

Another trend relates to rate increases. According to Kelly, auto insurance rates in 2016 spiked the most since 2003. As a result, customers are shopping around and that could impact retention rates.

Kelly outlined the sources of premium leakage:

1. unrecognized drivers – $10.3B
2. underestimated mileage – $5.4B
3. violations/accidents – $3.4B
4. garaging – $2.9B
5. identity exceptions – $2.8B
6. other – $4.1B

Unrecognized drivers could be the result of the boomerang generation, she said, noting that kids are coming back and living at home again. In some cases, they will operate a motor vehicle owned by their parents.

Nearly 40 percent of policies have a change of driver, vehicle or address each year, according to Kelly. This, too, can affect the rate charged.

Growing direct written premium is another reason because growth in overall premium increases equates to growth in overall premium leakage.

Kelly explained that insurers struggle to address premium leakage for many reasons, including because it is too costly to ignore, too expensive to address and too risky to consumer relationships.

Despite the billions lost due to premium leakage each year, most insurers do monitor to prevent it, she said. This can be done at the point of sale, during renewal, at midterm or on an ongoing basis.

Kelly said better data and better use of the data will help drive down premium leakage.