Quality Planning Corporation (QPC), the Rating Integrity Solutions Company, released its annual Premium Rating Error report, detailing just how much often-overlooked premium rating errors diminish the overall profits of auto insurance companies.
QPC estimates that $13.7 billion of premium revenues were foregone in 2002. With underwriting profit averaging less than 5 percent, 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.
QPC’s Premium Rating Error report, which presents the results of premium audit reviews of over 13 million private passenger auto policies from 10 carriers, reveals the extent to which different categories of rating errors contribute to the overall premium rating error. The biggest culprits reportedly are unrated drivers (1.7 percent) and commute/annual mileage (1.6 percent).
To put the $13.7 billion premium rating error into perspective, it represents about 10 percent of personal auto insurance premium revenues industry-wide. Dr. Daniel Finnegan, founder and CEO of QPC, noted, “Our research shows that if an auto insurance company can cut its rating error by fifty percent, it is likely that the company can more than double its profits.”
Finnegan sees the problem of rating error extending beyond industry profits, adding, “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 reportedly exhibit 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 7,500 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 percent 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.
The report can be found online at: www.qualityplanning.com/research.html.