Premium leakage related to unknown driver risks account for more than half of insurers annual losses on personal auto policies, according to new research from Verisk Analytics.

Unidentified drivers, accidents, and identity exceptions, made up an estimated 57%, or $16.5 billion, of carriers’ total $29 billion in lost premiums last year, Verisk says.

Its report, “The Challenge of Auto Insurance Premium Leakage”, suggests policyholders’ reluctance to add teenage drivers to insurance plans is one factor behind the statistic. The average wait time for new drivers to be added is just over 13 months, according to the researcher, costing insurers more than $1,000 in each case.

Verisk cites underestimated mileage, unverifiable addresses—garaging—misrepresented commercial use of vehicles, and cars beyond mechanical limits as other causes adding to underwriting losses. All findings are based on 82 insurer analyses conducted by the New Jersey-based company.

“Insurers face stiff competition to attract and retain business with a painless buying experience and a hassle-free customer relationship,” Verisk wrote. “Valuable policyholders could defect if their rates go up or the insurer wastes their time with unwarranted inquiries. The problem challenges underwriters and product managers to strike the right balance.”

Aside from dishonest reporting by customers, premium leakage is also a result of agents guiding customers to bend the truth for lower rates, Verisk says. So too are absent or unverified online prefill functions that omit important underwriting information.

Plugging the leak

A majority, 70%, of insurers surveyed monitor premium leakage today, led by larger firms at 83%, compared to just 57% of smaller carriers. Almost three-quarters of discovered drivers are considered high risk by insurers, according to the study.

Verisk suggests predictive analytics as a solution to combat the problem. More sophisticated models can compare details on applications against multiple databases, helping companies shed unwanted policies and validate client information. Other benefits include:

  • More risk-appropriate premiums and accurate up-front quoting.
  • The ability to catch important changes to rating variables at renewal.
  • Building a feedback loop for measuring the impact of premium pursuit on profitability and retention.
  • Steering underwriters away from ordering costly motor vehicle reports at point of sale

“Premium pursuit should be more than a short-term quest for missing revenue,” Verisk says. “It can be part of a long-term strategy to keep profitable business and remediate or remove policies that are only costing you money.”

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